First-time homebuyers beware: Buying and owning a foreclosed property isn’t as easy as it sounds.
A foreclosed property is sometimes known as a bank-owned or real estate-owned (REO) property
You can also buy foreclosure homes at public auction or before, when the home is in pre-foreclosure
You can get a conventional or FHA-insured loan to buy a foreclosed home
Unless you are a seasoned investor house flipper, buying a foreclosure can have unforeseen consequences as they require renovations and may have unforeseen liens
What’s not to like about buying a cheap home that needs a little fixing up? Buying a less expensive house means taking out a smaller mortgage, which ultimate saves you money in interest over the years. For this reason, many people look to foreclosure homes and distressed properties. A home that’s been foreclosed on has been repossessed by a lienholder, usually a bank. But you can actually buy a foreclosure property before then, like at a public auction, or even during the pre-foreclosure process.
Buying a foreclosed property may seem like a smart idea, but it may not always be worth the time or the money. Foreclosure homes may be in very poor condition and need extensive repairs, which you may not even know about. Foreclosed houses are often sold “as-is” and sometimes you can’t even see them before you buy. All of that may leave you with a damaged home with liens and unresolved issues, which can cause another headache.
The foreclosure market can be challenging to navigate and may require patience and negotiation. We’ll walk you through everything you need to know about buying a foreclosure home at any stage.
You can find foreclosure homes through the usual househunting methods, like using a real estate agent, browsing through the real estate section of the newspaper, and searching real estate websites. Foreclosure homes are listed both on general listing sites, like Zillow, and others that specialize in foreclosure properties, like realtytrac.com or foreclosuresusa.com. Some websites might require you to make an account or pay for membership. If you use a website, make sure to still maintain contact with a human being (you’ll more than likely have to reach out the listing agent at one point), since foreclosure properties may not be updated in a timely manner.
The process for buying a foreclosure house will depend on the stage of the foreclosure process the property is in: pre-foreclosure, auction, or when it becomes a bank-owned property.
Learn more about how foreclosure works and how to avoid it.
No matter what type of foreclosure home you’re looking to buy, make sure you research it ahead of time. Look up comparable properties in the neighborhood to get a sense of the market price and make a rough list of anticipated repairs and estimate the costs.
We highly recommend working with a real estate agent when applicable. Whether you’re interested in a property in pre-foreclosure or a fully foreclosed house, a real estate agent can help negotiate on your half and look out for your best interests. Make sure you find a buyer's agent with experience in dealing with foreclosure homes, or even with designation or certification in dealing with distressed properties.
Pre-foreclosure is the period before a property is sold at public auction. It begins when the homeowner is notified that they may default on their mortgage loan. This notice of default (NOD) or lis pendens is usually registered with the local court. So if you want to get a head start on finding a potential foreclosure property, you can search through the public records. You can also check your local newspaper, since counties are typically required to list the foreclosure publicly. Online listing sites may also note pre-foreclosure homes.
However, just because the homeowner is in default doesn’t mean they are willing to sell you the house (even if it is the best solution for them). The homeowner may have other plans, like negotiating a loan modification plan with their mortgage lender. Trying to buy a pre-foreclosure property can require a lot of patience, since it’s very early on the foreclosure process, which can last for months. This is where having a good agent can help you. (If you’re interested in buying a short sale, learn more here.)
You don’t need a buyer’s agent to bid at an auction sale— in fact, a buyer’s agent does not receive commission from an auction sale so you may be hard pressed to find one to work with you.
Buying a foreclosed home through auction can happen at the county courthouse or online. In-person foreclosure auctions are open to the public, so don’t get intimidated if it’s crowded. Not everyone is there to bid, but those who are may be professional house flippers or experienced real estate investors . You usually have to register ahead of time and show proof of finances if you plan to bid at the auction. In some states you may even have to put down a deposit, based on the projected final bid.
Online foreclosure auctions make it easy for people to bid on properties from all over the country. If you win the bid in an online auction you may have to pay fees, like a percentage of the final price, to the auction site. Someone from the auction site should reach out to you and guide you through the process and paperwork. You’ll probably have to make a deposit while the lender checks out your financial situation.
Homes that failed to sell at public auction and homes acquired through a deed-in-lieu of foreclosure become bank-owned properties or real estate-owned (REO) properties.
The process for buying an REO property can be similar to a conventional home purchase. A real estate agent will help determine the price as well as show and sell the house. These houses are generally listed at close to market value, unless they are in need of considerable repair.
There are many ways to find real-estate-owned properties. Large banks may list REOs for sale on their websites, along with the listing agents. Fannie Mae’s HomePath and Freddie Mac’s HomeSteps have their own databases of foreclosed homes, as does the U.S. Department of Housing and Urban Development.
You can usually get a loan to buy a foreclosed home from a conventional lender. The only time a lender may be hesitant to lend you the money is when the property is in so poor of a condition that the lender feels like it’s not worth the investment.
The first step to buying a home, including any foreclosed real estate, is to get mortgage preapproval.
Fannie Mae and Freddie Mac also have their own loan programs designed for buying real-estate-owned properties. These organizations have first-time homebuyer programs if you want help buying one of their REO properties.
You can also try to get a government-insured FHA loan to buy a foreclosed home, or 203(k) rehab loan if you plan to renovate the property. You’ll need to meet certain income and eligibility requirements and must live in the property as your primary residence.
Buying a foreclosed home is a big responsibility and potential financial risk, especially for first-time buyers. Here are some things to consider when buying a foreclosure:
Right off the bat, the asking price of a foreclosure home might not be cheap. Once a house becomes an REO property, there is less of an immediate need to get it sold. For pre-foreclosure properties in a hot real estate market, the homeowners may try to list the property at a higher price to get as much money out of the sale as possible.
Homes sold at foreclosure auctions may start out very low, but have a potential to rise in price if there are other competitive bidders.
Foreclosed homes are sold “as-is”. You may not be able to conduct a home inspection and negotiate repairs or receive any seller concessions as part of closing costs. All renovations will come out of your own pocket, and if you can’t get a good look at the house — as is often the case with homes bought at auction — they may be more extensive than you prepared for. (Some renovations may not even add much value to your home.)
When you buy a property, you will inherit any liens or other encumbrances or clouds on the title, like unpaid property taxes or issues of ownership. It can be a hassle to clear the title and you might end up paying a lot in legal fees to clear it.
Since you can’t know everything that's wrong with a house on first sight, you should consider paying for a title search and getting title insurance to check for any surprise liens. Theoretically, liens should be cleared when you buy at foreclosure auction, but some that might stick around to cause you trouble include liens for unpaid child support, unpaid property taxes, and unpaid federal and state taxes. Sometimes the original homeowner might pay off existing creditors during what’s known as a redemption period and try to reclaim ownership even after the house has been sold.
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Elissa is a personal finance editor at Policygenius in New York City. She writes about estate planning, mortgages, and occasionally health insurance. In the past she has written about film and music.
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