You can save thousands of dollars buying a foreclosed home. Unlike buying a home the traditional way, though, foreclosed homes have a lengthier and more detailed process. Keep reading to learn what steps you must take to buy the foreclosed home you have your eye on.
Determining the Type of Foreclosure
First, you need to know the type of foreclosure the home is in when you see it. There are two types:
- Bank owned – The owners are still in the home at the time, but the bank started foreclosure proceedings. At this point, the bank wants to make back as much of its money as possible. The home will sell auction style, where the bank chooses the highest bidder. You need to know the auction date and any particulars that the bank requires.
- REO owned – The bank also owns REO foreclosures, but the home didn’t sell during the auction process. The bank hires a real estate agent to sell the home on the open market. You may see it in the MLS listings and you can bid on it in a more traditional way, but there are still differences in the purchase process.
You must get pre-approved if you want to buy a foreclosure. Just like with a traditional sale, the preapproval letter shows the bank you are serious about buying the home. Banks typically only accept serious offers. If you don’t have a preapproval letter, the bank doesn’t have proof that you have the ability to buy the property. They will likely move onto the next bid, looking for a seller paying cash or with a preapproval letter in his or her hand.
Find a lender and get your pre-approval letter before you start looking for a home. We suggest applying with at least three lenders. This way you can compare the offers and choose the one that suits you the most financially. Look at the interest rate, term, and closing costs, as well as the conditions the lender requires before choosing a lender.
Find a Real Estate Agent
You need an experienced real estate agent on your side when buying a foreclosed home. A real estate agent does the legwork for you, including the bidding. In fact, if you purchase a bank-owned home, a real estate agent must submit your bid for you or the bank won’t accept it.
Shop around for the right real estate agent that has the experience necessary to successfully find you a home. Talk with agents about the number of foreclosures they have helped clients purchase and even talk with past clients to get a feel for the experience they had with the realtor.
Figure Out a Good Bid
Here’s the tough part. Figuring out how much money to bid on the home is important. If it’s a bank-owned home, you have to outbid the other bidders to win the auction, but you have to have the financing (or cash) to back it up. If it’s an REO owned property, you still need a proper bid. This is where the real estate agent comes in handy.
You can do some of the legwork yourself, but a real estate agent will have more knowledge of the proper comparable sales to use. You should know how much similar homes in the area sold for recently. This gives you a basis point. You will likely bid less than their sales price because the home is in foreclosure, but keep in mind that the bank will have the comparable sales amounts in mind when deciding to accept or ignore your bid.
Sign the Contract
Once the bank accepts your bid, you sign a contract. Make sure you understand the fine print of the sale, though. If it’s an auction-style sale, you may only have 24-48 hours to prove that you have financing and can close quickly. Know the details before bidding. If you have financing and satisfied most conditions, except those that pertain to the home, you should be in good shape.
At this point, you should include your real estate attorney in the process as well. The real estate attorney can put the proper contingencies in place, especially the inspection contingency. Banks sell foreclosed homes ‘as is,’ meaning they won’t make any repairs or renovations to the home. The inspection contingency gives you time to have an inspection completed and evaluate the report. You can then decide if you want to move forward with the sale or back out because of the home’s condition. Pay close attention to the expiration date of the contingency to make sure you don’t miss it.
Resolve any Liens
Make sure the title company conducts a thorough title search on the property. You need to know if there are any other outstanding liens that put the home at risk. For example, if there is a second mortgage on the property, the title company/loan officer need to get in touch with that company to see about releasing the lien. If the lienholder won’t release the lien, you may want to reconsider the purchase as liens stay attached to properties, not borrowers.
Close on the Loan
The final step is to close on the loan and own the property. The type of financing you have determines how quickly you must move into the home. If the home requires extensive renovations, make sure the lender understands that you can’t move into it until you complete the renovations. This is common with FHA 203K loans – the FHA allows borrowers six months to renovate the home before you must move into it.
Buying a foreclosed home has more steps and more major decisions than a traditional purchase, but it can save you thousands of dollars. Make sure you understand the process and what’s required of you before making a bid to make the most of buying a foreclosed home.