Buying homes in foreclosure may sound like a great idea, but there are a few things that every homebuyer should be aware of before committing to purchase. Foreclosure properties generally take longer to secure, and the process isn’t always easy. Below are some of the things you should do, and aspects of buying a home in foreclosure you should be aware of.
Buying Homes in Foreclosure: Things to Know and Do
Find an Appropriate Agent
The first thing you should do as a buyer is find an experienced real estate agent who works directly with the banks that foreclose on residential properties. This will save you the expense of splitting the commission between 2 agents. This is one of the only cases where you are just as well off or better off working without a ‘buyer’s agent’. With foreclosed properties, having a buyer’s agent matters much less than it does with traditional real estate because there’s less room for negotiation anyway. This is because the home is already being priced at a reasonable market value, and the lender is not likely to take much less.
The other advantage to having an agent who routinely works with REO homes and homes in foreclosure is that they can help you comb through the many listings, and bring your attention to properties that have not yet been made public through the listing database in that area. They can also help you make an offer that will be accepted. Remember, the lender is already pricing the home to sell quickly. There are limits on the types of negotiations you can make.
Get Pre-Approved for a Loan
This is a good idea for anyone looking to purchase a home, but is even more important for the person buying homes in foreclosure. This is because the lender is looking to ‘unload’ the property quickly and will ultimately give preference to those buyers who have already secured funding. Whereas a traditional seller may be willing to deal with you despite not having a pre-approved letter, or may even wait for you to get approval after accepting your offer, banks will traditionally ignore your bid in favor of someone who already has loan approval. Your only other option, if you hope to compete with pre-approved buyers, is to offer full payment in cash.
Another thing to realize is that the bank that owns the property may not be the lender that will be financing your mortgage. Don’t assume that you can find a home in foreclosure, seek approval from the bank that owns it, and expect to make a deal with them directly. It’s just as expeditious and sensible for them to sell the home to borrowers who already have their own lender. Remember, they’re just trying to unload unpaid assets. The agents working directly with these banks are usually not loan officers themselves; so finding the home and finding the funding are two separate transactions.
Getting pre-approved for a loan will also allow you to shop around for the best possible rates in your area.
Foreclosure Properties are ‘As Is’
With few exceptions, homes in foreclosure are sold ‘as is’. This means the property is being sold at a certain price in whatever condition it’s in. Often, the bank has only recently acquired the property, and there may be no official record of its condition or level of maintenance. Many foreclosed homes are also older properties, so the likelihood of there being necessary repairs may be higher.
You should plan on paying for your own home inspection and deciding if the home is worth the asking price based on that (the bank will not fund the home inspection in most cases). You will not have the same negotiation power you would otherwise have if the home is in need of repairs. The bank is not likely to lower the asking amount based on the level of repair or remodeling that is in order. If the home doesn’t seem worth the asking price based on a home inspection, keep looking. Or at the very least, plan out your finances beforehand in order to budget for the necessary repairs before moving yourself in or renting it out.
Be Prepared to Make a Good Offer
Homes in foreclosure may sell much faster than other homes, depending on the market conditions in that area. Sometimes, foreclosed homes will only be on the market a few days, or even hours. Generally, the person with pre-approved funding who makes the best offer as soon as the property is put up will secure the home. The lender may even put the home up for auction within days of it hitting the market. In this case, you will be bidding against others more directly, and should be prepared to spend a certain amount (within reason) without further negotiation.
When it comes to foreclosed properties, put your best offer forward based on market prices in the area.
If homes are selling quickly in a particular neighborhood, you may find yourself in the position of paying the asking price without much time or room for working the deal out in your favor. Make sure you do not offer more than you can comfortably afford, taking into consideration that there may be additional out-of-pocket expenses and repairs.
In the end, foreclosed homes are usually a great deal for the informed buyer, even when the home is in need of basic repairs and upkeep. However, finding the right foreclosed property, in the right condition for the right price, can be an ordeal. An experienced agent can make the process much faster and easier, but you should still take the extra time beforehand to mentally and financially prepare yourself for the venture.