What’s the Process to Buy a Foreclosure?

Written By: Ashley Sutphin
Thursday, November 26, 2020

Some analysts are predicting the number of foreclosures will go up as we near the end of 2020. While the housing market is strong, coronavirus shutdowns have significantly impacted the economy, and unemployment remains high.

If youre waiting to see if you can find a deal in the form of a foreclosure, its important to be prepared for the process. Many of the elements of buying a foreclosure are similar to buying any other home, but if youre clear on what to expect, you can streamline the process.

Types of Foreclosures

There are two general types of foreclosed homes. There are bank-owned homes and real estate-owned properties REO. The lender owns the homes in both scenarios. The primary difference between the two is the stage of the foreclosure.

Bank-owned homes are in the midst of foreclosure, so the homeowner has quit making payments, and their lender is taking steps to remove them from the home. Foreclosed homes are bank-owned properties that go to auction. If the home doesnt sell at auction, its still owned by the bank, but its an REO. REO properties have been in an auction and still arent sold. The lender will often try to sell through them REO agents.

Foreclosures tend to be cheaper and sometimes significantly less expensive than similar properties in the area. Many foreclosures are sold well below market value. You might also get other benefits of buying a foreclosed home, such as lower interest rates, reduced down payments, and you may avoid appraisal fees and some closing costs.

There are situations where you can find a deal on a distressed property, but its not bank-owned.

For example, theres the pre-foreclosure phase. This means the lender has let the borrower know they are in default, but if the homeowner can sell the property, they might avoid foreclosure proceedings. Short sales are when a lender takes less for a property than whats owed on a mortgage. You dont have to be in default for a lender to approve a short sale.

There are also government-owned properties. When a property bought with a government-backed loan goes into default, the federal government owns it.

Buying a Foreclosed Home

If you want to buy a foreclosure, the following are the steps to expect:

Mortgage Preapproval

Its a good idea to have a preapproval for a mortgage from a lender before you start looking for foreclosed properties. Preapprovals will show youre serious about buying, and it will guide your search.

Find an Agent Experienced in Foreclosures

Its important to have an agent on your side whos experienced in dealing with foreclosures. If you dont have a specific property in mind, they can help you find options in your area.

Make a Competitive Offer

Just because youve found a property in foreclosure doesnt necessarily mean you dont have to be competitive in your offer. Youre probably already going to be getting a substantial deal, but if you make an offer too low it can be rejected.

Get an Inspection

You buy foreclosed homes as-is. Whoever is on the seller side isnt going to make any repairs. Whatever is needed becomes your responsibility if you buy the property. That means you need to know what youre heading into when you make an offer. If you do an inspection and the problems are too much for you, you should pass on the property. The inspection is only to help you make a decisionwhatevers found isnt going to be much in the way of a negotiation tool.

If you buy a home at auction, you dont have the opportunity to do an inspection.

Usually, if you buy a home at an auction, you cant even go inside beforehand.

The Risk for Buyers

There are a lot of risks that come with buying a foreclosed home. There are often problems and hidden costs that you may not even discover in inspection. Its also a slow process.

Theres a lot of paperwork when buying a foreclosure. Banks tend to be slow on their response times with these properties, and if a bank has a backlog of foreclosures, it can take months for them to respond to an offer.

None of this automatically means buying a foreclosure isnt a good option for you. It just means that you need to prepare yourself for these hurdles.

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