In the market to buy a home? Odds are you’ve come across the term “foreclosure”. Especially if you’ve been setting that Zillow price range selector low-low.
Foreclosed home — A home that the lender has taken back or repossessed. Typically, this is because the owner didn’t make their mortgage payments or otherwise defaulted on the loan.
While their loss is unfortunate, it could be your gain. That’s because foreclosed homes are typically known for their lower price tags.
That’s not all you may need to know about this label, though. There’s a lot to learn when it comes to these diamonds in the rough.
Read on for the history, pros, cons, and process for buying a foreclosed home.
Buying a Foreclosed Home: The Background
Way back when (pre-2007ish), buying a foreclosed home wasn’t easy. There just weren’t many on the market, which made finding them difficult. Interested buyers had to dig through piles of legal paperwork or endure long auctions at the local courthouse. Anything for a deal, right?
When the mortgage crisis hit, though, foreclosures exploded. Sadly, millions of people couldn’t afford to pay, or they defaulted on their mortgage loans.
Defaulting — Failing to make the loan payments you agreed to. A homeowner “defaults” on their mortgage loan when they miss a payment — this typically doesn’t happen until a homeowner has missed three or more payments. You might also read that the borrower is “in default”.
So, their lenders had to take the houses back. At alarming rates, too. More than 4 million people were foreclosed on during the Great Recession. The peak hit in September 2010, when about 120,000 homes were repossessed that month alone.
With more foreclosed homes on the market, buying one became much simpler. Eventually, the process looked very similar to buying any other type of home.
Recently, foreclosure rates started to drop. Just 0.23% of homes were foreclosed on last year. That’s down from 2.23% in 2010.
Today, foreclosed homes can be hard to find. But if you’re dedicated, there are still a few available in most markets.
Buying a Foreclosed Home: The Potential Benefits
So, what might make buying a foreclosed home attractive? Turns out, there could be a lot to love.
Low Price Point
The single biggest benefit of purchasing a foreclosed home might be the price. They’re usually listed for far less than similar properties just down the street. That’s because the lender wants to wash their hands of these homes as fast as possible and is not willing to make any improvements or fix any damage.
Remember: the previous owner wasn’t paying — maybe for months or even years. That means the lender is likely losing major money. If they can sell a foreclosed home quickly, at least they’ll make something back.
That’s not all, though. Some foreclosed properties might offer additional incentives, like:
- A reduced downpayment
- A lower interest rate
- Waived fees
- Waived closing costs
Have your eyes turned into cartoon dollar signs yet?
Home Equity
Pro tip: With potentially lower costs all around, buying a foreclosed home could also mean building Equity faster.
Equity — The value of the home minus the amount you owe on it. You can use home Equity for things like home improvement projects, or just pocket the cash when it comes time to sell or refinance.
Imagine a foreclosed home that’s hypothetically worth $200,000 is listed for sale. Maybe you snag it for $150,000. Even with 0% down, you would theoretically have $50,000 in home equity — almost immediately. Factor in a downpayment with regular mortgage payments, and your equity might only go up.
Buying a Foreclosed Home: The Potential Drawbacks
While the financials might be tempting, you should know that buying a foreclosed home might come with challenges, too.
Condition of the Home
Foreclosed properties are usually sold “as-is”. That means no fancy staging, no deep cleaning, and no haggling over pre-sale repairs.
And if the previous owner couldn’t afford their mortgage payments, they may not have had the option to maintain physical property, either. That might just mean the lawn needs some TLC. Or, it could mean leaks, mold, copper pipes, damage or more.
Unfortunately, you could even see theft or vandalism. Think stolen appliances or spray-painted messages. Foreclosure is, understandably, an emotional process, and sometimes the previous owners take that out on the home.
Drawn-Out Process
Buying a foreclosed home can take a while. If you plan on buying a foreclosed home, get your autographing hand ready. These properties come with quite a few additional documents you’ll need to sign off on. Yay, paperwork!
Also, some lenders take 90 days just to respond to an offer.
To save some time, think about getting pre-qualified before shopping.
Pre-qualification — The process of working with a mortgage professional to determine how much you may be able to borrower.
Pre-qualification can help move the process along and even ensure you stay ahead of the competition.
High Demand
Speaking of competition, foreclosed homes may be a hot commodity. After all, who wouldn’t want a piece of those potential savings?
Almost everyone is interested in foreclosed homes. You might find yourself bidding against:
- The current occupants. They might fight to stay in the home.
- Investors and flippers. They’re attracted to the potentially low price point and profit potential with minimal repairs and upgrades.
- First-time buyers. Breaking into homeownership can be hard, and every saved cent counts.
Before you know it, a bidding war might break out.
Buying a Foreclosed Home: The Process
So, are you ready to find your diamond in the rough? Here’s how you might get started:
Find a Real Estate Agent
A good real estate agent will be key. Working with one who specializes in foreclosures could be helpful, but it’s not necessary. Interview a few, find one you like, and dive in.
Determine your budget
Now it’s time to connect with a home finance professional. Your agent might have recommendations, or you can seek one out yourself. Mortgage brokers can often be the most helpful in financing less-traditional purchase situations, making them a good starting point.
Work with them to determine just what you may be able to borrower. Don’t forget to factor in potential repairs or renovations.
Remember that pre-qaulification we mentioned? Here’s where that comes in.
Find a property
Now, the fun part! Foreclosed homes may be few and far between. Plus, they can sell quite quickly. You’ll need to stay on your toes.
You and your agent might want to keep an eye on:
- Online and print publications. Foreclosure websites, lenders’ websites, your local newspaper, and beyond. Fannie Mae HomePath might be a good place to start.
Fannie Mae — The Federal National Mortgage Association, known as Fannie Mae, is a government-sponsored enterprise. Basically, a financial institution backed by the government. Fannie Mae provides home loans and, if borrowers of those loans default, can repossess the homes.
Fannie Mae HomePath — A collection of foreclosed homes now owned by Fannie Mae, all for sale.
- The multiple listing service (MLS).
Multiple listing service (MLS) — An online database where sellers and agents can list homes for sale. Listings on the MLS are more accurate, current, and complete than other real estate sites.
You may be able to access the MLS yourself, or you may need to go through your agent. Either way, be sure to check property descriptions for foreclosure status.
- Your local government. Keep an eye out for foreclosure updates from your city or county government.
Make an offer
Work with your real estate agent to craft a strong offer. Use your budget, the property’s condition, and any other important factors to inform the offer.
Remember: foreclosed homes may be in high demand. A bidding war is always a possibility, so try not to get too emotionally attached.
Complete Due Diligence
Won the bidding war? Once your offer is accepted, due diligence may be a must.
Due diligence — An “audit” to confirm the facts of the deal. During Due diligence, you’ll assess the home’s condition and any potential risks.
You might need the help of a title company, home inspector, and real estate attorney.
Close
When due diligence is complete, all that’s left to do is close. You’ll sign documents, hand over funds, and get the keys. Congratulations, homeowner!
Final Thoughts: Buying a Foreclosed Home
So, are you sold on buying a foreclosed home? It may not be easy, but it could be worth it.
Keep your eyes peeled, lean on your homebuying team, and don’t give up. You’ll find that diamond in the rough — we know it!
Published on May 15, 2023
