The housing market is filled with opportunities to find your next home, but with prices on the rise, that’s become a lot harder.
Although the home prices depend on size of the home, location, and other factors, the average home price in the US amounts to almost $350k!
This is why you might wanna consider looking for a home that is currently facing foreclosure.
These properties are often listed at a lower price than the rest on the market.
However, there is a downside.
The condition of a foreclosed property may not be as good as a non-foreclosed property, and the property may require significant repairs or renovations.
Essentially, it could be a mess that isn’t worth investing money in.
But it could also be a goldmine!
This article will aim to educate you on homes facing foreclosure and how you should approach buying one.
What is a Foreclosure?
A foreclosure happens when someone who owns a home (borrower) doesn’t pay the money they owe for it.
The financial institution (lender) that gave them the loan to buy the home takes the property back and tries to sell it to someone else.
Homes like this are usually either put up for sale at a discount price or they’re offered at auctions.
This way, lenders can try to recover from any loss that they may be facing and make back at least some of the money they can from the property in question.
Sometimes these homes are sold for less money than other homes because they might need a lot of fixing up.
Most of the time, this happens when a household can’t pay for the property’s maintenance.
Why are these types of homes popular?
The main reason people interested in buying even look at properties facing foreclosure is the reduced price.
Additionally, sometimes these properties also have their down payment, interest rates, and closing costs lower as well.
It is also important to mention the psychological side of the story.
In most cases, the current owners of the property are going through a financial struggle.
This means that the person selling is desperate to get rid of it, and may even settle for a lower price, giving the buyer advantage in negotiations.
How do you even find a property like this?
Unfortunately, finding these properties is easier said than done. You’ll want to start your search on multiple-listing service websites.
You can also expand your search by looking through recent ads in newspapers and online.
It’s important to note that the foreclosure status likely won’t be in the property’s headline, but rather in the description, so they’re fairly easy to miss.
Another thing to consider is asking at the local real estate agent’s office.
They deal with properties like that every day, and probably know about a few opportunities in the area.
Learning more about these listings
A lot of people think that there is only one type of foreclosure. That’s actually not the case! There are a variety of different types of foreclosures including:
- Short Sale
- Auction Homes
- Properties owned by the Government
- Directly Purchased from the Bank
- Pre-Foreclosure Properties
People are borrowing money from a bank or other financial institutions, lenders, to pay for the house.
The house serves as collateral for the loan, which means that the bank can take ownership of the house if the borrower doesn’t pay back the loan.
This type of loan is called a mortgage.
In case the borrower is unable to make their mortgage payments, the lender might decide to sell the property for a lower price than the mortgage amount to cut their losses.
That’s what we call a short sale.
It is important to note that the person borrowing the money doesn’t even have to be dealing with a default with the short sale for it to happen.
As long as there’s proof that the current owner is struggling financially, the lender can agree to a short sale.
You can also find that purchasing a short-sale home is pretty much identical to the standard property-buying process.
The key differences are that the contract uses different wording and that the process can take significantly longer than usual.
This adds to the list of reasons why you should do thorough research before going after a property like this!
After the borrower has exceeded the grace period for repaying their mortgage, the next step is usually a sheriff’s auction.
These auctions are typically held by a county sheriff’s office and are open to the public.
The purpose of this auction is to ensure that the lender gets their money back as soon as possible.
However, you probably won’t get the property for “peanuts”.
In order to ensure that the property is sold for a fair market value, sellers set an upset price.
Upset price is a minimum amount that the seller is willing to accept for the property.
If the upset price is not matched or exceeded, the property won’t be sold.
If you’re interested in buying a house at a sheriff’s auction, it’s important to do your research and be prepared to bid quickly.
Auctions can move quickly and you don’t want to miss your chance to place a bid.
Properties owned by the Government
Not all properties are repossessed by private financial institutions like banks.
If you used an FHA or VA loan to purchase a property, the government may repossess it if you are unable to make the required payments.
When the government reclaims a property like this,it is the responsibility of the brokers to sell it.
One of the ways to buy a property like this is to contact some of these brokers directly.
You can also find a number of these options online at the US Department of Housing and Urban Development’s website.
Directly Purchased from the Bank
Not all properties sell fast and easy at auctions.
If no one buys the property at the auction, it goes back into the bank’s possession.
When this happens, its status is changed to real estate-owned property, or REO for short.
Instead of going to an auction to buy a property, this might be a simpler way to do so.
A property in danger of being foreclosed on is called a pre-foreclosure property.
The lender sends a letter saying that they might take back the property if the owner doesn’t start making their mortgage payments.
The process takes place before the property goes on sale at an auction, and homeowners will often try to sell before it goes into foreclosure.
For those looking to buy a home, this might be an excellent opportunity, financially speaking.
The owners are usually very motivated to sell their property and break even at the very least.
Even though buying a property at a lower price can feel like you’ve won big, the risk/reward ratio isn’t something to write home about.
Properties like this often come with a load of disadvantages, those being:
- Property issues
- Slow purchasing process
- Hidden costs
- Competitive market
Unfortunately, if you’re hoping to buy a home at “discount” price, you should be aware of potential risks that come with it.
These risks might include fixing big problems you’ll notice right away, and some smaller issues too.
Losing a home isn’t easy, and some people tend to take it out on their home before it’s repossessed.
If this happens, you’ll be the one responsible for cleaning up the mess, and that’ll surely leave a sour taste in your mouth.
Slow purchasing process
With foreclosures, you should prepare to be patient.
There’s a lot of paperwork to fill out, and the process can take a long time.
Sometimes it feels like it’s just not worth the effort.
For instance, if there’s loads of damage on the property, its appraisal value will be low, making it harder for you to secure funding.
With that, the purchasing process may become even longer than what it usually would be.
It’s not strange for these homes to sound too good to be true.
If you’re not careful, you’ll be paying for the underlying costs that may follow.
Back taxes can sometimes cause a damaged home to cost you more than its current value, so make sure you’ve done your research.
One thing you should remember is that you should expect to repay every last cent before the purchasing process is over.
Just like any minor expense, these numbers add up too fast for comfort.
Naturally, if a property is selling for a fraction of its value, it’s bound to attract a few potential buyers.
With demand high enough, an auction can turn into a bidding war.
More often than not, this leads to an overpriced property.
It’s important to note that you shouldn’t forget to check back on it every once in a while though, as foreclosure deals fall through more often than you’d think.
Regardless of whether you’re looking for your next home or a business opportunity, properties facing foreclosure might be a great option to consider.
These properties are usually sold for less than their original price, which can be a good deal.
However, this does come with downsides, the biggest one being that the property is likely in poor condition.
If you’re still interested in buying a property facing foreclosure, you can try looking on MLS websites and newspapers.
Your local real estate agent may also have some information worth checking out.
In the end, you can never be too careful, as the risks that come with buying a property facing foreclosure are massive.
You could potentially end up with a home that is beyond repair, with no way to sell it.