If you’re bargain-hunting for your next home, you may stumble across foreclosed homes at great prices. Here’s what you need to know before you commit.
If you are looking for the opportunity to buy a home but you are working with a tight budget, you may have considered the potential savings of a foreclosed property—that is, one that has been reclaimed by the bank after the previous owner failed to fulfill loan repayment obligations. This option can offer exceptional potential both for traditional homebuyers and for savvy investors. However, before you begin the process, it is important to ask yourself whether or not you are ready for the sometimes-lengthy process of buying a foreclosed home, and to educate yourself as to how it differs from a traditional home sale. Don’t worry—we’ve got you covered with this rundown of considerations:
Pros and Cons of Buying a Foreclosed Home
While there can certainly be significant advantages to buying a foreclosed home, the process can be complicated by a number of factors, including legal issues and the lender’s own internal policies. Here are some of the pros and cons you might want to evaluate if you’re considering buying a foreclosed home:
- Lower Costs: The bank is motivated to rid itself of the property, so it’s not subject to the same market conditions as other homes. Accordingly, foreclosed homes are often sold at below-market prices.
- Clear Title: Before they sell the property, some banks will clear the title to ensure an established chain of ownership. Be sure to find out if the bank you are working with has done this in the case of your purchase.
- Negotiated Repairs: Depending on the requirements of your loan, you may be able to negotiate repairs with the bank in order to ensure that you can obtain financing.
- Loan Options: Unless the property is sold at auction, there are typically a number of loan options available for the purchase of a foreclosed property, including VA, FHA, and conventional loan products. Simplist can even help with all of these!
- Extended Timeline: In many cases, it takes much longer to purchase a foreclosed home than it does to conduct a transfer of ownership from one homeowner to the next. This can be due to a variety of factors, including the bank’s internal policies or local governments’ required waiting period for owner redemption.
- Deferred Maintenance: It stands to reason that, in many cases, maintenance on the property will have been neglected due to the prior owners’ lack of funds and due to the long-term vacancy of the property. It’s worth bearing in mind that you may have to do a fair amount of work in order to make the property safe and habitable—which is typically required to secure a mortgage.
- As-Is Sales: Similarly, some banks may choose to only entertain “as-is” sales, meaning that they’re not prepared to negotiate when it comes to needed repairs and improvements to the property. As mentioned above, you’ll need to make sure the property is “safe and habitable” to secure a mortgage, but that leaves some wiggle room for smaller needed or wanted home improvements.
- Squatter’s Rights: Depending on the circumstances and local laws, you may have a difficult time evicting squatters who have taken up residence in a vacant property. This is an uncommon (but not unheard-of) scenario that could require significant time and money, inhibiting your ability to take possession of the property.
If you are more focused on the location and potential of the property than a particular timeline, buying a foreclosed home may make sense. In most cases, you should be able to purchase the property for well-below the fair market value, allowing you to add value through repairs and improvements and build equity almost immediately.
Tips for Success
Work with a real estate professionals experienced in REO and bank-owned properties Not all real estate attorneys, agents and brokers have experience with foreclosed properties. It is crucial to work with someone who understands:
- Relevant local and state laws
- The property’s real estate market
- Specific policies of the bank selling the property
Get pre-approved for your loan before you begin the process If you’re hoping to purchase a bank-owned property, you should have a candid talk with your loan expert. Buying a foreclosed home may impact the type of loan you qualify for and the requirements for pre-approval. Make sure that your pre-approval is renewable in the event of a protracted timeline and that you understand which factors could change the terms of the pre-approval.
Familiarize yourself with the rules regarding redemption periods for your market Depending on local laws, homeowners have a specified length of time during which they can redeem the foreclosed property. Make sure you know how long you’ll need to wait before the bank is able to move forward with the process with a potential buyer.
Ensure that you conduct a thorough inspection and appraisal Especially considering deferred maintenance and potential damage from squatters or vandals, it is vital to undergo a thorough inspection and appraisal process, just as you would with any home purchase. Even if the property is being sold “as-is”, there may be some repairs that are required by the terms of your loan.
Make sure that all liens have been satisfied and that the title is clear While the purchase may satisfy the mortgage lien in the bank’s eyes, there may be additional liens against the property for taxes or other loans. You will need to make sure that an adequate title search has been conducted and that there are no additional liens for which you will become responsible upon purchase.
Stay flexible throughout the purchase process The key to a positive purchase experience is flexibility. If you are looking for a turnkey dream home or are pressed for time, it’s likely you’ll become frustrated with the processes that come with purchasing a foreclosed home. However, if you are able to take the long view and are willing to deal with the red tape, you might just reap financial dividends that make the frustrations worthwhile.
With tens of thousands of loan products available, you are sure to find the right loan for your bank-owned property purchase at Simplist. Talk to your dedicated loan expert about your options and we’ll do our utmost to help you find the right loan product for your specific financing scenario!