Don’t you just love getting a good bargain? It’s so amazing when something that you want is only a fraction of its original price. Even if you weren’t looking to buy it at the time when the price decreases, the allure of saving may change your mind.
This principle doesn’t just apply to clothes and other things that you may see in a store or purchase online. Sometimes, the assets that you want to purchase also see massive price drops that make the desire to buy them increase tenfold.
You could buy a used car from a car dealer, or you could take a trip to an auto auction and grab one of the repossessed ones. All the banks want to do is reclaim the balance of a loan, which may be minuscule in the grand scheme of things.
A car is a big deal, but this concept can be taken to an even more significant place. How does cheaper homeownership sound to you? This is a rundown of everything you need to know before you jump at the chance to buy that foreclosed home.
What is a Foreclosure?
The first order of business is to understand the concept of foreclosure, so you know how and why the house is now available in the manner it currently is.
As you know, most people don’t pay for their homes in cash. A house is a very expensive purchase, and the reality is that people just don’t have the kind of money that is necessary to make such purchases upfront.
Therefore, aspiring homeowners turn to lending institutions, such as banks, to get a mortgage, which is a loan that covers the purchase of the home. If you know anything about loans, you know that they aren’t free money. A loan must be repaid, and this is where things sometimes go south for these homeowners.
Sometimes, circumstances cause mortgage payments to become unbearable, and sometimes a second mortgage is added, and it was just too much to handle. Whatever the case may be, the point is that there are occurrences that happen and cause people to fall behind on their mortgage payments.
When this gets past the point that a lender is willing to deal with, then the home is foreclosed. What this means is that the lender takes the home from the person who was unable to honor the payment agreement to completion.
While this is a terrible thing to happen to anyone, it does create an opportunity for a potential buyer, such as yourself. Now, you’re able to acquire a home that is being sold for a price that is below its market value.
The bank’s interest lies in seeing its investment through, so it has a vested interest in getting the home sold, and it is even willing to go through some level of negotiation to do so.
Why Should You Buy a Foreclosed Home?
The most obvious advantage to doing this is the fact that you can get the home at what is a steal. Additionally, there are different states of foreclosure, which can offer you different cost benefits.
One of these is known as pre-foreclosure. In this phase, the current homeowner has already defaulted on the mortgage payments. The lender is typically ready to repossess the home at this point, but it has simply not happened yet.
If you can catch a home in the pre-foreclosure stage, you may be doing yourself the biggest favor of your life. This is because you can usually get a home through a short sale process at this point.
What does this mean? Well, a lender never knows the level of interest to expect for a property. When the full foreclosure comes around, the plan is to auction the home, but who says there is a sure sale waiting?
When you express interest during pre-foreclosure, you are guaranteeing the lender a chance to not lose out completely. Therefore, you are quite likely to get the house for a price that is even less than that which the previous buyer owes in mortgage payments.
Once a foreclosure has already happened, the property is typically put up for auction, though there are cases in which a real estate agent is brought in to sell the property. Even at this stage, you can get amazing discounts, but it all depends on the real estate market and where the home is in the foreclosure process.
How to Buy a Foreclosed Home
Now that you can see the clear advantage of buying a home that is in a state of foreclosure, it’s time to answer the age-old question of, “How does buying a foreclosed home work?” Well, there is a five-step process that takes you from end to end that is covered below.
Locate a Real Estate Agent with Experience
This whole process can fall apart if the real estate agent that you use is inept. Even some of the best real estate agents for regular sales can be some of the worst with foreclosures, so you must be careful here.
You want to find an agent that knows all there is to know about this process. Naturally, the agent represents you and ensures that the process flows in a manner that is conducive to your best interests.
The good thing is that you can identify a good realtor for the process based on credentials. There is specialized training available in this area, so you need a realtor who has said training. The Short Sales and Foreclosure Resource (SFR) or the Certified Distressed Property Expert (CDPE) credentials are great places to start.
Have Your Cash or Preapproval Letter Ready
Foreclosure purchases can be a delicate process, and you need to demonstrate that you are not only serious about the property, but that you are also ready to get the ball rolling on the purchase.
One of the best ways to do that is to show that you are both willing and able to buy. This is not the time for window shopping, and you need to demonstrate that you’re not just looking around.
If you are purchasing the property in cash, ensure that your realtor knows that you can afford to do so and that you are ready to move forward. If you plan to use a mortgage, seek out a lender that fits well based on your needs, and take care of what is necessary to get a preapproval letter.
Use a Comparative Analysis
Though you want to close this purchase without dragging your feet, you also don’t want to dive in headfirst without any crucial information.
Sometimes you can get the property at a lower price than that which you initially saw because there are comparable properties that go for less. Have your realtor do what is known as a comparative market analysis (CMA). This process investigates recent sale prices of homes that are comparable to the one you are interested in.
You can use this information to make an offer that is more beneficial to you if the CMA returns favorable results.
Bid to Win
You have a bit more breathing room when there isn’t much activity in the area where foreclosed homes are concerned. In fact, that may be a reason for you to bid lower.
However, if you notice that activity surrounding such homes in the area is high, you may want to beef up your bid to stay competitive. Remember that the list prices for foreclosed homes tend to be discounted, which means that the bank may not be too keen on your cutting the price even further. This is where your realtor comes in handy, though. Ensure that you lean on the sound advice that is provided before you make any decisions.
All this depends on the activity in the area and the level of demand. You can’t win a competitive race by choosing not to compete, so bid a bit higher than the asking price if securing the property is what really matters to you.
Remember the Condition is Unverified
A foreclosed home is sold in whatever condition it is currently. Which bank is going to spend money to have a home returned to pristine condition just to sell it to someone at a discounted price? Now, this isn’t to say that you can’t get a foreclosed home that was well-maintained by the previous occupant. The point is that you don’t know what kind of state the place is in.
There could be pest infestation, mold presence, lead paint, etc. The bank doesn’t do anything to verify the condition and is even less likely to do anything in the area of remediation.
Note that you can get a home inspection done for your peace of mind. This is not a prerequisite for a home purchase, but it does help you to identify anything that may not be in order before you decide to commit to a purchase. You can also use your newly found information to either move forward as planned or walk away. You could even attempt to use the imperfections as a bargaining chip, though your success in that regard is not guaranteed.
This is one of the reasons that you need a realtor who is an expert. If you got one, the chances are that there was a home inspection contingency built into your contract. This means that even if the deal was “sealed,” you still have the power to walk away to protect your interests.
You can get a great deal on a new home by going the route of purchasing a foreclosed home, but it’s not the same straightforward and pleasant process that is synonymous with a new home purchase.
There is a lot of tactical work to be done, and you need a realtor that is experienced in foreclosure to be in your corner throughout the process.
Additionally, you don’t know what kind of issues the property has, so you may want to ensure that you place a home inspection contingency in your contract.
Finally, remember that you need to give the impression that you’re serious about buying.