So, you’re trying to get into real estate investment and you’ve heard foreclosures are a great deal. Maybe, instead, you’re looking to buy a new house and don’t mind putting in some TLC before you move in.
Either way, finding a great foreclosure can save you tens of thousands of dollars if you know what you’re doing.
What exactly is a foreclosure?
Well, technically, there are four different types.
This is also sometimes called a short sale. As you might understand from the name, this is actually right before the house is foreclosed on. The family no longer has the ability to make the payments regularly, so they make an agreement with the bank to sell to property for at least the amount that is owed on it.
You’ll help the owner avoid a huge hit to their credit score while also paying a price that is typically lower than market value. The cost is also lower pre-foreclosure than post many times because the lender doesn’t have to pay any of the costs associated with the process of the foreclosure.
Like most foreclosures, the home is sold as-is and each original lender has different requirements for how you can buy the property. Some require all cash, some accept a high down payment, and others accept more typical loans.
True of almost all foreclosures, being sold as-is means that you cannot make the sale contingent on everything passing the home inspection. This also means that you are disqualified from a lot of the typical loans.
Off to Auction
If the home has passed the first stage without selling, it goes through foreclosure and off to auction. It is much riskier to buy a home at auction because you cannot certainly know that the property doesn’t have liens or encumbrances.
In addition to this fear, you typically cannot see the inside of the house and don’t have the right to inspect the property, so you don’t know what condition it’s in. At the auction, it’s almost certainly cash-only, so you’ll have to come prepared with a cashier’s check, willing to take on the unknown for a great deal.
Real Estate Owned (REO)
This is by-far the most common way for people and small investors to buy a foreclosure as it’s easier and safer. If, for whatever reason, the home doesn’t sell at auction, the lender now takes full possession.
While you usually won’t get as good of a deal as you could at auction, the much-improved safety of buying this house is well worth the price increase. And, of course, you wouldn’t buy a foreclosure if it wasn’t a good deal, anyways!
Foreclosures are usually priced to bring in a modest profit for the lender but low enough to sell rather quickly. Typically, after the lender takes control of the property, the house will be investigated for liens. Sometimes, lenders are even required to pay these.
Like the other types of foreclosures, REO homes are almost always sold as-is. A common way of buying these homes is either with cash or an investor’s loan, but it is impossible with the traditional home-buyers loans.
This is another popular way of buying a foreclosure. A popular site that we work with directly is Hud Home Store. Homes are sold as-is and the paperwork required is a bit different than buying other types of homes, so make sure you have a realtor that knows the intricacies.
It’s possible to find great deals with government owned foreclosures, just as with REO foreclosures.
How to buy a foreclosure
We talked a little bit about how to buy each type of foreclosure above, but here we’re going to focus on the safest and most common way to buy a foreclosure. These are homes that have gone past the pre-foreclosure and auction stages.
You might think the first step would be to find the house, but that’s not actually true, especially for foreclosures. If you find a foreclosed home way below market price in great condition, you can bet many other investors in your area have as well.
If you haven’t gotten pre-approved, not only can you not be certain that you can afford the house you want, but you have to wait for the lender to approve you before you can submit your offer. By that time, the house might’ve already been taken.
Find a realtor that works directly with the banks with foreclosed homes
Most banks have specific real estate companies or brokers that they work with for selling their foreclosed homes. These agents are experts in their field, and thus selected to represent the bank.
They know the ins and outs of all the paperwork that has to be completed, the exact method for when offers are looked at, which properties that are about to go on the market, and if they’re a good deal or not.
If you’re preapproved, these agents can take you around to all the foreclosures within your budget, as well as alert you the second that new homes are on the market.
Luckily, if you live in East Tennessee, I work directly with HUD and Chase banks and can find you the great deal you’re looking for at Priority Real Estate.
Make the offer!
Once you’ve found the house (or houses) you want to buy, it’s time to put in your offer! Here, again, you’ll need a knowledgeable real estate professional because the requirements can vary by bank and government agency.
If you aren’t paying by cash, you’ll usually need a specific loan that lets you buy the house as-is. These details would likely have been worked out with your lender before this point. Many banks don’t allow you to make the sale contingent on the home inspection, so make sure you’ve already checked out as much as possible!
Sometimes, the seller will wait a certain number of days the look at all offers (such as HUD does). Additionally, they could have multiple offers so it will come down to “highest and best,” meaning that multiple offers will be looked at and the highest and best will be accepted. Others it will be like a normal home sale where they can accept, reject, or counter your offer.
As long as you have an agent that understands the bank’s rules about making offers on foreclosures, like us at Priority, you’ll hopefully have bought your first foreclosure. Good luck!