Why buy foreclosed property

Mortgage issuers typically put foreclosed properties up for auction, which often means selling the home for less than market value. When homes fail to sell at auction, however, lenders may slash the sales price and sell them directly. Because foreclosures are often terrific bargains, they are popular with real estate investors looking to use them as rental properties or flip them for a quick profit.

Competing with these investors, many of whom have access to significant credit and can put down extra-large down payments or even purchase properties outright for cash, can be challenging for first-time homebuyers. If that means you, you're not necessarily out of the running for a foreclosure purchase. But to compete with investors, you'll need to lay some groundwork to document your ability to close the deal. You'll also need to be careful and decisive about choosing a property you likely won't have much time to size up before you make a bid.

To fully understand what you may be getting into with a foreclosure purchase, it's helpful and sometimes essential to work with a real estate professional with foreclosure experience. It's also crucial to understand that foreclosure typically follows a timeline, and that purchasing opportunities and procedures differ during each stage in the process.

The duration of each stage in the timeline may differ according to circumstances and state or local laws, but they typically occur in in this order:. The main benefit of purchasing a foreclosed home is savings. Depending on market conditions, you can purchase a foreclosed home for considerably less than you'd pay for comparable, non-foreclosed homes. The main risks come from the degree to which a foreclosed property can be a mystery to the buyer. Foreclosed homes are sold in "as-is" condition, and are typically unavailable for a walk-through before purchase.

Foreclosures may have sat unoccupied, without heat or air conditioning, for weeks or months prior to sale, and past owners may have neglected or even vandalized them. If you succeed in purchasing a foreclosed home, you'll likely need some cash or available credit to get the property to move-in condition. Do-it-yourselfers may see this as a golden opportunity for savings, but less-capable or less ambitious homebuyers might consider putting that repair budget toward a down payment on a more conventional purchase.

Where to Find Foreclosed Houses The following resources can help you find foreclosed properties for purchase. Real estate professionals in your area may know of additional resources.

Think buying a foreclosure may be the right choice for you? Follow these steps to ensure the process goes as smoothly as possible. Secure a Preapproval Letter A mortgage preapproval indicates a lender has reviewed your financial status and agreed to issue you a loan up to a set amount, with a repayment term and interest rate based on a specific down payment.

Preapproval attests to your ability to finance a purchase within the specified price range, and having one is practically essential when you're competing with cash buyers. Plan on spending a fee of several hundred dollars for each preapproval, and be aware that a preapproval letter is typically only good for 60 to 90 days.

Specific financing terms may change if interest rates increase or your income or credit score changes before you finalize your loan application on a specific purchase. If you're not happy with the terms of your preapproval, take steps to improve your credit score and reduce your debt. It's possible to get a preapproval letter based on conventional mortgage lending terms and under the terms of any government-backed mortgage assistance program you qualify for, such as a Federal Housing Administration FHA loan or a mortgage backed by the U.

Note that these programs spell out eligibility requirements on properties they're willing to finance, and some foreclosures may not qualify.

This should be standard procedure with any home purchase, but it's particularly important with a foreclosure because.

Unlike a traditional home sale, the seller of a foreclosed home is not required to disclose material defects in the property when offering it for sale. Knowing about potentially hidden issues with the property so you can plan to address them before taking occupancy. Prior to foreclosure, the owner of a house may have taken out a second mortgage or a home equity line of credit HELOC —forms of credit that use the house as collateral.

Granted, you don't necessarily need to come up with the entire purchase price on the day of the auction. You might just need to make a down payment. But you'll need to produce the rest of the cash shortly after the fact.

This restriction could limit you to properties that don't actually meet your needs or result in cash-flow issues. The previous owners of foreclosed homes often don't do the best job of maintaining them. Homeowners who become delinquent on their mortgage payments tend to have cash-flow issues, so their properties are commonly left in disarray. Furthermore, banks that reclaim foreclosed homes rarely make repairs.

When you buy a foreclosure, you're getting that property as-is. And although a home inspection will reveal any glaring issues, you'll need to fix them on your own dime. Rack up enough repairs and the savings from snagging a lower purchase price might be wiped out.

Of course, this assumes you're not buying a foreclosure at an auction. In that case, you won't get an opportunity to have an inspection done, increasing your risk of taking on more costs. Although lenders try to unload foreclosed properties quickly, the closing process can be lengthy.

