Purchasing a foreclosure can allow you to score big discounts, but the process requires in-depth research and persistence. Follow this comprehensive guide to successfully navigate finding, bidding on, and how to buy a foreclosure property.
What is a Foreclosure Property?
A foreclosure occurs when the homeowner defaults on their mortgage and the lender repossesses the property to recoup their investment. The property is then sold via various methods:
- Pre-foreclosure – The owner is in default but can still sell before auction.
- Short sale – The lender agrees to let the property sell for less than is owed on the mortgage.
- Auction – The property is auctioned on courthouse steps to the highest bidder.
- Bank-owned (REO) – The property reverts to the lender after auction and is listed for sale.
Foreclosures sell at a discount since the lenders want to unload the properties quickly. This presents opportunities for buyers.
How to Find Foreclosure Listings
Finding foreclosure opportunities takes persistence and creativity. Useful sources include:
- MLS – Foreclosures are sometimes co-mingled with regular listings.
- Foreclosure websites – Sites like RealtyTrac list pre-foreclosures and scheduled auctions.
- Bank and lender websites – Many list their REO properties online.
- Public records – County recorder and tax assessor sites can help uncover distressed properties.
- Foreclosure specialists – Real estate agents who specialize in foreclosures have insider access.
- Signage – Properties with foreclosure notices posted out front may not yet be widely advertised.
Drive potential neighborhoods to spot foreclosure signs. New listings can sell fast, so be ready to move quickly.
Foreclosure Purchase Pros and Cons
Foreclosures offer big discounts but also potential drawbacks:
Pros
- Deep discounts of 20% or more off market value
- Good opportunity in expensive markets with limited inventory
- Chance to negotiate lower prices and favorable terms
Cons
- Properties often need extensive repairs
- Stiff competition from investors paying cash
- Approval process can be lengthy with uncertain timeline
- Can’t tour inside prior to bidding in some cases
Weigh your risk tolerance and do thorough cost estimates before bidding.
How to Buy a Foreclosure at Auction
Buying a foreclosure at auction involves these key steps:
1. Research before bidding
Learn as much as possible about the property beforehand:
- Review the property history report for liens, violations, repairs needed, etc.
- Drive by to assess external condition and neighborhood.
- Determine your maximum bid price based on needed repairs and local sales data.
- Get pre-approved for financing in case repairs are minimal.
2. Inspect during open houses
Ask about inspecting the interior at open houses. If none are offered, view what you can externally.
3. Bid in person on auction day
Arrive early with certified funds for the deposit amount. Listen closely to the auctioneer and jump in when you’re ready with your maximum bid.
4. Pay the winning bid promptly
You’ll need to provide deposit funds rapidly once your bid wins. The remaining amount is generally due within 1-2 days.
5. Complete additional paperwork
Work quickly to submit necessary paperwork and set closing date. Transfer utilities, insurance, etc. into your name.
Auction sales move extremely fast, so know your budgets and goals before bidding.
How to Buy a Foreclosure Listing
Purchasing a bank-owned foreclosure functions similar to a traditional home purchase:
1. View the listing
If possible, tour the interior to assess the condition. However, foreclosures are often sold “as-is” with no seller repairs.
2. Submit an offer
Bid competitively but below market to account for needed repairs. Request home inspection and appraisal contingencies to protect yourself.
3. Negotiate as needed
Use the inspection and appraisal results to request repairs or credits for issues found. Be prepared to walk away if problems are too extensive.
4. Finalize loan details
Continue working with your lender to get the mortgage fully approved and underwritten. Shop multiple lenders familiar with foreclosures.
5. Close on the property
Final walkthrough, signing paperwork, and closing works similarly to traditional deals. But extra patience for snags is key.
Move fast, as many investors are pursuing the same deals. Expect heavy competition.
Financing Foreclosures with a Mortgage
Financing options for foreclosures include:
- FHA 203(k) loans – Cover purchase + renovations. More flexibility than conventional loans.
- FHA 203(b) loans – Finance purchase. Allow lower credit scores than conventional mortgages.
- HomePath or HomeSteps – Special programs through Fannie Mae and Freddie Mac for foreclosures they own.
- USDA and VA loans – 100% financing options for eligible borrowers. Can be used for foreclosures.
- Conventional loans – Possible for foreclosures in good condition needing minimal repairs.
Each option has pros and cons. Discuss best loan approach for your scenario with a knowledgeable lender.
Paying Cash for a Foreclosure
Paying cash allows you to compete with investors and close quickly. Consider:
- Tap retirement accounts – Use Roth IRA funds or cash out a 401(k) or IRA. Weigh taxes/penalties carefully.
- Home equity line of credit (HELOC) – If you have sufficient equity in your primary residence, a HELOC provides accessible funds.
