Many real estate investors dream of scooping up a cheap foreclosure and being able to sell it for a tidy profit. However, it’s important to keep in mind that foreclosures aren’t quite as awesome as they might seem. These properties come with some unique issues to be aware of. If you want to know how to buy a home in foreclosure and do it successfully, follow our guide.
Understand the Different Types of Foreclosures
Foreclosure tends to be a catch-all term that describes any property where the original owner couldn’t pay the mortgage. The reality is that there are actually several different types of foreclosures. Different types may require different approaches, so you’ll need to understand the various foreclosure styles.
- Pre-foreclosure: This is a home where the owner cannot pay their mortgage, but the lender hasn’t taken possession yet. Other than the owner being very motivated to sell, the sale is basically just a usual sale.
- Short Sale: In this arrangement, the property is usually worth less than the owner paid for it. The lender agrees to let the owner sell the property and turn over all profits to the lender. These sales tend to take a little more time and involve some extra paperwork.
- Sheriff’s Sale Auction: After the owner defaults, the lender can choose to let the property go at an auction. These are run by local law enforcement and involve all interested buyers placing bids for the property. Buying a property this way is very cheap, but you don’t usually get to examine the property much beforehand.
- Bank-Owned Properties: Instead of selling at an auction, the bank may choose to hold onto the property and sell it themselves. Buying these properties is like buying a normal home, but you’ll negotiate with a bank instead of an individual seller.
- Government-Owned Properties: Since the government backs some loans, foreclosed properties sometimes revert to the government. To buy these homes, you have to work with a broker working for the government. This can be time-consuming, so you’ll need to be patient.
Start the Process Early
One of the main downsides of buying a foreclosed home is simply that it takes longer. You might need to complete extra documents or get approval from the owner’s lender. In addition to the extra paperwork, things take longer because you’re dealing with big organizations that own hundreds of properties. All the complications of buying a foreclosure can make the process take months instead of weeks.
Make sure your timeline accounts for the lengthier process. If possible, start looking for foreclosed homes months before you need the property.
Get Your Finances in Order
When you’re buying a foreclosed home, there are some extra financial considerations to think about. It’s not quite as simple as just finding a property and getting a mortgage from the bank. Many foreclosed homes are sold for cash. The various organizations that own the home aren’t usually willing to wait for you to get a mortgage. Another issue is that many foreclosed homes are damaged. Banks might not be willing to give you a loan in the first place.
If possible, try to look at your finances and liquidate cash for the purchase. If this isn’t an option, consider talking to your lender before you start hunting for a property. Having a preapproval can show owners you’re serious, and it can help you compete with all the cash buyers. For those planning on buying a fixer-upper, it may even be necessary to get a business loan instead of a traditional mortgage.
Find an Agent Who Handles Foreclosures
Purchasing a foreclosure isn’t usually a DIY task. Since these sales have even more paperwork than usual, it’s not something you can easily handle yourself. Taking the time to find the right real estate agent who can talk you through how to buy a home in foreclosure can save you a lot of stress later on. Try to look for a buyer’s agent who has experience handling foreclosures.
A good agent does more than just handling paperwork. They can also walk you through the process of looking for a good property. With their industry contacts, they can even bring your attention to properties that aren’t on the market yet. Having a good agent to walk you through the whole process makes things far simpler.
Create an Offer That Accounts for Hidden Costs
Many buyers make the mistake of placing a large offer for a foreclosure and then being overwhelmed by hidden costs. Compared to a typical property sale, foreclosures tend to come with a lot of add-on costs. The buyer often has to pay any delinquencies associated with the property like liens or back taxes. In many cases, foreclosures also need extra repairs and renovations that add extra costs.
Try to create an accurate picture of these costs so that you can factor them into your offer. If possible, get experts to examine the property and provide estimates for fixing it. Make sure your agent asks about what liens or other delinquencies are attached to the house. You ultimately want to offer a fair price that will leave you with some savings to handle extra costs.
Think Carefully About Your Plans for the Property
When you’re looking at foreclosures, it’s easy to get tempted by great deals. Though a low price is appealing, make sure the property actually works for your needs is critical when learning how to buy a home in foreclosure. You’ll lose more money in the long run if you end up saddled with an awkward layout or a too-small space.
Try to thoughtfully consider why you want a foreclosed property. Think about your plans for renovation and decide whether you want to sell, rent, or keep the home. Once you have a clear plan, assess the foreclosure to see if it works for your plan. By staying focused, you can avoid making an impulse purchase you regret.
Be Prepared for Possible Issues
When you’re dealing with a foreclosure, it’s important to expect the unexpected. No matter how carefully you arrange everything, issues are likely to pop up. Since foreclosed properties are often neglected or vandalized, they can come with some physical problems. The financial problems of the previous owners can also cause unexpected legal troubles.
In some cases, preparing ahead of time can help solve the problem. For example, since you usually cannot ask the previous homeowner to disclose issues, an extra-thorough inspection can alleviate some concerns. Keep in mind that you might find out about some surprising problems, like liens on the property, at the last minute. It’s only a good idea to buy a foreclosure if you can handle stress and surprises.
Ultimately, a foreclosed home can be a smart investment. For the best outcome, you have to be willing to do plenty of research and hunt for the right property. If you want to make this process as easy as possible, turn to the professionals. At Evergreen Investments, we can help you with everything from learning more about how to buy a home in foreclosure, finding a foreclosed home all the way to fixing it up to flip for a profit. Contact us today to learn more about our real estate investment services.