Banks often have backlogs that delay closing. If you need to close on your purchase quickly -- say you're hoping to move your family in before the start of a new school year -- you may want to think twice about buying a foreclosed home. Before you make a decision, consider your appetite for risk and how you plan to use the property. It's one thing to buy a foreclosed home as an investment you can flip and sell at your convenience.

It's another thing to buy a foreclosed home for your family to live in. Finally, if you buy a foreclosure outside of the auction process, consider hiring a real estate agent who's familiar with the market. That way, you'll be more likely to get a good deal. Our team of analysts agrees. These 10 real estate plays are the best ways to invest in real estate right now.

Find out how you can get started with Real Estate Winners by clicking here. Maurie Backman has been writing about personal finance for years. A firm believer in educating readers without boring them, she … Learn More. Advertiser Disclosure We do receive compensation from some affiliate partners whose offers appear here. Millionacres Logo. Tax Deductions Depreciation Capital Gains. Select basic ads. Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights.

Measure content performance. Develop and improve products. List of Partners vendors. Before the mortgage crisis of , buying a foreclosed home was a difficult proposition. Real estate bargain hunters had to follow auctions put on at courthouses or sift through reams of legal filings.

The wave of foreclosures brought on by the subprime meltdown not only increased the number of available properties; it also made it easier to find and acquire them. In fact, today the process is often similar to the search for any other sort of home.

Foreclosed homes are available in virtually every real estate market across the country, providing opportunities for homeowners and investors alike. One can find foreclosed properties in multiple-listing service MLS periodicals and websites, via online real estate searches , bank offices and websites, and local newspapers. In local multiple-listing services, the foreclosure status of properties may not be highlighted per se; the fact may only be stated in the property description.

Some financial institutions, such as Bank of America, also offer pages dedicated to helping you search for a foreclosed home. Some real estate pros even specialize in foreclosure properties.

Locating a foreclosed home depends on where exactly it is in the foreclosure process. Properties can still be owned by the original homeowner in the earlier stages, like pre-foreclosure and short-sale properties , or by an entity such as a bank or the government in the later ones. Here are five types of foreclosure and approaches to buying.

A property is in pre-foreclosure after the mortgage lender has notified the borrowers that they are in default but before the property is offered for sale at auction. If a homeowner can sell the property during this time, they may be able to avoid an actual foreclosure proceeding and its negative effect on their credit history and future prospects. Pre-foreclosures are typically listed in county and city courthouse buildings. In addition, many online resources, including Foreclosure. Short sales occur when the lender is willing to accept less for the property than what is owed on a mortgage.

Borrowers do not necessarily need to be in default of the mortgage payments for a lender to agree to a short sale. However, they typically need to prove some type of financial hardship, such as the loss of a job, which is likely to result in default. Often the residence in question is underwater , meaning it is worth less than the outstanding mortgage balance. A bank may take several months to respond to a short-sale offer, so the process can take considerably longer than a traditional purchase.

Many real estate websites, including individual firms or listing services, offer the option to search by short-sale status. A sheriff's sale auction occurs after the lender has notified the borrower of default and allowed a grace period for the borrower to catch up on mortgage payments. An auction is designed for the lender to get repaid quickly for the loan that is in default.

The property is auctioned to the highest bidder at a publicly announced place, date, and time. Properties that do not sell at auction revert back to the bank; that is, they become real estate-owned REO properties.

Online sources such as RealtyTrac have extensive listings of such bank-owned properties that can be searched by city, state, or ZIP code. When these properties go into foreclosure, they are repossessed by the government and sold by brokers working for that federal agency.

A government-registered broker must be contacted to purchase a government-owned property. Buyers can research possibilities on the website for the U.

Most foreclosures are sold at a sizable discount below market value , with the exact amount varying from region to region. Buyers may also take advantage of additional savings with perks such as reduced down payments, lower interest rates, or the elimination of appraisal fees and certain closing costs.

What makes these properties such a deal? If the residence is in the pre-foreclosure or short-sale stage, its owners are in a financial bind—and time is not on their side. They have to unload the property and get what they can while they can, before they lose possession of it.

Buyers can benefit even more if the property has in fact been seized. Financial institutions typically want to rid themselves of foreclosed properties promptly for a reasonable price, of course—they have to answer to investors and auditors that they made every attempt to recoup as much of the original loan amount as possible.

Again, buyers can take advantage of this situation. The below-market price is the big plus of buying a foreclosed home. Nevertheless, these properties also carry their share of pitfalls.