Three Ways to Buy a Foreclosure
Photo by Christian Stahl on Unsplash

Although a foreclosure is a closed door for many, it can be an open door for someone who might not be able to afford a home otherwise. But here’s the question: is buying a foreclosed home really a way to get a good deal? Let’s find out.

How to Buy a Foreclosure

First of all, the concept of how to buy a foreclosure can be pretty tricky. There are a lot of terms that don’t mean the same thing but that get thrown around together. Here are a few such terms to know:

  • Foreclosure: What happens when a bank officially takes over ownership of a home due to default on the mortgage.
  • Pre-foreclosure: The status your home can technically be in from the moment you have one late payment, up until it officially gets foreclosed upon.
  • Short Sale: When a home is sold for less than the amount of debt that is still owed on it.

Now that we have the terminology underway let’s talk about the different ways you can acquire a home that’s being forfeited by the owner.

Short Sale

It can be pretty easy to find a home for short sale. If you’re working with a real estate agent, he or she could narrow down the search to only those types of homes, or you might find them yourself as you’re searching online.

When buying a short sale, the closing process could take a bit longer than a traditional sale, though you can obtain a mortgage to buy this type of home.

Public Auction

A home has been officially foreclosed upon when it gets sold at auction. At this point, the bank has taken ownership of the home and is trying to offload it to whoever can buy the day of the auction. At this point, the buyer would need to have the cash at the ready (such as with a cashier’s check) to buy the home. What’s more, the home will most likely be bought sight unseen.

If you want to search for homes that will go up for auction, you can do so each week. A home might be put online for such a sale months in advance, but could sell in the meantime in other ways. Therefore, checking out local auctions the week of may be the most accurate way to search.

Very often you’ll see real estate investors or house flippers buying homes at foreclosure auctions. As for whether or not you’ll get a good deal, this might not be the best bet. Vija Williams, Zillow Premier Agent and Principal of VIJA Group Real Estate, says a bank will still sell at market price at this point and might not really start lowering the price until it doesn’t sell at auction, after which point it becomes a real estate owned property (REO).

Real Estate Owned Property (REO)

A real estate owned property is one that’s being sold by the lender and becomes as such because it didn’t get sold at auction. Like a short sale, your real estate agent can help you narrow down the search to REO properties if that’s something you’re really interested in. Another thing in common with a short sale is that you can obtain a mortgage, or even an FHA loan in some cases, to purchase an REO property.

And, like homes sold at public auctions, this is a type of home real estate investors might be interested in — either to buy and hold until market values increase or to buy and flip.

The One Thing You Should Always Have Before Buying a Foreclosure

If you’re trying to buy a foreclosure to get a better deal when choosing where to buy a home, there’s one crucial detail to consider: a repair fund.

In many cases, a foreclosure can sit vacant for some time and there might even be cases in which the home has been damaged. Either way, you could be entering into a deal for a home that needs a lot of TLC before it becomes livable, and that means having funds set aside for just that.

One way to do this is to save up some cash reserves (that should be different from your general emergency fund). Another way is to apply for a home equity loan or home equity line of credit (HELOC). That’s a way for you to borrow against the home’s value, (using the home as collateral) to pay for any necessary repairs or desired updates. But if you go that route, make sure you can afford the monthly payments on top of your mortgage (or that you can afford them after paying in cash for a home on auction).

No matter what you do, prepare yourself for the worst. Foreclosed homes might come in lower than market value, but there will very likely be costs to cover once you get your keys.

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