How to Buy a Foreclosed Home
What You Should Know
- Buyers look towards foreclosed homes for great deals, but hidden costs and repairs can make some properties more expensive than they seem.
- To buy a foreclosed home, you will need to work with an experienced real estate agent and do your research so that you don’t end up with any hidden surprises.
- Foreclosed homes can be sold at an auction, or listed for sale by the bank as a real estate owned (REO) property.
- A home inspection is important when buying a foreclosed home, since it allows you to see what repairs are needed and how much it will cost.
In 2020, there were 214,000 homes in foreclosure:
If you're interested in buying a foreclosed home, there are a few things you should do. First, research the property and the foreclosure process in your state. This will help you understand what to expect and how to protect yourself. Next, get a mortgage pre-approval from a lender. This will give you an idea of how much money you can borrow, and whether or not you will be able to afford to buy the home. It also allows you to see the mortgage rate that you might qualify for, and the associated mortgage interest costs that you will be paying, which can be helpful when determining whether a foreclosed home is worth the purchase. Finally, work with a real estate agent who specializes in foreclosed properties. They can help you find foreclosed homes and guide you through the purchase process. In the section below, we’ll take a detailed look at the steps to buying a foreclosed home.
Step 1: Get Pre-Approved for a Mortgage
Unless you’re planning on buying the home outright with cash, you will need to have a way to finance the purchase. For most people, a mortgage is necessary to buy a home. Before considering any type of home, whether it is a foreclosed property or a regular property, getting pre-approved for a mortgage helps you with many things. For one, it helps you secure things like a mortgage rate and mortgage term. However, the primary benefit with getting a mortgage pre-approval ahead of time is that you secure a budget.
By prequalifying for a mortgage, not only do you verify that you are eligible for a mortgage, but you’ll receive a mortgage amount that you can use as a guideline as your maximum home price. This way, you’ll only consider homes within your price range and you’ll know exactly how much you can afford given your financial situation. It’s also useful because sellers are more comfortable when buyers have guaranteed financing. If the mortgage lender who owns the property knows that you are already pre-approved, they’re more likely to sell to you.
While you will be buying the foreclosed home from a specific mortgage lender, you can choose any mortgage lender you want for the mortgage itself. Generally, you should compare different mortgage APRs and find the best lender.
Step 2: Hire an Experienced Real Estate Agent
Unfortunately, most mortgage lenders do not sell foreclosed homes directly to home buyers. Instead, they give their properties to Real Estate Owned (REO) agents that sell the properties through standard real estate agents, or, they might list the foreclosed property for sale online. You will need an experienced real estate agent to facilitate the transaction with a bank or help you with an auction. A real estate agent can also help you with many parts of the transaction and save you money in the long run.
You want to find a real estate agent that has experience with REO homes and knows the local area well. They can help you with the search process, the buying process, negotiation, inspecting, and anything else related to the transaction. They can also help you with any county or state-specific regulations because of their experience. In most cases, hiring a real estate agent can save you plenty of time and money down the road.
Step 3: Look for Foreclosed Homes Available for Sale
Now, you can start looking for foreclosed homes available in your target area. A real estate agent can help you search for homes and negotiate prices, but you can also look for foreclosed homes yourself. There are different types of foreclosed homes and the purchase process will vary between them. Regardless, you will know your maximum budget with a pre-approved mortgage, but you should make sure that you have enough money left over for inspections, closing costs, insurance, property taxes, and repairs.
Your real estate agent should know where to look for foreclosed homes, but if you want to look on your own, you can look through online listings, local newspapers, or your local city hall/court. Some lenders may even own foreclosed homes as a part of a deed-in-lieu of foreclosure. You can check the websites of different lenders for foreclosed properties.
At this stage, it’s important to make competitive purchase offers. While foreclosed homes are generally much cheaper, the bank selling the foreclosed home may reject purchase offers that are too low. The bank is trying to recover their money, not simply give homes away! A real estate agent can help you determine a good purchase offer based on the information for your local area. This may also include writing an offer letter or making a backup offer on the home.
Step 4: Pay for a Home Inspection
Unfortunately, when buying a foreclosed home, you take on a certain amount of risk in regards to the quality of the property. This is because you are purchasing the home as-is, which is how the previous owner left it. The lender selling the home will not pay for any repairs, so this is your responsibility. You may even need to take out a separate home improvement loan depending on the severity of repairs needed.
