What do you think about when the idea of buying a foreclosed house comes to mind? You’ve probably seen listings for what sound to be genuinely amazing deals in newspapers and online real estate sites, right? Maybe you’re someone looking to invest in real estate, or perhaps you want to buy a home for the first time.
And here they are! These foreclosed properties are being sold at apparently rock bottom prices. Well, sometimes there are incredible bargains to be had, but you can’t go into any of this with your eyes closed. Below we’ll go over what constitutes a rocking deal and what pitfalls to watch out for.
Let’s get started!
Related: House Buying Checklist for Beginners
Related: Buying A Second Home: How To Finance
Are you looking to make an educated decision about buying a foreclosed house? Let one of our local Orange County mortgage brokers guide you.
Types of Foreclosed Homes
It's crucial to know that there are two kinds of foreclosed houses. The first is Real Estate Owned (REO) and Bank-Owned. In both instances, the bank actually owns the place. (Yes, we know that doesn't sound very clear.) The difference between these two types of foreclosed homes is the stage in which the foreclosure happens to be in.Real Estate Owned (REO)
When no one buys a house at auction that the bank has foreclosed on, the bank usually tries to sell it through a real estate agent. That agent often specializes in REO sales. These types of foreclosed houses can be good deals since they weren’t bought at auction.Bank Owned
In this case, the bank owns the house because the former homeowner stopped paying. Legal proceedings have been started by the lender to have that homeowner removed from the home. Sometimes this can be a prolonged process. However, as noted above, after that happens and before a foreclosed house ends up as an REO property, the bank usually tries to sell it at auction. The bank’s goal is to recoup the money it lent.Getting A Good Deal on a Foreclosure
There are a couple ways to secure a good deal on foreclosed homes for sale. The first is by buying a house at below market value. The second is through buying a house from homeowners before the bank forecloses.Purchase from the Owners Prior to Foreclosure
When buying a foreclosed house, many people don’t know that at any point before an auction takes place, homeowners have the right to sell the home. In other words, the house is on the way to foreclosure but hasn’t got there yet. That’s good for you if you’re looking to buy because it means the homeowner likely has a lot of motivation to sell because it means they’ll be able to avoid foreclosure altogether. You can get in touch with the homeowners and then make an offer. If you go this route, be sure to have cash, and don’t forget to protect yourself from liens by purchasing title insurance. If you’re a first-time homebuyer instead of an investor, you can also approach a homeowner before the bank forecloses. However, you should adhere to some additional criteria: Ensure that:- You don’t have debt
- You have an emergency fund with 3 - 6 months of expenses saved
- You can get a 15-year fixed-rate mortgage by having a down payment of at least 10-20%
- You have saved money on top of everything listed above that can cover the cost of necessary repairs
Choose a Home Below Market Value
As mentioned above, another great way to get a good deal on a foreclosure is to purchase the place below market value. Many consider a deal wherein you get the foreclosed house at 80% of market value except for the cost of repairs to be a good one. Recall, however, that a lot of these houses need repairs. Sometimes they need a great deal of “fixing up.” In many instances, no one has lived in the foreclosed house for as long as the bank has owned it. Remember, too, that the bank is interested in getting as much as it can to recoup whatever it loaned and not in maintaining the house’s upkeep.Foreclosure Traps to Avoid During Purchase
Competitors
Competitors are a thing when it comes to buying foreclosed houses, just so you know. Since great deals can be found in foreclosures, they’re appealing to investors who may want to rent out a house or even flip them. Additionally, the bank may consider real estate investors who can make all-cash offers and who can close quickly more attractive than someone who wants to buy and live in that home.Lack of Seller Disclosures
Recall that nobody from the bank has lived in the foreclosed house you want to buy. That means they have zero clue as to whether there are problems with the property or not. With that in mind, you’ll have to do your own due diligence by asking neighbors about the property, by ensuring a thorough home inspection, or by sheer experience after you’ve bought the house.Delays With Owner’s Bank
Be ready to wait. While it seems natural that banks will want to get rid of foreclosed properties as soon as they can, the reality is that they’ll sometimes take a while when thinking through offers.Lender Issues
Lenders can present headaches to would-be homeowners and real estate investors. They have their own issues, which come about due to limited transparency and the increased bureaucracy offered to those who want to buy foreclosed houses. That’s why it’s a good idea to talk with experts on financing, such as the Loan Brothers who happen to be great Orange County mortgage brokers.
Related: Buying A Second Home: How To Finance
Are you looking to make an educated decision about buying a foreclosed house? Let one of our local Orange County mortgage brokers guide you.