- Private lenders – Hard money or private money loans offer short-term financing at higher interest rates.
- Crowdfunding – Platforms like Groundfloor allow pooled investments in rental properties.
- Partners – Team up with other investors to combine down payments and other capital.
Cash offers are strongest, but assess risks before liquidating retirement savings or borrowing at high rates.
Inspecting Foreclosures Before Buying
Thoroughly vet properties before bidding since foreclosures are sold “as-is”:
- Hire a professional inspector. Don’t skip the general home inspection, even if you can’t go inside, to check roof, foundation, pests, etc.
- Assess structural soundness. Look for sloping floors, cracks in walls and ceilings, mold, water damage.
- Evaluate major systems. Plumbing, electrical, HVAC, appliances – assume they will all need repairs or replacement.
- Consider additional tests. Radon, lead paint, septic tank (if applicable) should also be examined.
- Get contractor estimates. Use inspection reports to get bids from contractors on likely repair costs.
Factor needed repairs into your offer price and financing plans.
Rehabbing Foreclosure Properties
Most foreclosures require significant repairs and upgrades:
- Prioritize safety and habitability issues – Focus first on electrical, plumbing, roofing, structural problems.
- Take care of deferred maintenance – Bring mechancial systems, appliances and finishes up to par.
- Enhance curb appeal – Improve landscaping, exterior paint, front entryway to attract tenants/buyers.
- Add value through upgrades – Refinished floors, updated bathrooms/kitchens, and energy improvements boost appeal.
- Permit and oversee all work – Hire licensed contractors and don’t cut corners on permits or inspections.
- Stick to your budget – Having contingency funds is wise since unexpected issues can arise during renovations.
Assume all systems and finishes will need at least minor repairs. Build out a detailed renovation plan and budget before purchasing.
Managing Foreclosure Investments Long-Term
Owning rental properties takes hands-on work:
- Advertise vacancies – List units on rental sites and your website. Highlight upgrades and amenities.
- Qualify tenants thoroughly – Screen applicants carefully by running credit/background checks and contacting references.
- Use proper lease agreements – Utilize a local real estate attorney to draft a comprehensive lease.
- Stay on top of maintenance – Be proactive with repairs to keep properties in rentable shape.
- Pay bills and taxes on time – Missing payments can quickly cause major headaches.
- Comply with laws – Stay current on landlord-tenant and fair housing regulations.
- Build reserves – Set aside funds monthly to cover vacancies, maintenance and periodic rehab costs.
Managing rentals effectively helps maximize returns and minimize hassles. Consider hiring a property manager if your portfolio grows.
FAQs About Buying Foreclosures
How much below market value do foreclosures sell for?
Discounts vary greatly by property. In a normal market, 10-20% below market is common. In a buyer’s market with high inventory, discounts can reach 40% or more. Location, property condition and market factors all impact price.
Do you need a realtor to buy a foreclosure?
It’s smart to use a real estate agent experienced in foreclosures to represent your interests, provide guidance and assist with negotiations – but it’s not technically required in most cases. If buying a property the lender already owns, they may not pay buyer agent commissions.
How can you get a foreclosure before auction?
A pre-foreclosure happens when the owner defaults on payments but still holds the deed. You can attempt to purchase pre-foreclosure properties directly from struggling owners to help them avoid auctions. This involves negotiating a short sale where the lender agrees to forgive a portion of the unpaid mortgage balance.
What hazards should you look for when viewing foreclosures?
Look for structural damage like cracked foundations, water leaks and pest infestations. Also beware of black mold and other environmental hazards that may be present if a property has sat vacant. Assume all mechanical systems will need repair. Thoroughly vetting properties before bidding is critical.
Can you rent out a foreclosure after buying it?
Yes, most lenders allow you to rent out a foreclosed property after purchase. However, if using a residential mortgage, you will typically need to occupy the home as your primary residence for at least 1 year before converting to a rental. Refinancing to a commercial loan can remove this restriction sooner.
To Recap
Purchasing a foreclosure takes grit and diligence but can pay off big when you score a home below market value. Set your goals and budgets upfront before house hunting. Research auction procedures if going that route. Inspect carefully, know your dealbreakers, and don’t overpay for extensive repairs needed. Look for contractor teams able to execute renovations smoothly once you take ownership.
With the right property, financing and sweat equity, a foreclosure investment can provide stellar returns. But also know when to walk away if undiscovered issues render a deal economically unviable. Patience, planning and persistence are key both when bidding on foreclosures and managing them for the long haul. Take time to thoroughly evaluate each opportunity and align it with your investment objectives.
In another related article, 10 Tips for First Time Home Buyers: Your Complete Guide to Buying Your First House
