Homebuyers in the market for a deal on their dream home needs two things: lots of patience and the stomach to do battle with investors. Any home that is in a decent area and priced right is facing keen competition in today’s market.
Homebuyers in the market for a foreclosure need those qualities tenfold. Buying a foreclosure is a lengthy process, and, although most investors prefer pre-foreclosure sales and auctions, you will face your share of competition for bank-owned homes.
Let’s take a look at some foreclosure-buying options and how to participate.
Buying a Foreclosure at Auction
Homes that are sold at auction, typically carried out at the county courthouse, are those that homeowners have lost because they failed to bring the mortgage current during the reinstatement period.
The lender’s representative, known as the trustee, will be on hand to receive the money from the winning bidder, if there is one. The opening bid is typically equal to the loan balance, trustee’s fees, accrued interest and other costs incurred by the lender during the foreclosure process.
Can you get a bargain at auction? That depends on how much the homeowner owed before defaulting on the loan. The opening bid must be met or the trustee purchases the property and it then becomes an REO, or “real estate owned” by the lender.
You may have seen foreclosure auction shows on TV. If so, you know it isn’t the place for a novice to get a good deal. Most of the bidders are highly experienced flippers and investors offering up fierce competition.
You will also not be able to view the inside of the home or perform inspections. Plus, if you’re the winning bidder, you may have to evict the current occupants. Depending on the state in which you live, eviction may be costly and time-consuming.
Finally, many foreclosures have additional liens against them, which you will take on if you purchase the property. Recorded liens are public information; you can search for them at the county clerk’s office, the county recorder or the assessor’s office. But not all liens are recorded.
One way to ensure you’re protected is by purchasing an owner’s title insurance policy.
Buying an REO
Purchasing a bank-owned property is much easier than buying a home at auction and much like a conventional purchase.
You’ll need a loan preapproval letter from your lender, unless you’re paying cash, and the services of a real estate agent.
Most REO properties are vacant and somewhat cleaned up. Although the bank won’t supply you with property disclosures as sellers in a conventional transaction are required to, you will be allowed time for inspections.
Many experienced REO buyers perform extreme due diligence, such as checking the city planning office for permits that may be on file for any work the previous owner performed. Have anything that looks the slightest bit suspicious inspected, from the roof to the foundation.
Your buyer’s agent should be able to assist you in learning as much as possible about the home’s history. And, since real estate brokers are required to hold on to transaction files for a number of years (varying according to state), if the home sold in the past few years, your agent may be able to track down a past disclosure.
Banks typically don’t pay for repairs to the property, so you’ll need to take on that expense. Ultimately, although it may seem that you’re getting a bargain-priced home, once all is said and done, it may be worth it to purchase another home in turnkey condition.