Buying a foreclosed home can be an excellent investment. It’s an opportunity to buy a house at below market value. The national average price reduction is 5%. There are also state and regional programs to help sell foreclosed properties.

Price is the obvious advantage. You can also end up with instant equity depending on the property. It can be a good idea to buy a home in foreclosure but prepare yourself. The market for these properties can be very competitive.

Do your homework. We can help.

What’s the Plan?

There are different ways to purchase foreclosed properties. Why are you buying these homes? Are you planning to flip them, rent them or move into them? Your purchasing strategy should reflect the plan.

Live-in: If you plan to move your family into the house, the home needs to be in good condition. Purple wallpaper is one thing, but a toilet that flushes into the shower isn’t going to fly. Get a thorough home inspection and have your funds available.

Pay attention to up and coming neighborhoods. If you buy in early, gentrification builds equity fast and increases resale value.

Flipping: The business of flipping houses has been glamorized. Don’t kid yourself – it’s a big commitment and a lot of hard work. Buying cheap foreclosed properties is the premise for profit. The budget for these projects have to be carefully thought out:

  • Cost of the house
  • Inspection fees and permit costs
  • Buying materials
  • Paying skilled contractors

You don’t earn your money back until you can get it on the market. Make sure you have relationships with high-earning realtors.

Rental: Rentals fall somewhere in between the first two options. The home needs to be livable as quickly as possible to start earning income. Fixing cosmetic issue are usually less costly than flipping a house but as a landlord, you are responsible for repairs.

Turnover in tenants, faulty HVAC or leaky pipes will wipe out your profits. Look for ugly houses – cosmetically challenged but structurally strong. Paint, carpet, fixtures are affordable. Get a thorough inspection. Make sure you have good tradesman to help if there’s an issue.

Foreclosure Trends

This chart shows the foreclosure trends up to March 2020.

Forecasts for the housing market due to coronavirus aren’t pretty. This is the time to start monitoring foreclosed homes.

Buying Foreclosed Homes

When homeowners can’t their pay the mortgage, they have two options to avoid foreclosure:

  • Pre-Foreclosure Sales
  • Short Sales

In both these scenarios, the sale needs to happen fast. You might deal with real estate agents, banks or property owners.

Pre-Foreclosure Sales

The actual process to foreclose on a property can be lengthy. Selling the home before it concludes is a pre-sale. The homeowner can avoid some of the legal and financial impact of a foreclosure. The bank cuts their losses earlier and avoids costly eviction processes.

So they are very willing to negotiate on price. You can get these listings in public records at the courthouse. Some are for sale by owner, others use real estate agencies. There are online tools to help you find these properties.

Short Sales

A short sale can happen before a homeowner is in default. They are trying to avoid default by working with their lender. The lender must agree to sell for less than what’s owed.

When a home sells short, the owner is facing a financial hardship that could put them in default. The bank or mortgage broker decides to take a small loss as opposed to dealing with a foreclosure. Real estate agents have these listings.

Be aware that short-sales can be challenging. The owner and realtor may be happy with your offer, only to have the lender reject it.

More Options for Buying Foreclosed Homes

There are three other options for buying a foreclosed home:

  • Government-Owned
  • Real Estate Owned (REO)
  • Auctions

Government Owned

When homeowners default on a government loan, the government takes back the property. Find these listings on agency websites that offer government loans. Each agency has a different process and handles things differently.

These homes are often cheaper than other foreclosures. They sell “as-is” properties, so get a thorough home inspection. If there are structural issues, you can ask for repairs. They may or may not agree to do it.

Beware of houses that have issues with electric or plumbing. If you’re buying the house to flip, they become a money pit very fast. If you’re planning to move in, delays are almost inevitable.

REO Sales

Banks or lenders own REO homes. They purchased it at a foreclosure auction and are trying to resell it. The point is to recoup some of the money lost due to the foreclosure.

REO listings are in the MLS used by real estate agents. These transactions can be simple or cumbersome. Banks are slow in handling the approvals. They may want to haggle more than necessary.

Our suggestion is this – get a read from the agent. He or she should have some experience with the lender. If the purchasing timeline is too long for you, step back and keep looking.

Auctions

Auctions begin once the foreclosure process is complete. They’re run by auctioneers hired by the lender. Sometimes the sheriff department holds them for property seizures. The IRS will auction a property for back taxes.

Auctions offer excellent bargains but come prepared to pay cash. At a minimum, you’ll need a high percentage of the final purchase price. Make sure you read the auction notices carefully before you attend.

Best Opportunity?

Sheriff auctions! Set up a Google alert for “sheriff sale auctions.”

Sheriffs seize homes that are in default. They give the homeowner a chance to get back on track. If that doesn’t work out the sheriff conducts an auction to sell the property.

Sheriffs aren’t inclined to hold on to foreclosed homes. The longer they sit vacant, the higher the risk of vandalism. Banks that hold these mortgages want the property off their books. They still want a fair offer but depending on the property – this is the best chance to get a great deal!

5 Prep Steps

When you’re buying foreclosed homes, you need to be ready to move on a deal. Here are some tips for staying ahead of the game.

1.    Know what you can spend

This is true for any home you’re planning to purchase. Use an affordability calculator to determine how much you can spend. This number also gives you an idea of what you might need to borrow.

2.    Get pre-approved for a loan

This is pretty basic. Banks process these requests quickly. If you have a good credit score and make a reasonable income, it shouldn’t be challenging.

