Buying a Foreclosure
With shows like Flip or Flop and Fixer Upper more popular than ever, the idea of buying a foreclosure and turning it into your dream home seems very appealing. These shows make buying a foreclosure look very easy. What’s the reality? Allow us to break it down for you.
First things first.
What Exactly IS a Foreclosure?
Foreclosures occur when a lender takes property from an owner who has failed to make payments.
A mortgage is tied to a home like a car loan is to a vehicle. When the owner fails to make payments, the lender has the right to seize the collateral. In most cases, the lender will charge late fees and default-related fees prior to moving into the foreclosure stage. Depending on the state, foreclosures can happen within a few months or take years and involve court proceedings.
Once in foreclosure, the lender will then try to recoup as much of the initial investment as possible by selling the property — often for less than it’s worth.
Types of Foreclosed Homes
There are essentially two categories of foreclosed homes: bank-owned homes and real estate owned (REO) properties. Both are under the ownership of the lender, which, in most cases is a bank. The difference lies in the stage of foreclosure. If the property does not sell at auction, then the lender takes over ownership and it becomes an REO property in the lender’s financials.
Advantages of Buying a Foreclosure
- You can get a great deal on a home. You’ll very likely buy the home for less than it is worth.
- The process of buying a foreclosure property is often smoother than working with a traditional seller.
- Banks have no emotional attachment to the home and are anxious to unload it. They don’t get hung up on price. They’re losing money every day the home is in foreclosure.
Tips for Buying a Foreclosure
Here are some tips to prepare yourself before buying a foreclosure:
- Understand the financing restrictions on foreclosures. Most banks won’t lend you money to buy a home in poor condition. In a typical sale, the seller might make any repairs your bank requires. But with a foreclosure, the selling bank isn’t likely to do the needed work. The problem? The bank lending you the money may not be willing to close the loan without the repairs. This means buying a foreclosure can get more pricey than anticipated. Insider tip: you MAY be able to minimize the financial impact around this catch-22 with a HUD 203(k) loan.
- ALWAYS look at the comparable sales, or “comps,” before making any offer, but never more so than when buying a foreclosure. Your Realtor will talk you through this process.
- Be prepared to bid higher than the list price, especially if foreclosures in your area are selling fast.
- Be prepared to have to pay cash if the property is up for auction.
- Know that you’ll be buying the foreclosure in “as-is” condition. These homes are often quite distressed and require lots of deferred maintenance. Secure good estimates so you know about how much it will cost to make the home livable. Be sure to read our related post on buying a fixer-upper.
Is Buying a Foreclosure Right for Me?
First, ask yourself why you want a distressed property and share those reasons with your Realtor, who can advise you if buying a foreclosure makes sense.
There may be are other, more suitable, opportunities to get a good deal on a home.
In most cases, it makes more financial sense to buy through a traditional sale vs. a foreclosure but as always it depends on the situation.
The Bottom Line
Buying a foreclosure is a very personal decision that depends on many factors, including your risk tolerance, financing options, and ability to move quickly. You could reap big savings if the foreclosure is priced right. But in our region, foreclosures are not all that common and more commonly end up being more expensive in the long run once repairs are taken into account. There are lots of other ways to get a great deal on a home and our team would be love to help you!