To understand the extent to which the home needs to be repaired, you should pay for a home inspection. After you submit a purchase offer for the home, there is a period where you can arrange for home inspections before closing on the sale. A home inspection, which typically costs $400-$800, can uncover many problems and even change your mind about purchasing a property. It is a good idea to have an inspection contingency in your purchase offer, however, contingencies can make your offer less attractive.
During a foreclosure auction, you will not be given the opportunity for a home inspection. This considerably increases the risk of buying a substandard home, so you should have significant experience with home repairs. Otherwise, it’s best to avoid buying foreclosed homes that do not allow for inspections.
If you are planning on using a mortgage, then you will also need to get the home appraised. This is a process where the property is assigned a fair price. Lenders require home appraisals before giving you a mortgage to ensure that they are loaning you the correct amount. If the appraised value of the home comes far below your purchase price, you may be required to put down more money as a down payment to make up for the difference. To help protect against this situation, you might consider having an appraisal contingency in your purchase offer.
Step 5: Finalize the Transaction
Once you’re sure that you want to purchase the foreclosed property, read the inspection and potential appraisal results to understand the costs and price. You will then have to contact your mortgage lender and real estate agent to finalize the deal. Since the foreclosed home is most likely purchased as-is, you will need to do a couple of extra things as well.
You will need to perform all necessary repairs to meet housing codes. Nearly all repairs needed should be listed in your home inspection report. Once you’ve finalized your deal and made any necessary repairs, you can move into your new home!
Types of Foreclosed Homes
Generally, foreclosed homes can be put into three categories and it’s important to understand their differences:
1. Auctioned Properties
In an auction, banks and lenders will sell their homes at auctions to get the best price available as quickly as possible. Generally, homes sold at auctions are cheaper than those sold directly by lenders, but auctions may require you to have cash on hand. You may also not get the opportunity to arrange for a home inspection or appraisal and will have to take the house as-is at the final price. This means that you will be taking on a large amount of risk with both the quality and fair price of the home.
2. Real Estate Owned (REO) Properties
Real Estate Owned (REO) properties are sold by banks and lenders in the real estate market. These homes have already been auctioned but were not sold. Since the lender is unable to sell the property, they retain ownership and attempt to instead sell the property directly to home buyers.
Banks and lenders will typically hire REO agents that sell the properties to regular real estate agents. You can submit purchase offers directly to a bank or lender, which will typically take a long time and the home might be more expensive. But with this option, you take on much less risk because you can arrange for a home inspection and appraisal before purchasing the property. If you are unhappy with the results, you can choose not to buy the home.
3. Government-Owned Properties
Government-owned properties are very similar to those owned by banks and lenders, but the homes were previously financed by government-insured mortgages. If this is the case, a government agency or government-sponsored agency will take possession of the property and sell it through auctions and their own channels.
- U.S. Department of Housing and Urban Development (HUD)
- U.S. Department of Veterans Affairs (VA)
- Internal Revenue Service (IRS)
- U.S. Department of Agriculture (USDA)
- Federal Deposit Insurance Corporation (FDIC)
- U.S. Army Corps of Engineers (USACE)
- Fannie Mae and Freddie Mac
How to Find Foreclosed Homes for Sale
You now know the steps to buying a foreclosed home and you’re ready to start looking. This question now becomes: How can you find foreclosed homes for sale? One of the best ways to find foreclosure listings is to search online for listings in your area. You can also check with your local county courthouse or government offices to see if they have any listings of foreclosed homes in the area. Banks and other lending institutions will also sometimes have lists of foreclosed homes that they are looking to sell.
Another option is to hire a real estate agent who specializes in finding foreclosed homes. They will usually have a good working relationship with banks and other lenders and will be able to help you find the best deals on foreclosed homes. In this section, we’ll take a look at some sources of foreclosure home listings for sale.
Bank Foreclosure Listings
Some banks list their real-estate owned (REO) properties and bank-owned homes right on their website. One example is Bank of America, which has a dedicated website with their foreclosure listings from across the country. To see current foreclosure listings by Bank of America, visit the Bank of America Real Estate Center. As of April 2022, Bank of America has 25 foreclosure listings across 15 states. Let’s take a look at a few of their listings to see how foreclosed homes are priced.
A 1,174 square foot single-family home with 2 bedrooms and 2 bathrooms located in Fort Pierce, Florida was listed for $220,000. The foreclosure listing has the contact information of a listing agent from Remax Classic. According to Realtor.com, the median sold price of a home in Fort Pierce, Florida was $275,000 in April 2022, with a median listing price of $192 per square foot. For this 1,174 square foot home, this means that it would be comparable to around $225,408 for a home with a similar square footage using the median price per square foot. The $220,000 listing price of this foreclosed home is at a slight discount.
