Are you considering buying a foreclosure or bank-owned home? It can be tempting to look at foreclosed properties if you want a bargain, but are the lower prices really worth the potential problems? A different approach is needed when you are looking to buy a foreclosed house. Below are some tips and tricks to make the process smoother.
It's essential to know that these kinds of real estate transactions can be a bit riskier than your traditional purchase. Quite often, first-time homebuyers are under the impression that foreclosure properties are the bargain of the century. While at times there is a discount, don't expect it to be monumental. If only going from a renter to a homeowner translated into instant equity. Unfortunately, it rarely ever works that way.
Keep your eyes wide open and use these simple tips for buying a foreclosure:
Is It a Good Idea to Buy a Foreclosed Home?
A foreclosed property has been recovered by the lender when the owner was unable to keep up their mortgage payments. The lender wants to get as much of their money back, and they want to do it quickly. This leads to foreclosed homes coming on the market for less than the value they really offer.
For buyers, this can present an excellent opportunity to save thousands on the house. There are some downsides and potential pitfalls to purchasing a foreclosed property, and it won't be for everybody. If you're happy with the higher risks involved and can move quickly on a deal, this could be a way to get a decent discount on a home.
Here's what you'll need to do to secure a foreclosure bargain:
Get the Right Real Estate Agent
It'll be helpful to get the services of a buyer's real estate agent who's knowledgeable about the foreclosure market. To find an excellent REALTOR®, check the online listings for foreclosed properties in your area. Look for agents with specialized qualifications, like the Certified Distressed Property Expert and the Short Sales and Foreclosure Resource training certificates.
Buyers will sometimes go directly to the seller's agent, which, frankly, isn't smart. The thinking for doing so most often is getting savings in commission. Keep in mind that the listing agent works for the seller. Their fiduciary duty in every way is to the seller. Getting a discount in commission isn't beneficial if you make a terrible mistake or overpay for the property.
If you find a great agent, you can expect them to look out for properties that meet your needs. You have to be ready to do things quickly, however, as these listing don't usually remain on the market for long.
There are specific online search tools you can use to find foreclosure properties.
Have a Preapproved Mortgage
If you aren't able to pay cash for the property, you'll need to show a preapproval mortgage letter to prove that you're serious. It will show that you can close on the property quickly, being able to pay the amount offered.
Having a loan ready will mean that you can better compete with offers from real estate investors, which will normally be offering cash. Lenders will need the property appraised to find the value. You need to take this into account when making an offer so that the loan amount isn't below the offer you've made. If this happens, you may have to find the difference if the sellers won't reduce the price to match.
Comparative Market Analysis
It can be challenging to judge the right amount to offer for a foreclosed home. Analyzing the recent sales information can provide a better understanding of the bid you should offer to get the house. Your agent should be able to run this analysis for you. They should also be able to give you some idea about how quickly sales go through, which will inform you on how much you need to bid.
Your agent needs to realize when running comparable sales data to be comparing apples to apples. The condition will play a vital role in the value. The agent will need to have decent skills at estimating necessary improvements.
If you find that foreclosures are selling quickly in your area, you will need to bid more to make sure you're successful. Your agent should be able to help you create an offer that has a good chance of success. The foreclosure price may be discounted by the lender already, so putting in a low-ball offer may not be a reliable approach. In fact, you may find that bidding the asking price or slightly above is the best way to win the purchase.
You may need to waive some of the contingencies which seem essential in a regular purchase. While it may seem crazy to do so, some buyers will waive a home inspection when buying foreclosure homes. As an agent who has been in the business for 33 years, I wouldn't recommend it, but it certainly happens.
The waiver of a financing contingency, even when you're not paying cash, is also a possibility. This will make sure the sale goes through faster, which is what the lender is looking for. If you decide this is the route you're going to take, make absolutely certain you'll have no problem getting the mortgage. Otherwise, you would be putting your earnest money at risk.
Condition of the Property
Often, a foreclosed property will be in a worse condition than you would expect from a typical house sale. The previous owner may not have cared much about the state of the property when they left it. Quite often, bank-owned properties are fixer-uppers that need quite a bit of work. The lender isn't going to be particularly interested in making any repairs, either.
You should have a home inspection done to make sure you fully understand the problems the property may have. As previously mentioned, not having one is foolhardy. Things may be uncovered that were unknown to the lender, and a better deal could be possible if that happens.
While lenders aren't going to care about routine maintenance items, if something significant pops up, like a non-functioning heating system, there may be some consideration.
Buying a foreclosed home is not for everyone. When purchasing this type of property, it is essential to make sure you do extra due diligence. It's not out of the realm of possibility there could be the next problem you weren't aware of lurking around the corner.
Bill Gassett is a nationally recognized real estate leader who has been helping people buy and sell Metrowest Massachusetts real estate for the past 33 years. He has been one of the top RE/MAX REALTORS® in New England for the past decade. In 2018, he was the No. 1 RE/MAX real estate agent in Massachusetts.