Buying a foreclosure isn’t all that different from buying any other home, but there are small differences important to know when buying a foreclosure home. This post will walk you through the process of buying a foreclosure for your personal use or as a real estate investment – so you know exactly what to expect and go into the process prepared.
How to Buy Foreclosure: The Foreclosure Process
Before diving deep into the details, let’s first make sure we are on the same page with all the terms. Foreclosure is a process where the lien holder, i.e. the person or lending institution that has a claim on real estate, reclaims the property for any number of possible reasons, but usually lack of payment on the loan. The foreclosure process varies from state to state, but it typically begins with several notices served to the property owner, followed by a legal set of steps leading up to the actual foreclosure.
There are generally three places in the foreclosure process where it is possible to purchase a property:
- prior possession
- on the steps of the court
- after foreclosure
When learning how to buy a foreclosure, it’s important to know all three steps.
1. Buying a Home During Pre-Foreclosure
It is possible to buy a home before foreclosure is finalized and the homeowner is evicted. Buying a property during this period known as “pre-foreclosure” is a common technique used by many real estate investors and can be a good way to find motivated homeowners. After all, few things in life are more motivating to a homeowner than knowing that they will soon be physically removed from their home.
2. Buying Foreclosures on the Courthouse Steps
In most states, once the legal process is complete, the property is forwarded to the county for public auction on the “courthouse steps” (sometimes figuratively, but often literally). on the steps) and sold to the highest bidder. This process is known as a trustee sale. Bidding typically opens with an automatic starting bid of the amount owed on the property, so it is generally not possible to place a dollar bid on the property at the courthouse. For example, if a homeowner owed $80,000 on a loan secured by the property, the bid would start at $80,000. If no one bids higher, the lien holder will be awarded and title to the property.
Connected: 6 Tips For First Time Investing In Foreclosure
To buy a foreclosure on the courthouse steps, there are several tips to keep in mind:
- buyer beware. When you buy a foreclosure at the courthouse, you get no guarantee that the property is free of liens or encumbrances. This means you can buy a property that has hidden liens (such as a lien placed by a contractor, a disgruntled ex-spouse, or any number of other persons). For more information on how to locate a lien on a property, see Property Lien Search: How to Find Out if There Are Liens on Property.
- You probably won’t know the condition of the property. Because the property is still owned by the landlord up to this point, you probably won’t get a chance to go inside the property and check it out (unless you go to the property, knock on the door and ask). The home may have hidden defects, and you usually won’t have time to do a formal inspection.
- You will need cash. Finally, when buying a foreclosure on the steps of the courthouse, you will need the entire money upfront the same day you purchase the property. This means that you cannot use a conventional loan to buy the property. There are also some hard moneylenders who finance such deals.
3. Buying During Post-Foreclosure
After the sale on the steps of the courthouse, the new owner of the property will be required to evict “tenants” (former homeowners) who may still be living in the property. If it is a bank that does the foreclosure, the bank will typically go through the process of evicting the tenant and listing with a real estate agent to sell the home.
When a bank takes a property back and begins to sell it, the property is now referred to as an REO, or “real estate owned.”
3 places to shop for foreclosure homes
There are many ways to shop for foreclosure—here are some of the most common.
1. MLS
By far the most common source of foreclosures is the Multiple Listing Service (MLS). The MLS is a collection of lists put together by local real estate agents of all the properties that are currently for sale in their offices. In the old days, these lists were kept in file cabinets, and each office kept its lists private. Today, real estate brokers all work together to freely share information using the MLS.
The MLS is fully accessible to any real estate agent, so it is highly recommended that you either obtain your own real estate license or work closely with an agent you prefer and trust (after all, a real estate The agent is usually paid by the seller, so it’s free for you to use an agent!) You can also search online through many different websites such as Realtor.com, RedFin.com, Zillow.com, or Trulia.com. can get information. These sites help you sift through almost all listings and give you at least some information about the property.
Keep in mind, however, that these listings can also have slight delays, so in a hot market, you may miss out on some deals if you rely only on the internet.
2. Bank REO Department
Banks usually have an “REO department” and someone in charge of working with those properties. While most REO properties end up on the MLS (see above) it is possible to connect with the REO department and gain access to properties before they are placed on the MLS. This is especially true with smaller community banks.
Connected: 5 Big Benefits of REO Properties to Real Estate Investors
3. HUD Store
Some properties that have been foreclosed by the U.S. Department of Housing and Urban Development (HUD) are not publicly listed on the MLS, but are accessed privately only at HUD Home Stores.
how to make your offer
Once you have found the property you want to buy, it is time to submit your offer. Again, this is when a good real estate agent comes in handy. Typically, you will meet with your agent and tell them the terms you want to offer. Your agent will submit an offer to the seller and the bank will look at it and either:
- accept it
- deny it
- ignore it
- fight it (most common)
highest and best
Often times, if there are multiple offers on a property, the seller will ask you to submit your “highest and best” offer. In other words, the bank is asking you to bid on the property against others. At this point, it can be easy to fall into “auction mode,” and many may overpay due to the hype, so be sure to stick to the numbers needed to turn a profit.
Do Your Due Diligence and Actually Buy Foreclosure
Once your offer is accepted, it’s time to do your due diligence and make sure all your ducks are in a row. This is when you hire an inspector to check over the property and get your financing in full. In most states, the closing process is handled by a title company, which will prepare all the documents and arrange for them to be signed by both parties. Although, in some states, an attorney is responsible for this process, the steps are roughly the same.
After both parties have signed the documents and the new deed has been filed with the local county, the property is officially yours!
We have updated this article and are republishing it to help our new readers.
What questions do you have about the process? Or have you learned any lessons from your experience that might help others with foreclosure buying?
Leave your comment below!
Note by BiggerPockets: These are the views expressed by the author and do not necessarily represent the views of BigPockets.
