Not all home-buying experiences are cut-and-dry. You have options, and if one of these is to invest in a foreclosure, there are some things you need to know before you buy.
Most professionals will tell you this might not be a good idea. Why would you want to invest in a property where there could be a large amount of debt, including past taxes and damage, and that you would assume responsibility for these issues?
If approached thoughtfully and with the right preparation, however, foreclosures could prove to be a good investment for your future.
When someone fails to make their mortgage payments, they could be evicted and their home could become a foreclosure. This foreclosure will be owned by the lender—oftentimes a bank—which will then re-sell it. These are often much less expensive than buying other homes on the market, but they can also come with a lot of maintenance and risk. Foreclosures are typically cash only purchases. There are some exceptions, so working with a Realtor who is knowledgeable in the re-sale of foreclosure properties will make the process less stressful.
Before we get into that though, let’s break down the four different types of foreclosures.
At this stage, the homeowner still has ownership and control of the property. The homeowner has likely negotiated with the lender because they were not able to make mortgage payments. This negotiation leads to the home being sold below its market value.
What does this mean for the buyer? For one, the home is likely in better shape than it would be at later states of foreclosure. The buyer can also perform all standard inspections on the home.
However, this also means that the homeowner could make up on payments and retain ownership of the home. The process can take a very long time, and the bank does not have to agree to the lower price after a buyer has invested months into the process. If the homeowner has not been making their mortgage payments, there is a possibility they have not been paying their taxes as well. This is important to understand if you venture into a pre-foreclosure home: the risk here is very different from the risk you assume in later states of this process.
At this state, the home is now officially in foreclosure and has moved into the auction stage. The lender can no longer make a profit off the property, and the auction is likely handled by a third party.
Just like any other auction, the home will go to the highest bidder. That money goes towards any debt incurred on the home first, and anything left over goes to the previous homeowner.
If you get involved in a foreclosure home auction, be sure to learn all that you can about any additional debt or interest on the home. Do this by checking public records on the home so you have a full understanding of the property and no surprises come up later. This research should include your state’s Statutory Right of Redemption laws, which could allow the previous tenant to pay all past-due bills within a certain amount of time in order to reclaim their home.
Also, understand that you may not be able to perform a thorough inspection on the home. This is because often plumbing is drained and hot water and utilities are shut off to avoid any possible damage to the property.
This is the next step a home enters if it fails to sell at auction, and it’s typically considered to be the safest way to buy a foreclosed property. Why? Because the lender now owns the property since no one bid the default amount.
However, there may be a lot of competition to buy the home at this stage. While the previous owner will have already moved out, the home has likely been unoccupied for a while and may be in poor structural condition. This is one of the biggest risks you will assume if you buy a home at this stage of foreclosure.
This is the fourth and final stage of a home in foreclosure. It involves the most paperwork and is the slowest process when buying (though the process is relatively slow at any stage of foreclosure). You also accept that the property is sold “as is.”
In learning as much as you can about the property before you invest, you’ll want to either hire someone to perform a thorough inspection or see if you can get access to the records of a recent inspection. A real estate agent can help you with this.
The number one thing in buying a foreclosure is to thoroughly do your research and proceed with caution and care. The more careful you are, the better chance you’ll have in getting a great deal out of a foreclosure. But, if you’re hasty and careless, you can end up with a property that results in more trouble and money. You might end up inheriting any debt that comes with the house, including unpaid construction loans, tax obligations, and more.
On the other hand, if the value of your home goes up after you buy it in foreclosure, you could reap the benefits and enjoy some financial gain. Be aware, however, that this doesn’t always happen and you could find yourself in the opposite situation. You may want to consider scheduling a viewing of the home to better understand any work that needs to be done.
We cannot stress this enough: it’s extremely important to conduct thorough research when it comes to investing in a foreclosure.
If you want to make sure you do everything right and have a smooth buying process, you’ll want to work with a real estate agent who specializes in foreclosures. Also, get together with a real estate attorney for legal advice on your potential purchase. Both can help you with the paperwork that comes with buying a foreclosure.
No matter what, don’t be surprised if you receive slow response times and if it takes time to move forward with the process. Also, be aware that, just when you think the house is yours, someone can outbid you and the house can go to them.
Still, with proper planning and execution—and just a little bit of luck—you might just find the home of your dreams at a fraction of the cost.
Kayleigh is a content writer with a BA in technical writing/literature and an MA in creative writing. When she’s not at work writing, she’s at home writing, reading, or binge-watching television shows… for research, of course. A big do-it-yourselfer and crafter, Kayleigh loves testing out projects and gifting them to friends and family—all in preparation for when she owns her own home one day and decorates with her own personal creations. Her work has appeared on The Writing Cooperative and as an Honorable Mention in East Meets West American Writers Review.