When you are looking to buy a foreclosed home, there is more to consider than just the price and the condition of the property. You also must understand the legal ramifications of acquiring foreclosures within the state where the property is located. Issues include whether (and for how long) the previous owner has the right to buy your new house back after the sale, a stipulation called the "redemption period."
To avoid complications, research the state's foreclosure laws before you move forward. If you have a choice of states, focus on the one(s) with the most favorable rules for buyers. (You can look up the laws in different states here.)
Get to Know the Foreclosure Laws
As a potential buyer of a foreclosed home, you must research three key aspects of the law: whether or not a judicial process is required; the length of the pre-foreclosure period; and the length of the redemption period. Here is more on each of these topics:
- Judicial versus non-judicial process: Some states require the foreclosure process to go through the courts, which will likely take longer and be more complex. Other states allow a non-judicial process, which takes less time and is much simpler to complete.
- Pre-foreclosure period: Each state has its own process for foreclosing on property. The pre-foreclosure process starts when the owner is first legally notified that he or she is in default and the property can be sold by the bank or other holder of the debt. During the pre-foreclosure period, the owner can satisfy the default (pay what is due to bring the mortgage current) or sell the property to someone else. Often this will be in a short sale, where the buyer works with the bank to get it to agree to a lower price than what's due on the property. Texas has the shortest pre-foreclosure period in the U.S. – 27 days. Other states with a pre-foreclosure process of less than 60 days include Georgia (37 days), Virginia (45 days) and New Hampshire (59 days), as well as the District of Columbia (47 days). Wisconsin has the longest pre-foreclosure process (290 days). That is not necessarily a bad thing if you are looking to do a short sale. The longer the pre-foreclosure process, the better the chances that the seller/buyer could strike a deal with the bank to take less than is due.
- Redemption period: This adds risk to any purchase of a foreclosed home. The redemption period is the time during which the original owner is given the opportunity to buy back the property that was sold by the bank as a foreclosure. The states with the longest redemption periods – up to one year – include Idaho, Kansas, Kentucky, North Dakota and Wisconsin. Those that have no redemption period include Georgia, New Hampshire, Texas and Virginia, as well as the District of Columbia.
Choose Your State
After researching these three key legal issues, your next step is to narrow down the states where you want to buy foreclosures. Knowing the legal risks, you can then focus on states with the best prices on foreclosure homes.
Numerous lists pick the top 10 states in which to find foreclosure deals. Bankrate.com, for example, focuses on the 10 states with the highest number of foreclosures. Its top choice is New Jersey, where one out of every 562 homes received a foreclosure filing in April 2017. Delaware is second, with one out of every 706 units having received a foreclosure filing in April, and Maryland is third, with one in every 776. The more homes in foreclosure, the lower the prices are likely to be. The others in the top 10, from fourth to tenth, are: Connecticut, Illinois, Nevada, Florida, South Carolina, Ohio and Massachusetts.
SmartAsset.com used a different methodology, developing a ranking according to where the best deals are, given the foreclosure and redemption laws in each state as well as changes in home values, population and housing stock. Its conclusion: Look toward coastal states and retiree states. The only states on SmartAsset's list that are not on a coast are Nevada and Arizona. At the top of this list is Florida, followed by Nevada and Hawaii. Others in the top 10, in descending order, are: Maryland, Texas, Massachusetts, Arizona, Georgia and Oregon (tied for eighth place) and South Carolina.
The Bottom Line
If you want to buy foreclosed house, be sure you understand the foreclosure laws in the states in which you are thinking of making a purchase. Find a good deal and, if there is time, try to work out a short sale with a bank during the pre-closure process if the people losing their home are willing sellers and the bank agrees to cooperate. (See also: Buying a Foreclosed Home and Should You Buy a House at Auction?)