When most people buy homes, they browse through home listings, use a realtor to find the perfect fit, and prepare their finances for a down payment and closing costs. Buying a foreclosed home is a little different.
“Buying a foreclosure is definitely a bit of a grind. It’s not easy,” says Robert Jensen, broker and president of the Rob Jensen Co. in Las Vegas. “You’re getting fantastic pricing, but sometimes it takes going through a lot of houses and writing a lot of offers to get the home you want.”
Before you take the plunge into buying a foreclosed home, make sure you know what it is and how to buy one.
What is a foreclosure?
A foreclosure is when a lender takes control of a property from its owner in order to get paid money owed.
If you haven’t paid your mortgage in a few months, that could cause your bank to foreclose on your home. You’ll lose all money you’ve paid up until that point and your credit score will tank.
Lenders, in turn, will try to make a profit off a foreclosed home by turning it around and selling it for much less than it might be worth. Banks usually request payments in full when accepting offers but you still might be able to get a mortgage on a foreclosed home.
5 steps to buying a foreclosed home
Buying foreclosure homes is usually a much faster process than going through a normal home purchase. You might be doing multiple steps at once to keep up with it.
5 steps to buying a foreclosed home
- Find an agent specializing in foreclosures
- Get a preapproval letter
- Look at ‘comps’ before making an offer
- ‘Bid the higher price’ if homes are selling quickly
- Remember, the home is sold as-is
1. Find a real estate broker and lender
The goal of combing through foreclosure listings is not to find a house; it’s to find an agent. Banks usually hire real estate brokers to handle their REO properties, or “real estate owned.” This signifies that the property has been foreclosed on and the lender now owns it and is selling it.
In many cases, the buyer works directly with the bank’s broker instead of using a buyer’s agent. That way, the commission doesn’t have to be split between two brokers.
Elaine Zimmerman, a real estate investor and author, recommends that shoppers first visit any site with a database of foreclosed homes. You also could look at a local real estate website that lets you filter the results to see only foreclosures.
“A lot of realtors have a long-term relationship with [the] banks, and they know of listings that haven’t even come on the list yet,” Zimmerman says. “Call them about the listings that you’re interested in, but also ask them about listings that may be coming up because sometimes it may take a day or two or even a week before a listing actually comes onto the database.”
2. Get a preapproval letter
Unless you plan to pay cash, you’ll need a recent preapproval letter from a lender. The letter will detail how much money you can borrow, based on the lender’s assessment of your credit score and income.
“The problem is, buyers want to find the house first, and then they think they’ll work out the financing,” Jensen says. “But the problem is, the really good deals on these bank-owned, they go quick — and the buyer doesn’t necessarily have time to try to work out the financing afterward. They need to work that out first.”
Zimmerman says some first-time buyers make the mistake of assuming that the bank selling the home will also finance the mortgage as part of the deal. “Don’t expect to get financing from the bank that foreclosed on it,” she says. “That’s a totally separate transaction, and they view it that way. The people in the (bank’s) REO department are not loan officers. They are getting rid of bad assets.”
3. Look at ‘comps’ before making an offer
There’s no rule of thumb on what the bank’s bottom line is on price. Just as with any other real estate purchase, you have to evaluate the recent sales prices of comparable properties, or “comps.”
“You really have to look at the comps in today’s current market conditions and write a competitive offer based on that,” says Jensen. “Sometimes the bank prices the homes really low, and the home will have multiple offers over list price within hours.”
4. ‘Bid the higher price’ if homes are selling quickly
If the foreclosed homes you’re looking at are selling swiftly, “the best advice on a bank-owned property is to come in at your highest and best, unless the property has been sitting on the market forever with no activity,” Jensen says.
“If you’re going to be upset because you would have gone $5,000 more but you lost the property, just bid the higher price in the first place.”
The type of house and location matter a lot, and some homes might sell faster than others. With foreclosures, a 3,500-square-foot house with a pool in a gated community might sell within days or hours, but more modest homes might sit on the market for weeks. Or vice versa, depending on market conditions.
5. Remember, the home is sold as-is
Keep in mind that foreclosed houses generally are sold as they are. That means that you shouldn’t expect to get a discount to compensate for repairs.
“Let’s say the house is listed for $200,000, all the comps are $200,000, and so the client comes in and says, ‘Hey, look, I want to buy this house but I’ve got to do paint, carpet and fix some mold damage, so I want to take $15,000 off the price,’” Jensen says. “You know what? All the other ones were in the same condition, and they sold for $200,000.”
Because repairs are almost inevitable with foreclosed houses, Jensen and Zimmerman recommend getting to know tradespeople who can assess and repair damage from pests, mold and leaks. Zimmerman says you should assume that the air conditioning needs to be fixed, and possibly the heating system, too.
Foreclosure homes are rewarding, but risky
If you’re buying a foreclosed home at an auction, you probably won’t get the chance to take a tour of it beforehand. Not having an idea of what shape the house is in before making a purchase means you could end up paying more than you imagined in repairs.
Once you buy the home, problems that arise are your responsibility. Even if you got a house for much cheaper than you would through a traditional buy, repairs can get costly. Before you buy a foreclosed home, make sure you do as much research on the home as you possibly can. Talk to lenders and brokers who are willing to work with you and try not to go into the process blindly.