If your credit isn’t so great, start paying off your credit card debt. Set a goal to improve your FICO score within 6 months.

3.    Build Relationships

There are relationships in the real estate business you need to have. Start exploring your contacts and get connected now. If you need a fast response, you don’t want to be cold calling anyone.

People you need to know:

  • Real estate agents: Get to know more than one. They serve different locations and clientele.
  • Home Inspectors: Put them on speed dial.
  • Electricians/Plumbers: These guys are in demand all the time. You want to be near the top of their priority list. The same for HVAC installation and repair.
  • Loan officers: A positive relationship with your bank can help you keep money flowing. This is even more critical if you’re flipping homes. Tell them what you’re trying to do and avoid pitfalls in the process.
  • Painters/Carpet Installers: You may or may not need them. Real estate agents and property management companies will have names for you.
  • Government officials: Fixing up houses is a quagmire of permits and licenses. It’s good to know who’s in charge of what. Do your research and reach out when appropriate.

4.    Cash flow

If you’re going to an auction, you will need cash. How much can you access quickly? If the answer is “Not much,” start working on a plan to fix it. Talk with your bank and see what you can do.

Make sure you keep documentation on any large cash transactions. The IRS and law enforcement agencies get suspicious of large cash purchases. Keep your bank in the loop at all times.

5.    Study neighborhoods

Start by paying attention to changes in your community. Keep an eye on boundaries between neighborhoods. Buy when gentrification looks probable.

There are tools to look at properties and evaluate neighborhoods. Some are free, others are premium. Take your real estate agent out to lunch to pick his or her brain. Set up Google alerts to help you stay on top of things, like sheriff auctions or pre-foreclosure sales.

The goal is to keep in front of the curve.

How can I buy foreclosed homes with no money?

You have to have a way to pay for the home. Though you may not need cash upfront, you will need to pay something eventually. You can use traditional methods, mortgages and loans. You can share the properties purchase with a partner. They bring the money, you provide the skills.

The most interesting way to buy a foreclosure without any money is offered by HUD. It’s a little complicated but worth the effort.

Be Smart

There is a whole industry built around buying real estate without money. These companies are behind a lot of the yard signs you see – “We buy ugly houses.” Some of them have an Amway type referral system. The recruiters can be aggressive.

They offer group meetings, webinars, courses and templates. They can be costly. There’s an investment upfront. Then there are other fees and expenses along the way. There are promises of support, that receive mixed reviews. Sometimes there is a lender or preferred financial partner.

These organizations help provide people with structure. If you need a motivator, they provide it. But pay attention. If the firm makes a lot of exaggerated, get-rich-quick claims, step back for a minute.

Remember your goal is to buy real estate without money. Don’t spend all yours on company’s who want to tell you how to do that.

The Truth About Buying a Foreclosed Home

Is it a good idea? Yes, but not for everyone. Buying a foreclosure takes time. It’s a lot easier if you have access to credit or cash. If you have no free time then real estate may not be for you.

Pitfalls and Problems

Here are some of the issues you can expect to encounter.

  1. Empty Houses

Foreclosed homes are often abandoned properties. The homeowners are often angry. The houses are left a mess. Rotting food, rodents and bug infestations are not unusual once the electric is off. Sometimes they damage sinks or toilets or take appliances that belong to the home.

Vandalism is a big issue for abandoned houses. Broken windows are common. Graffiti is a possible. Squatters try to take the home. It may be a mess.

Don’t overlook what it takes to get the home cleaned up.

  1. Bankers

Depending on the lender, you can expect major delays. If you plan to move into the house, prepare to adjust your timeline.

When a foreclosed home is bank-owned, (REO) negotiation can be tedious. Lenders want to recoup as much money as possible. Under the circumstances, you’d expect them to be anxious to get rid of these properties.

But that is not the case. If the house has problems that make it uninhabitable, it can be even worse. For people hoping to fix and flip, paying cash is the best option.

  1. Bad Maintenance

Do it yourself home improvements are a buyer’s worst nightmare. Their projects have no permits or inspections. The quality of the work is suspect.

Homeowners who are in default rarely have the money to maintain the home. The leaky roof continues to drip. The water damage gets worse. The central air doesn’t work. The ductwork is moldy. The furnace is barely blowing.

These are a few of the problems. Make sure you have a good home inspector who knows what to check in abandoned homes.

Is it a Good Idea to Buy a Foreclosed Home?

Yes, if you’re willing to do the work. A foreclosed home can save you money and offer instant equity. But be smart about it.

Start by offering 80% of the home’s value. The lender may consider that fair. If you can shorten the time to close, it’s to your advantage.

Check to see how much similar properties are selling in the same neighborhood. If the price is higher or lower, adjust accordingly. Expect surprises. When you put together your buying budget, add on 25% for the unexpected.

Please don’t overestimate your ability to do repairs. If you’re working full-time, you’ll be spending nights and weekends putting up drywall. Always get required permits and use licensed tradesmen for complex work.

Get with a realtor or an online listing service. Touch base with your bank about any foreclosed properties they might have.

It’s time to buy your first foreclosed home.

Sheriffs aren’t inclined to hold on to foreclosed homes. The longer they sit vacant, the higher the risk of vandalism. Banks that hold these mortgages want the property off their books. They still want a fair offer but depending on the property – this is the best chance to get a great deal!

 

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