Home prices are soaring nationwide, and the Federal Reserve continues to raise interest rates. These increased costs can make the savings you could score from buying a foreclosed home very attractive. Below, we’ll walk you through the steps of purchasing this type of property.
1. Find foreclosed homes for sale
You can find foreclosed properties advertised in many places, from national websites to your local bank branch. They may not always be available in the neighborhoods you’re eyeing, so be prepared to monitor the market for a minute. A real estate agent could help you.
You can find local foreclosures advertised in print publications and on Multiple Listing Service (MLS) sites. You may have to use a search filter for foreclosures — here are a few popular sites:
- Auction.com
- HUDHomeStore.gov
- ForeclosureListings.com
Pros and cons of foreclosed homes
As you look for foreclosed homes, be sure to keep the benefits and drawbacks in mind.
ProsYou could save a lot of money. A major perk of buying a foreclosed property is the savings. In terms of a foreclosure, the lender is strongly motivated to sell the home, giving the buyer a strong negotiating position.
Needed repairs could give you an opportunity to customize the home. If the house were perfectly move-in-ready, spending money on renovations may feel wasteful. But if you already have to make some repairs, spending a little extra to get exactly what you want may be worth it.
You could make a profit. Even if you’re not a professional house flipper, selling a foreclosed property that you fixed up and lived in for a while can still net you some cash.
ConsBuying a foreclosed home can be a long process. Purchasing foreclosed properties generally involves more paperwork. The average foreclosure process during the second quarter of 2022 took just under three years, according to ATTOM Data Solutions.
A foreclosed home can have hidden debts. Foreclosed homes can have outstanding taxes or unpaid liens on them that new owners will have to pay. The exception to this are REO homes. A title search should reveal if there are any issues, and title insurance will protect you from any new ones.
The property is “as-is” and may not be in great shape. Foreclosed homes are sold as-is. You can’t negotiate and ask the seller to make any repairs. Because the house is a foreclosure, the former owners had major financial trouble and may not have maintained the property. You may find damage, trash, mold, pests and weeds.
You may be competing with many buyers. Other homebuyers, professional home flippers and real estate investors can all smell a good deal. You might have some stiff competition.
2. Hire an expert real estate agent
Steps No. 1 and 2 can be interchangeable. Many people, however, like to look at what’s available first and determine what they want so they can find a local real estate agent who specializes in foreclosed properties.
Here are the types of homes you’ll come across that may be in the foreclosure process:
Preforeclosure
Some owners will sell their homes before their mortgage lender can start the official foreclosure process. Owners generally have 120 days (about four months) from their first missed payment to find a solution. Selling the house for enough to cover what they owe before the deadline can save their credit.
Short sale
In a short sale, the lender and the homeowner agree to put the home on the market for less than what the current borrower owes — all in an effort to avoid foreclosure. Short sales can be found on all the sites listed above.
Auction foreclosures
If a homeowner isn’t able to catch up on payments or sell their home, the lender can foreclose on the property and send it to public auction. Many foreclosures are auctioned off at sheriff’s sales, which are run by local law enforcement and typically held at a courthouse. The highest bidder gets the deed.
Notice of sheriff’s sales — including when, where and what’s being sold — are typically announced four to six weeks before the event in local newspapers and on the county sheriff’s website.
Bank-owned foreclosures
When homes don’t sell at auction, they can become real estate-owned (REO) properties and the bank holds the keys. Most banks don’t want to fuss with managing properties that may be located all over the country and are typically willing to sell at large discounts. Here’s how to negotiate home prices.
Government-owned foreclosures
When a government agency guarantees a loan, it’s obligated to pay the lender if the borrower doesn’t and there’s a foreclosure. Several federal agencies can hold the keys to foreclosed homes, including the U.S. Department of Housing and Urban Development (HUD), the U.S. Department of Veterans Affairs (VA) and the U.S. Department of Agriculture (USDA).
You can only buy a government-owned foreclosure with the help of a real estate agent, servicing representative or mortgage broker — a real estate agent with additional credentials.
3. Get a mortgage preapproval
A mortgage preapproval is necessary in a hot market and lets owners know that you’re capable of purchasing the property. A preapproval also provides you with a stronger negotiating position when it comes time to find the best rate and finalize your loan.
If you’re interested in a foreclosed home because finances are tight, there are tons of programs that could help you.
- Government-backed loans typically have lower qualification requirements:
- FHA
- VA
- USDA
- First-time homebuyer programs, including:
- Fannie Mae’s HomePath Ready Buyer program
- Freddie Mac’s HomeSteps program
4. Submit a competitive offer
Work with your agent to submit a competitive offer. Remember that you may have some tough competition — depending on how good the deal is — and that it can take a long time to close on the deal. One tactic is to submit multiple offers on foreclosed properties to better your odds of one being approved.
5. Get an inspection and appraisal
Because the property may not have been well taken care of, it’s strongly recommended that you get a home inspection. A professional inspector will flag any problems with the home’s structure or major appliance systems. If there are large issues that’d be expensive to fix, you’ll have to weigh the cost of repairs with the savings you’re getting from purchasing a foreclosed home. A home appraisal will provide you and your future lender with a professional estimate of the home’s value.
How to back out of buying a foreclosed home
Your ability to back out of the purchase may depend on how far into the purchasing process you are. Generally, you’re able to back out of buying real estate if you haven’t signed the purchase and/or financing contract that would put the title in your name. If you do back out, you could lose any earnest money you originally put down toward your purchase offer.
6. Purchase the home
The mortgage closing process can take a while as multiple entities get their ducks in a row. Respond quickly to any paperwork requests to facilitate the process on your end.
Frequently asked questions
Buying a foreclosed home could be right for you if you are looking for a deal, can partner with an experienced agent and aren’t in a hurry.
Generally, you shouldn’t seek a foreclosed home if you aren’t financially prepared for potential repairs and need to buy a house ASAP.
It’s a good time to buy a foreclosed home when you find a property that offers you financial savings and meets your needs.