Many first-time homebuyers relish the idea of being able to get a bigger house than they really could afford. With the economic meltdown in the wake of the coronavirus pandemic and high delinquency rates for mortgage payments, you can find attractive deals on foreclosed properties.
Buying a foreclosed home may look like a steal at first glance. However, it pays to be prepared for what lies ahead on this particular home-buying route. Do your due diligence before you make an offer, especially if the property is abandoned or has been neglected for a long time.
If economic relief measures, including forbearance on mortgage payments, are not extended, we could see an uptick in foreclosures in 2021. But some of these homes come with hidden problems, and you may incur high running costs once you move in.
This happens mostly to buyers with no or little real estate experience. Luckily, you can educate yourself to be ready to face reality when purchasing a foreclosed home.
Foreclose occurs when a lender decides to repossess a property due to overdue mortgage payments and unmet terms in the mortgage agreement. To recover the amount still owed, the lender advertises the property at a much lower cost than the home’s actual value.
Before you buy
Understand everything about the home. It is crucial to learn about the history of the home you plan to purchase. Find out the maintenance processes of the property, the repair history, and any additions made. You can obtain this information from the Sellers Property Discloser Statement, which shows every activity related in the home’s history.
However, there is no Seller’s Property Disclosure when a bank forecloses on a home. Learning about the property’s history might be the only sure way to obtain information about any changes made over time.
Hire a Professional in Real Estate. Buying a foreclosed home is not a walk in the park. That’s why it’s important to work with an experienced realtor who can take you through the entire process.
Make sure the real estate agent you choose understands the nitty-gritty of foreclosure. Learn what their clients say about foreclosure services they offer.
You can obtain more information about realtors by visiting their websites and social media platforms. Look for a Certified Distressed Property Expert for a seamless experience.
Once you identify an experienced realtor, ask for a foreclosure property that aligns with your needs and expectations.
Here are key steps your realtors can take you through:
- Information about bidders who want to buy foreclosed homes within your area;
- Pre-foreclosure bailing of the seller before the bank repossesses the property;
- Lenders’ bank-owned properties;
- Details showing that the bank agrees to let go of a portion of the borrower’s debt.
A realtor can also help you to create a mortgage pre-approval letter, especially when you plan to take a loan. Most lenders ask for the letter before approving your loan.
How to buy
Auction and Real Estate Owned (REO) properties are the two ways to buy a foreclosed home.
Auction. Here, the lender can put the property up for public auction when the homeowner can no longer pay the mortgage. The lender will try to sell the home to the highest bidder.
One of the downsides of buying a property at auction is that you do not get an opportunity to inspect the property. This is a risk since you may buy a home that needs more repairs. When you buy a property at auction, you should be ready to pay cash or pay with a certified check.
REO. Here, a buyer decides to purchase the property after the lender repossesses it. It is the traditional method of buying a property where it is listed and sold by a realtor.
You can hire a real estate agent to help you review the home before you purchase it. This is for your benefit to ensure that you make informed decisions before purchasing the property.
Foreclosure Market is Getting Leaner
Today, fewer homeowners fail to repay their loans as expected by the lender. In this case, the foreclosure properties are falling out in the industry.
Statistics show a drop in foreclosure properties between 2010 and 2014 from 62% to 3%, respectively. Therefore as you plan to buy a foreclosure home, you should remain open-minded, knowing that the chances of getting the property are becoming smaller by the day.
Analyze market prices
Doing a Comparative Market Analysis (CMA) is a crucial consideration when planning to buy a foreclosed home. You can hire a real estate agent to help you analyze the market trends and current prices for the property you want to buy.
The realtor needs to run the CMA at least 180 days before the purchase. Factors to consider include tax analysis, property history, and similar properties sold recently within the same area. Assessing this information can go a long way, especially when planning to buy the property on a cash offer.
If you can’t afford a realtor, you can perform your own CMA by examining comparable properties on real estate listing sites like realtor.com.
Place a higher bid if other foreclosure properties are on a high sale
If you notice that foreclosed homes around your area are selling quickly, you need to place a higher bid to stand a chance of getting the property.
This may not be an easy task. It would be best to work with an experienced real estate agent to help you write a letter showing your interest in buying the home at a higher price. The process becomes seamless if you back up the offer letter with the pre-approved letter when applying for a mortgage.
Most foreclosed properties come at discounted rates. So, you may lose out on the chance to get a property if you place a lower bid.
A home inspection is crucial
Before you purchase the property, be sure to do a home inspection. Some foreclosed properties come with so much damage that they require a total makeover to make them livable. Such houses will quickly eat up any savings on their sales prices.
The best way to avoid this is to hire a home inspector. Remember, you can only inspect the property if you’re not buying it at an auction.
The bottom line
Purchasing a foreclosed home comes with lots of benefits only if you understand the processes involved. Many buyers do not enjoy the benefits of buying a foreclosed home because they do not take the time to learn about the factors involved.
Take time and analyze the nuts and bolts before you purchase the home. The tips above will help make the process of buying a foreclosed home smoother.
Happy house hunting!