Before the mortgage crisis of 2008-2009, buying a home that had been foreclosed upon was a much more difficult proposition than it is now. Real estate bargain hunters formerly had to follow auctions put on by courthouses or sift through reams of legal filings. But the wave of foreclosures brought on by the subprime meltdown has led many banks to begin selling these seized assets through real estate agents. This article shows you how you can find the home of your dreams in this depressed market and negotiate for it effectively. (For a background, check out our Investopedia Special Feature: Subprime Mortgages.)
Finding Foreclosed Homes
There are many websites that now specialize in finding homes and properties that are in foreclosure, like www.realitytrac.com and www.foreclosurepoint.com. You can also check your local multiple-listing service to see what they have available. However, properties that are being foreclosed upon may not be highlighted per se; this may only be stated in the property description. And, of course, there are real estate agents that specialize in foreclosure properties, so don't hesitate to consult your local agent for some good deals.
Where Should I Buy These Properties?
Although many foreclosed properties are sold at public auction, buying a home from this source can pose several disadvantages. Bidders at auction must pay for their properties in cash at the time of purchase, and cannot use a mortgage. Buyers at auction also usually do not have a chance to inspect their properties before purchase, which means that you can find any number of nasty surprises in your house after you sign on the dotted line, including structural and cosmetic damage to the structure, termites or pest infestations or other problems. Another issue to consider is the possibility of liens. Auction properties often have liens attached to them, either by the IRS or state or other creditors. These potential pitfalls can be avoided by purchasing your property from a bank, which will always pay off any liens attached to the property before reselling it to another party. Bank properties are also available for inspection before closing, so that you know exactly what you're getting for your money. Perhaps most importantly, bank properties can also be financed with a mortgage. (Learn more in Foreclosures: Bargains Or Money Pits?)
Use a Contractor
A large percentage of foreclosed properties typically have major structural problems. If your property falls into this category, hire a contractor to itemize and estimate the cost and material required to make the appropriate repairs or modifications. Don't get caught underestimating these costs; a shortfall in the funds necessary to make your property livable can leave you in a precarious dilemma.
Start at the Bottom
Of course, the advantages that come with buying a foreclosed home from a bank come at a price. Banks purchase these properties to make a profit, and the value they add to the equation will increase the price of the property proportionately. Therefore you'll need to sharpen your bargaining skills and start the process with a lowball offer on the property you want. Banks that have accumulated sizable inventories of foreclosed properties will be more inclined to negotiate on price, especially on properties that have been held for longer periods of time. Therefore you should probably make your initial bid at a price that's at least 20% below the current market price, or perhaps even more if the property you're bidding on is located in an area with a high incidence of foreclosures. (For more, check out 10 Tips For Getting A Fair Price On A Home.)
Play the Waiting Game
The amount of time that it takes to get a response on your bid can vary widely according to various factors. If the bank that holds your property is swamped with foreclosures, then it can take a great deal longer for the bank to process your request. Banks with substantial backlogs have been known to take up to 90 days to respond to some inquiries. Prospective buyers may be wise to submit bids on several properties at once, because it is possible for competing buyers to secure a property with a higher bid. Buyers who bid on bank properties would also be wise to get preapproval for a mortgage if at all possible to back up their bids. And don't get discouraged if someone else trumps your offer for a particular property; check back periodically to see if it reappears in the bank's inventory. Foreclosure deals tend to have a high rate of failure, and the possibility that the deal will fall through exists until closing.
The recent mortgage crisis and recession has left more than stocks valued at record lows. The rash of foreclosures has created tremendous opportunity for prospective homebuyers and real estate investors. However, those seeking repossessed properties should be aware of the risks that come with properties sold at auction. Bank properties can be much better bets due to their freedom from liens and availability for inspection. Buyers should obtain preapproval for financing and be prepared to wait for responses to their bids, which should be below the property's actual market value to begin with. (To learn more, see Foreclosure Investing Not A Get-Rich-Quick Venture.)