If you’ve started the home buying process you’ve probably heard a lot about foreclosures. In the last several years they have consistently been in the news. Recently from about 2007 and peaking in 2010 or 2011, foreclosures were a huge a concern to the housing market as a whole. Currently, foreclosures have begun to somewhat level off. But they can still be found, and if you are thinking about buying a foreclosure there is a lot to consider.
What is a Foreclosure?
When a homeowner defaults on a mortgage loan, a bank or lender can initiate the foreclosure process. The bottom line is that a foreclosure is what happens when a bank repossess a house as the collateral for a mortgage loan that is in default.
Foreclosures can be a lengthy and expensive process for lenders, and depending on how much the original owners still owed on their mortgage loan, this can spell big savings for buyers. However, buying a foreclosure is not always a walk in the park. If you are considering purchasing a foreclosure you need to make sure you have done your homework.
First Consider Researching Homes in Pre-Foreclosure
Sometimes you might be able to find a home that is still pre-foreclosure. This basically means that the homeowner is willing to sell his or her property before it fully goes into foreclosure. Sometimes owners in this situation are willing to lose huge chunks of equity they have in a house, versus ruining their credit score by letting the property foreclosure. This often means that the seller is in a big hurry to sell which can give buyers a huge advantage.
In general, there are three benefits to purchasing a property in pre-foreclosure compared to waiting until the property is in full foreclosure:
More Info on the Property
If you buy a pre-foreclosure you will have the benefit of inspecting the house before agreeing to purchase it. This includes a general walk-through as well as the ability to hire a professional to conduct a home inspection. Many true foreclosure sales or auctions do not permit the buyer to do a pre-inspection before committing to buying the property. The ability to an inspect a house can save a buyer a huge amount of potential time, money and energy.
Buying a pre-foreclosure means you are only dealing with the seller and not the bank. It’s a little more like buying a “for sale by owner” property. In contrast, a full foreclosure will involve negotiating with a lending institution, which can mean a huge amount of bureaucracy and red tape. Because of this, purchasing a true foreclosure can be very time consuming with numerous delays.
Potential Money Savings
A seller who is in pre-foreclosure usually wants to get out of the property quickly. Selling a property before full foreclosure proceedings begin will allow them to save their credit and quickly move on with their lives. Because of this, they are much more likely to make a deal on the property. Sometimes banks will hold out for the best deal possible once they repossess a property.
Of course, the biggest drawback to pre-foreclosures is actually being able to find them. Many homeowners in this situation are very embarrassed to admit they are in this situation, and will hesitate to reveal that they are in financial trouble and need to sell quickly. Sometimes you can find them by searching online, or perhaps your real estate agent will have caught wind of potential homes that need to be quickly sold.
Homes in Full Foreclosure
It will be much easier to find properties that have gone into full foreclosure. These properties are usually available at every price point from lower priced starter homes to high end properties. Additionally, just because a house is in foreclosure does not mean it will be in terrible condition with a long list of repairs needed. Condition varies with every property and can be affected by a multitude of factors, including how long it is has been in foreclosure. Typically speaking, the longer a home has been sitting empty and in foreclosure the less maintenance has been kept up with.
Many of the great advantages that come with buying a home in foreclosure come hand in hand with disadvantages. While it’s true that amazing deals can be found on these properties, this usually means that there will be stiffer competition for buyers who are interested.
Additionally, each foreclosure is truly unique and how great of a deal a buyer can get varies with each situation. Sometimes banks want to get out from under the property quickly and will agree to an amazing sales price. However, sometimes they are willing to sit on a property until a competitive offer comes in. These factors are unique for each property and depend on a lot of variables, including the amount still owed on the mortgage when it originally went into default.
Buying a Foreclosure at an Auction
One common place to buy a foreclosure is at an auction. If you are planning to do this you will need cash on hand to buy the property. A buyer who doesn’t have cash on hand to do this can try to find a lender who will guarantee a loan for such a transaction. Some lenders will do this and some won’t. Make sure to shop around to find a lender who understands the process of buying a distressed property before taking out a loan to buy a foreclosure on an auction. One more thing to think about is that often, buying a foreclosure from an auction, means that you will not be able to inspect the property prior to bidding. Which can be a dangerous endeavor. Speaking of which, foreclosures are sometimes in need of a lot of TLC. Which brings us to the next point…
Foreclosures Can be in Terrible Shape
Not all foreclosures are in poor condition, but many are. Sometimes the previous owners didn’t have the cash on hand to make needed repairs and maintenance was spotty as a result. In addition to this, some previous owners (not all), may have tried to cause damage to the home in retaliation for the bank taking it back. There are also times when previous owners, or even thieves who have since broken in, have gutted the house of things like appliances, copper wiring or pipes, cabinets etc. If the heat has not been on during the winter, pipes could have frozen or broken, or water leaks could have happened causing mold or other issues to develop. With no pest control being performed, insects or rodents could have taken up residence in the vacant property.
Know Your Rights as New Owner
In recent years, some lenders have started to allow the previous owners to continue to occupy a house until the foreclosure is sold, to try and avoid some of the maintenance issues listed above. If this applied to the property you are thinking of purchasing, make sure you consult with a legal expert on how to legally evict the former owners. Ideally, the contract should be worded so that the bank or lender is responsible for vacating the previous owners before you take possession of the property.
The Process of Buying a Foreclosure from a Bank
Buying a foreclosure directly from the bank is much less risky than buying at an auction. When a bank owns the home, you can enter it, inspect it and have a good idea of what you are getting into. It is true that buying from a bank can me delays and a longer process, but this is usually preferable to buying a home sight unseen at an auction. However, if you are serious about purchasing a foreclosure it is important to find a real estate agent who is familiar with the process. Agents with this kind of experience will understand the ins and outs of these kinds of transactions, which can ultimately help speed things up for buyers.
It is important to get a prequalification letter form a lender before starting to look for a foreclosure. Often, foreclosures can draw a lot of competition from buyers looking for a good deal. Getting pre-qualified will show the bank that you are serious about buying the property and will give you a leg up against other buyers who didn’t take the time to get pre-qualified.
Should You Get the House Inspected?
Absolutely. There is never a situation in which you shouldn’t get a home inspected if you are able to. However, inspections are especially important with foreclosures. Because maintenance has probably been neglected, there could be invisible problems that only a home inspection will uncover. Even though a bank will probably not be willing to fix a laundry list of issues, it is important for a buyer to know how much time and money they will need to invest in the home to get it back into tip-top shape. Additionally, if an inspection uncovers serious issues you will be able to walk away before investing money into a house that could become a money pit.
Can you negotiate with a lender?
The answer here is a resounding yes. There is always room for negotiation. You might be able to negotiate the price down because of the needed repairs, but you might not be able to get 100 percent of that cost off of the purchase price.
Think of it like this, the longer a bank owns a property the more money it is costing them. Banks like to recoup as much money as possible, but they also don’t like continuing to have a property on their books. The truth is, there is no concrete answer as to how much negotiating a bank will do. The old phrase, “it never hurts to ask” definitely applies here.
Purchasing a foreclosure can be a great way to score an amazing deal on a great property. With the right tools and knowledgeable people helping you out, you will be in a great position to find the best deal possible.