If you’re a fan of late-night television, you’ve seen the guys hawking their latest get-rich-quick-with-foreclosures program. These infomercials typically feature folks, “just like you,” who got stinking rich simply by buying foreclosed or bank-owned properties. It’s so easy!
What about the average consumer in the market for a home to live in who just wants a deal? Many of these non-investor type buyers hear the wild tales of deeply discounted foreclosed homes and want in on the action. Discounts make us salivate. After all, this is America; why pay full price when you can get a bargain?
Sometimes, though, bargains aren’t all they’re cracked up to be. The inexpensive sweater that unravels after the first washing, the generic tomato paste that tastes like aluminum, and the car that smokes and sputters when driven off the discount dealership’s lot are all indications that we get what we pay for.
Buying a foreclosed home requires either lots of experience, lots of research or the assistance of someone who has acquired both. This is not a transaction for the novice homebuyer to tackle alone. With that in mind, here is a quick foreclosure home buying guide to help you get started.
The 3 Ways to Buy a Foreclosed Home
1. Pre-foreclosure Homes
When a homeowner is delinquent on her mortgage payments – typically three to six months – the lender sends her a Notice of Default (NOD). This begins a period of reinstatement wherein she is provided the opportunity to bring her loan current. This is the pre-foreclosure stage and a point when many homeowners attempt to sell the house to avoid a foreclosure on their records. It’s also the point at which the late night TV guys swoop in, offering cash to take over the house.
Pre-foreclosure sales are popular with professional real estate investors, as they offer huge discounts off the home’s market value. The risks, however, run high, especially for the novice. Research becomes crucial to your success in this type of purchase. Some of the many things you will need to determine include:
- Are there liens on the property that the seller didn’t disclose?
- How delinquent is the seller on his property taxes?
- How many individuals are on title and are they all signing off on the deed?
- Has the seller filed for bankruptcy?
Each one of these considerations carries the risk of either the deal falling apart or putting you at financial risk. A real estate agent who is knowledgeable about the foreclosure process can provide valuable tips and may be your best advocate during a pre-foreclosure purchase.
2. Buying a Home at Auction
After the reinstatement period, if the homeowner fails to bring the loan current, the lender will sell the house at auction. The lender’s trustee, typically an attorney, represents the lender at the auction and receives the cash from the winning bidder. The opening bid is usually equal to the outstanding loan balance, plus accrued interest, trustee’s fees and other costs of the foreclosure process. If no bids match or exceed the opening bid, the trustee purchases the property, in the lender’s name, and it becomes what is known as Real Estate Owned, or REO.
This auction is another situation where the average homebuyer will be competing against seasoned real estate investors with deep pockets. Not only is the competition fierce, but also you are buying a property sight unseen, for the most part. While it’s possible to view the home from the outside before the auction, what lurks within typically remains a mystery. The home’s history – whether it’s been remodeled, the condition of the major systems and whether it’s been trashed – generally remain unknown until you take possession.
Which brings up another possible problem. There may be people living in the home and you will have to take over the process of getting rid of them.
3. Buying Bank-Owned Property
Buying directly from the lender is the safest way for the average homebuyer to purchase a foreclosure. While the process is lengthier than the traditional real estate purchase transaction, and fraught with delays and problems, you may still get a decent discount on price. Don’t expect huge savings off the list price, though, as bank-owned properties in most regions tend to sell close to asking price, according to the California Association of Realtors®.
Offers to purchase foreclosed homes are generally countered by the lender and usually for price, but there may be other terms of the purchase agreement that the lender takes issue with. While this part of a traditional real estate transaction is usually completed within a week, with the lender as the seller it has the potential to drag on for a lengthy period. After all, there are a lot of people involved in the process on the lender’s side, so it plods along at an excruciatingly slow pace.
The Fine Print – Considerations When Buying a Foreclosed Home
While foreclosed homes may seem like bargains, the average homebuyer needs to consider the trade-off for saving money. Some of the problems you may want to consider include:
- Information about a particular foreclosed home may be at a premium. The folks who knew the house best – the previous occupants – are long gone. The lender most likely knows nothing of the home’s current condition nor is it under any obligation to determine flaws and disclose them to potential buyers. “As-is” was never a more frightening phrase than when purchasing the biggest investment of your life.
- Buying bank-owned property may be a very lengthy process. Dealing with an emotional homeowner in a traditional real estate transaction is a snap compared with the dispassionate lender that owns the foreclosed home.
- How do you determine how much to bid at an auction when you have no knowledge of the house being sold? Do you have the cash if you’re the winning bidder?
While buying a foreclosed home may seem like the best way to get a real deal on your new home, “Foreclosures are more of an investment vehicle than a way to get the home of your dreams,” according to Ryan Slack, CEO of Property Research Partners.