Did you just come across a foreclosure listing in your favorite neighborhood that is otherwise out of your price range? Are you attracted to a particularly distressed property due to its surprisingly low asking price? Or do you want to buy a foreclosure as part of your real estate investment strategy? Whatever the reason is, there is no doubt about the fact that buying a foreclosure may be a hugely rewarding step as well as a risky endeavor. The outcome will depend on how informed and careful you are.
Here are five tips to follow if you are planning to buy a foreclosure:
1. Don’t Be Confused About What You’re Buying
People throw around the word ‘foreclosure’ a lot even though they don’t know what it exactly means. You can buy a home in any of the different stages of a foreclosure process.
Many properties are put on the market in a pre-foreclosure stage. They are called short-sales. During this stage, the property has not been foreclosed, and the owner is trying to avoid foreclosure by selling it off before the legal process begins. The owner needs to have written consent from the lender to proceed with a short-sale.
When a home doesn’t sell during the pre-foreclosure stage, the lender tries to recoup the outstanding mortgage amount by selling it through an auction. The auction is usually administered by a third party administrator such as a trustee or sheriff.
When a property doesn’t sell in an auction, the lender takes over its full possession. The property in this stage is called real estate-owned (REO). The lender engages a real estate agency to sell the property in the traditional way. The lender is usually obligated to clear any additional liens on the property, including back-taxes before selling a property during this stage.
Your strategy and the process of the property’s transaction will vary depending on which stage you are buying in.
2. Know Your Options
Don’t buy the first foreclosure you set your eyes on. If you have decided to invest in a foreclosure, you should look at many properties before deciding which one suits your budget and other requirements.
Here are some of the sources for finding foreclosure listings:
- You can find websites which exclusively list foreclosures.
- You can simply make Google searches with keywords like ‘foreclosure in (your city), auction in (your city or neighborhood)’.
- You can find a real estate agent who specializes in foreclosure transactions.
- You can also talk to lawyers who specialize in foreclosure cases.
- Another option is to approach various banks in your area directly and get details
- Look at newspaper ads for foreclosure listings, particularly the VA and the FHA foreclosures.
- Banks are required to have foreclosure and legal notices on mortgage delinquency published in newspaper ads. You should go through them, particularly if you are planning to buy during the pre-foreclosure stage.
- You can also check online public records and the county courthouse.
3. Get Familiar With The Legal Process And Hire Help
Being informed about how a foreclosure transaction takes place legally will give you an advantage in the buying process. Foreclosure laws vary from state to state in the U.S., so you should get acquainted with the laws that regulate foreclosure transactions in your area. There are two types of foreclosures:
- Judicial foreclosure: If you are buying in a state where the foreclosure process is a judicial, the lender will have to go to court to get the foreclosure started. It can take months for the lender to secure a foreclosure order from court in a judicial process.
- Non-judicial: As the name suggests, the lender can initiate the foreclosure without going to court.
The legal process of foreclosure can have a significant impact on your buying decisions. You should work with a real estate lawyer or an agent experienced in foreclosure transactions to avoid legal pitfalls. A professional will help you understand complicated terms and clauses in the purchase contract and documents that you will sign.
4. Understand The Closing Process Ahead Of Time
Even if you have experience with buying a regular home, you should try to familiarize yourself with the process of buying a foreclosure ahead of time. It’s necessary because the process is different in many aspects from a regular home transaction.
You won’t be able to put any contingencies with regard to financing and home inspection in the purchase agreement. You should also be prepared for unexpected delays at the last moment due to additional paperwork and legal formalities.
5. Conduct A Home Inspection
Foreclosure properties are sold ‘as-is’. Unlike most regular sellers, banks don’t perform repairs or restoration work before they list a property for sale. They also don’t have to abide by the ‘seller disclosure’ requirements, so you will need to hire a home inspector to know the defects with the property and determine if it is worth investing in depending on its condition.
If you are prepared to do your due diligence and deal with the challenges that come with buying a foreclosure, you can surely find a great deal.