Foreclosed homes are properties that have been seized by the bank after a mortgage borrower has defaulted on their loan contract by not making the agreed payments. By law, the lender can take the home back through a foreclosure legal action, in which they can then evict the defaulted borrower from the home and then resell the property.
This is the simple definition of a foreclosed home, and these properties are often offered at a lower price than a typical owner sold home on the market. These foreclosed properties can be a big homebuyer magnet because of this very reason.
In the course of the last several years, the market for foreclosure properties has grown due to the millions of homes which have been foreclosed upon as a result of the real estate crisis that started in 2007.
In this article, I would like to discuss how you can buy one of these foreclosed homes.
There are two general ways a foreclosed property can be sold:
1. Through a foreclosure auction
2. As a REO (bank owned property)
How to buy a home in a foreclosure auction
1. Find and file a property
Because foreclosure auctions are competitive sales, it is important to get the most up-to-date information when searching, and act on it quickly. Foreclosure auctions are public information, so they are relatively easy to search for. The information on foreclosure sales can be found from the county trustee or county clerk in whichever county you are interested in buying in. With the invention and development of the internet, foreclosure auctions are also accessible with a simple Google search.
There are several websites that focus entirely on listings of foreclosed homes. Websites such as Foreclosure.com, RealtyTrac.com and Auction.com to name a few. Please be aware, that most of these sites charge a monthly fee to view the property addresses and information.
While searching for foreclosed homes on the internet, it never hurts to drive by the property that you may find online to get a better idea of the properties condition. This initial step is crucial, as foreclosure auctions do not provide a traditional inspection on the home.
2. Brush up on property details
Because the opening bid at the auction is based on the total amount owed to the foreclosing lender, it is important to find out the estimated market value of the home ASAP. This public information can be found at the county recorder. Finding these numbers will help any foreclosure investor find out if the deal that they are looking at is a potential bargain when the opening bid is compared to the property’s market value.
Another important factor to look at, is how many outstanding liens are on the property; auction winners are often responsible for satisfying those notes. A real estate attorney or title company can check for liens, or you can check directly with county records.
3. Stay vigilant on the home and begin the bidding process
Because bidding procedures vary from state to state, familiarizing oneself with their local rules is a must. A foreclosure auction can be a time-consuming process, as cancellation of biddings postponements made by the bank of these sales is not uncommon. Staying up-to-date is crucial during this process. If you want to make a bid-upfront to beat the competition, be sure you know whether you have to bring the full amount you want to bid, or just a certain percentage such as 10%.
Contact the trustee or county clerk as much as you can. Verifying the type of foreclosure auction you are looking for is crucial when seeking information. Be sure to clarify whether you are searching for mortgage foreclosure auctions, or tax foreclosure auctions.
Educating yourself on the process on a step-by-step basis is crucial. It helps to hire a local real estate agent or Realtor before hand to help you brush up on your state foreclosure laws.
4. Determine potential bid amount
Because foreclosure properties sell for a loss to the lender, they are investor hotspots. Once a buyer determines their financial capacity and the potential bargain price, they need to bring their bid to the table. This step is especially vital in states where bidders are expected to bring the full amount in cash or a cashier’s check up to the plate. Not meeting these basic requirements could disqualify you from bidding. Finance options for investors or buyers who do not use cash include home equity lines of credit if they have enough equity in their existing primary residence. Keep in mind, that bidders who do not fulfill their entire amount usually can not get a refund on any deposits they may have made at the auction.
5. Make the bid
Be sure to call the trustee the day before the auction one last time and check if the auction has been cancelled or postponed. New auction dates are one piece of information a bidder should demand.
If all went according to plan, the bidder should arrive at the location arranged by the auctioneer ASAP.
6. Finalize the ownership
Seek out all of the necessary documents that verify that you were the winner of the auction. Find out all of the further steps that must be taken before the property is officially yours (This will usually take a few days to a month).
How to purchase a REO (Real Estate Owned Property)
A foreclosured home becomes a REO when the property is brought back by the bank or servicer due to the lack of a successful sale at a foreclosure auction. This process not only removes any chance the previous owner had of redeeming themselves and acquiring the property back, but also removes the liens that may have still been on the title. It is possible these liens could have been the factor that delayed the sale.
REO’s are often listed by Realtors, making it easier to get rid of them. This is why official REO properties are better for first-time home buyers or primary residence shoppers when buying a home.
1. Find an agent or Realtor to work with you
Once you have found a REO listing, find a real estate agent or professional Realtor. There are plenty of reasons why you should hire your own real estate professional when buying a home, and not stick to the one that is selling the home.
It is noteworthy that the National Association of Realtors (NAR) provides Short Sales & Foreclosure Resource certification to agents who take a special class on the subject. This is one of the many reasons why Realtors are more efficient than typical real estate agents who only must abide by their local state standards. Realtors on the other hand have stricter national standards to abide by.
2. Research the market
Just like foreclosure auctions, REO property sales take research. Because of the cut down prices, homes that just endured foreclosure move by fast. Study your local distressed home market.
3. Inspect the home
One of the many perks of buying from a REO vs. an auction sale, is that you can conduct a home inspection because REO sales are typically through a legitimate real estate company and are not trying to be sold directly by a lender as quickly as possible.
Hire a good inspector to go over the home and determine any abuses the former owners may have done on the home. This step will also come in handy when negotiating the price, which is another perk that does not usually come with a home sold at auction.
4. Establish financing
Setting up financing in advance is crucial. To do this, you will have to establish that your credit score is sufficient, and that you can provide a down payment that is required for the type of loan your pursue.
If you are looking for a a great mortgage and you need a good loan officer to work with, we recommend that you call Erik Sandstrom with New American Funding at 1-800-779-4547. He can help you run your credit and get prequalified for a new mortgage.