Let’s take a look at another example of a Bank of America foreclosed home listing. A four bedroom, 2 bathroom, 1,232 square foot detached home in Las Vegas, Nevada was listed for $245,000 by a listing agent from Resolution Realty. Resolution Realty specializes in buying and selling foreclosed homes in Las Vegas. According to Realtor.com, the median listing price in Las Vegas is $244 per square foot. This means that this foreclosed home listing might be comparable to a $300,000 home. That’s a slightly larger discount of about 22%.
Some real-estate owned (REO) property might even just be land. For example, Well's Fargo's REO page has a listing for a lot of land in Youngston, Florida. This is a cleared 0.5 acre lot on a paved road, with the property being listed for $19,900 by a real estate agent from Berkshire Hathaway HomeServices Beach Properties of Florida.
How long can banks hold onto a foreclosed home?
Banks can only possess a foreclosed home for two years, however, they may apply for an exemption to own the foreclosed home for as long as five years. The purpose of this is to prevent banks from holding onto foreclosed homes for a lengthy period of time and forces banks to eventually sell the foreclosed home back to the market.
Online Foreclosure Listings
Besides homes that are listed directly by banks or by government agencies, there are many free websites where you can find foreclosure listings that are available to the public. One of the largest and most well-known foreclosure sites is Realtor.com, which also lists regular properties. Some websites require a subscription in order to access foreclosure listings. This might include detailed statistics that can make it easier to compare foreclosed homes. Other foreclosure listing websites include:
Pros and Cons of Buying a Foreclosed Home
If you’re still having trouble deciding whether or not buying a foreclosed home is the right decision, you should weigh the pros and cons. Buying a foreclosed home is cheaper than buying a regular home, but you need to determine if it's worth the added risk.
- Lower Prices: Foreclosed homes will always be cheaper than similar homes because lenders are trying to get rid of the properties as fast as possible. They are trying to recoup some of the money they lost from the previous owner defaulting on their mortgage.
- Clear Title Transfer: A regular home purchase from the previous homeowner may face certain obstacles like back taxes or liens, but with a foreclosed home, you are buying it from a lender who can remove any of these restrictions. Known as a “clear title”, this removes any chance that your ownership could be challenged.
- Faster Negotiation: Lenders are trying to sell the property as quickly as possible, so if you submit a reasonable purchase offer, they are more likely to say yes. If you choose to buy a foreclosed home at an auction, the sale is instantaneous.
- Extensive Repairs: Foreclosed homes are sold “as-is”, which means they usually have not been properly maintained by the previous owners. You will probably have to spend a large amount on repairing the home and bringing it up to housing codes. While the purchase price might be cheaper than a regular home, the cost of extensive repairs may even make foreclosed homes a more expensive choice.
- Inspection Fees: You should arrange for a home inspection if possible. This will ensure you understand the property condition before purchasing it. However, home inspections can cost anywhere from $400-$800.
- Redemption Periods: Even if a home is in foreclosure, states will give homeowners the chance to catch up on their bills and reclaim the property within about 6 months. This means that some listings will be revoked.
- Squatters: Homes can be foreclosed and therefore unoccupied for years. This means that people often referred to as squatters can live in the home and need to be legally evicted. This process could take months and thousands of dollars.
Home Foreclosure Statistics
ATTOM’s Foreclosure Market Report tracks foreclosure data in the U.S. According to ATTOM's March 2022 report, 0.024% of all homes in the U.S. was foreclosed in March 2022. New Jersey had the highest foreclosure rate in the country, with 0.05% of New Jersey homes being foreclosed in March 2022. In total, 22,360 homes across the country entered the foreclosure process in March 2022, which includes foreclosure filing and notices, with 4,406 homes being foreclosed.
How long does foreclosure take?
According to ATTOM's foreclosure report, it takes on average 917 days from the beginning of the foreclosure process before the home is foreclosed. That’s around 2.5 years for a home to be foreclosed.
Foreclosure timelines vary by state, which is affected by state laws surrounding the foreclosure process. The state where foreclosures took the longest in 2022 was Hawaii, where a foreclosure took on average 2,578 days before it was completed. The state where foreclosures happened the quickest was in Montana, with an average foreclosure length of just 133 days.