Have you ever been browsing major online real estate sites, found a great deal on a listing only to discover it was a home in foreclosure? Some buyers will stop considering it right then and there because they think it means there’s something wrong with the home or trying to buy it will be too much of a hassle. But buying a foreclosed home can actually be a great opportunity to save some money because many are sold below market value. You just have to know what you’re getting yourself into. Here’s everything home buyers need to know about buying a foreclosed home.
What are Foreclosure Homes?
In the most basic sense, a home is in foreclosure when the owner is behind on their mortgage payments and at risk of losing the home. But there are actually five kinds of properties that fall under the umbrella term of “foreclosure homes.” Here’s a quick rundown on each one so you know the difference when buying a foreclosed home:
1. Pre-foreclosure
Homes go into pre-foreclosure when the owner defaults on their mortgage but the house is not yet set for auction. This gives the owner time to sell the home and repay their outstanding debt. In this scenario, time is on your side because the owner is motivated to sell quickly or risk losing everything. These types of homes offer a great chance to make a purchase below market value, but they can also attract a fair number of other buyers also looking for a steal.
2. Short Sales
A short sale is when a lender is willing to accept a sale price that is less than the amount owed on the mortgage. This typically happens when the property is underwater, and does not necessarily mean the home owner is in default, but rather is facing another significant financial hardship. In pricing these homes, the bank may opt for a broker price opinion (BPO) instead of a traditional appraisal. Because these opinions can sometimes come in over market value, it’s a good idea to get your own estimate and lean on your agent’s advice to make sure you are getting a good deal.
3. Sheriff Sale Auctions
If a homeowner in default is unable to catch up on their mortgage payments, the lender may decide to put the home up for auction. Many of these sales are conducted by local officials, which is why they are known as sheriff sale auctions. Because many buyers are unfamiliar with this process, these homes can potentially be bought at a great price, given the number of other bidders and local market conditions.
IMPORTANT: The thing to remember with these homes is that the homeowner may be able to exercise what’s called a “right to redemption.” This right gives the owner an opportunity to reclaim the home even after it has been auctioned if they are able to pay the full lien and any other costs. These instances are rare, but you will need to keep this in mind before falling too deeply in love with these types of properties.
4. Bank-Owned Properties
If a home goes up for auction but doesn’t end up actually being sold, it then comes under control of the bank. These homes are known as bank-owned properties or real estate owned properties (REO). The advantage to buyers here is that you are working directly with the bank, which is mainly interested in recouping their investment, not turning a huge profit. The bank may also be willing to waive appraisal fees, reduce closing costs and provide other benefits to buyers in order to close the sale quickly.
5. Government-Owned Properties
If a home that was purchased with an FHA loan or VA loan goes into foreclosure, the property will be repossessed by the federal government. There are many rules and regulations associated with these types of properties, and you will have to work with the federal government to complete the purchase. But these types of homes can also represent great investments for anyone willing to go through the process.
Things to Remember When Buying a Foreclosed Home
One of the biggest things to keep in mind when buying a foreclosed home is that these types of sales often take longer than traditional home sales. Although ironic, this is particularly true of short sales. The reason for this is simply because you will be working directly with a bank instead of a home owner. Banks may need to have several people sign off on the deal and contracts tend to be more complicated, leading to delays in the process.
You also need to remember when buying a foreclosed home that most are sold as-is. That means that unlike in other sales where you can negotiate for the owner to fix something as a condition of the sale, that is very unlikely to happen when buying a foreclosed home. This is why getting a home inspection is so important. Make sure you know exactly what you’re getting yourself into before finalizing the purchase.
Foreclosure is only a bad word if you’re the one being foreclosed on. If you’re a buyer, foreclosure can signal an opportunity for significant savings. Just make sure to manage your expectations about the speed of the process, vet the homes thoroughly and keep all the other intangibles in mind so you can find a great home for you and your family.
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