Are you interested in paying less per month on your mortgage? Or perhaps you would prefer if your mortgage was paid off a couple of months – or years – faster? If you are a homeowner with a
Guide To Purchasing Forclosures
Dated: July 1 2015
It can be an exciting and sometimes overwhelming process to find and purchase a home. You want to ensure the home you purchase is right for you and that you have a seasoned real estate agent to help guide you through the process.
If you are house hunting, you may want to consider buying a foreclosed home, also called a real estate owned (REO) property. An REO property is owned by the lender as a result of the previous owner defaulting on the loan. This is also known as a foreclosure property or a bank-owned property.
How do you buy a foreclosed home?
The two common ways of buying a foreclosed home are through a real estate agent or through a public auction.
There are many factors to consider when buying a foreclosed home compared to a traditional home purchase. REO properties are an affordable housing option, but there are also more things to watch for with this type of home purchase. Use this guide to better understand the steps involved in buying a foreclosed home and to increase your likelihood of success in finding one that is right for you.
Differences between a typical real estate transaction and the purchase of an REO property:
Negotiating the purchase price of a foreclosed home may take a little longer than a typical real estate transaction because the process may require multiple levels of approval. First, the bank will have to approve the offer. In some cases, an investor may own the property and will have to provide approval as well.
Pricing for a foreclosed home is typically set at market value in an effort to move the property quickly. You will want to submit a fair and reasonable offer, as most banks will list properties at a fair price.
There are several considerations to keep in mind when purchasing an REO Property:
Unknown property condition
Given that the bank has not maintained or had first-hand knowledge of the foreclosed home prior to acquisition, there may be no record of property repairs or maintenance that would assess the true property condition. As a result, the bank is often unable to verify the condition of the property or complete a Seller’s Disclosure.
Buyers are allowed and encouraged to complete professional home inspections on the property.
As with a typical real estate transaction, out-of-pocket expenses can occur before and after an offer to purchase a property has been submitted. These out-of-pocket expenses may include lender required documentation such as an appraisal or home inspection and bank-required minimum earnest money. Earnest money is a “good faith” deposit demonstrating the buyer’s interest in the property and may be an indicator of how much money will be deposited as a down payment.
Prior to closing, a buyer should work with their agent to coordinate the date on which they may take possession of the property. Title issues may be discovered during the closing process and will need to be addressed and resolved, along with completion of all necessary paperwork to support the transaction. An extension of the close date may be requested by the seller if these issues cannot be resolved by the contract close date. Because of this, the buyer should allow adequate time after the scheduled contract close date to schedule movers, furniture deliveries, utilities, etc.
Before you start looking at foreclosed homes, you will need to determine how much home you can comfortably afford. You will want to make sure the costs for your mortgage, property taxes and insurance are typically no more than 36% of your income before taxes and other deductions. Please visit our home loan guide to learn more.
If you decide to move forward with a purchase, getting prequalified gives you the advantage of being better prepared to make an offer. Getting prequalified is a process in which a prospective borrower provides financial and other information, such as employment history and funds for a down payment, in order for a lender to determine how much loan the borrower may obtain for the purchase of a home. In addition, a prequalified status shows you are not just browsing, which in turn makes you more attractive to a seller.
The REO market offers buyers a unique opportunity to invest in a variety of properties in a diverse range of conditions and price ranges. Foreclosed homes can vary from a regular home purchase, and you will want to research all loan products available for this type of transaction, including traditional loan products or an FHA 203(k) Renovation Loan (a mortgage that provides the purchase price plus funds for renovation by financing the “as improved” value of the home).
Bond Street Mortgage has loan products that can help with the purchase of an REO property. Beginning the prequalification process is easy and you can get started at the Bond Street Mortgage website.
Many foreclosed homes are listed for sale the same way as traditional homes. In addition to searching the usual resources such as newspapers and online real estate listings and websites, you will want to search various bank and government websites for REO properties. Simple online searches for “REO properties” or “foreclosures” will result in a variety of online property resources and listings.
Auctions are another way you can access and purchase an REO property. There are two types of auctions that may occur, a public foreclosure auction or public auction through an auction company. A public foreclosure auction can occur when ownership of the property officially transitions to the bank. If the property is not sold during the public foreclosure auction, the property is then listed with a real estate agent. You can purchase the property from the bank through a real estate agent once the property has been listed. After the property has been listed with a real estate agent, marketed for a set period of time and has not sold, the bank will often transition the property to an auction company. Many auction companies sell properties from various banks and investors, holding auctions across the country either in-person or online. Search online for foreclosure auctions in your area. Be prepared if you decide to purchase at an auction, most auction proceedings happen quickly and you have little time to deliberate. You may also not have the opportunity to inspect the property and instead have to rely on photos and printed descriptions. Despite these challenges, auctions can be a good resource, as long as the excitement of bidding does not lead you to buying a foreclosed home at an inflated price or more than you can comfortably afford. It is always a good idea to do your research and set your budget before you attend an auction.
You should work with a real estate agent who is experienced with REO properties. An experienced professional can guide you through any additional paperwork that may come with buying a foreclosed home and can help you determine if the price is a good value.
Get the property inspected
Getting a home inspection is always a good idea, but it is particularly important when buying a foreclosed home. Given that the bank has not maintained or had first-hand knowledge of the REO property prior to acquisition, there may be no record of property repairs or maintenance that would assess the true property condition. As a result, the bank is often unable to verify the condition of the property or complete a Seller’s Disclosure. Be sure to have a licensed home inspector evaluate the condition of the house. Most REO homes are sold as-is, and the cost of repairs typically becomes your responsibility. Make a list of everything that needs to be fixed, research the costs, and factor in those costs to any offer you make to ensure you could cover the costs on top of your new mortgage payment. Please keep in mind, de-winterizing a home may be necessary to complete the inspection.
A property inspection is encouraged and will help you determine:
Condition of the home
Estimated cost of repairs
A fair and reasonable offer
Funding the purchase
If you find that repairs are needed for your REO purchase, you may want to consider an FHA 203(k) Renovation Loan. An FHA 203(k) Renovation Loan is a mortgage that can cover the purchase price plus funds for renovation by financing the “as improved” value of the home.
Get the most up to date title information
A title search is always recommended for any real estate transaction. A title company will check the property for liens (outstanding debts someone is attempting to collect against the property) as well as verify that the deed to the home is correct. A title search is especially important when buying an REO property due to the unique transfer of ownership at foreclosure. There may be liens on the title that may not be uncovered until the closing process begins. Again, a real estate professional who is experienced in foreclosed homes can be a valuable resource in guiding you through this process.
Is a foreclosed home right for me?
Only you can decide if buying a foreclosed home is a good match for your current situation. Weigh the pros and cons, do your research and work with qualified professionals to help you make the decision that’s right for you.