Three Things you Should Know About Buying Foreclosed Property
Whether you are thinking of buying a homestead or considering buying property as an investment, the option of purchasing a foreclosure has likely crossed your mind. Understanding the pros and cons of buying foreclosed property will help you make better decisions.
Bankers and realtors use the term “distressed property” to describe homes that are either already involved in the foreclosure process or that are subject to repossession soon. There are three general types of distressed property.
Foreclosed
Foreclosed property is owned by the financial institution that issued the mortgage. This means that homeowners stopped making payments and the bank went through the legal processes to reclaim the property.
While selling prices can be significantly less than market value (30% to 85%), buyers must be cautious.
Usually when an individual has gone through a foreclosure, they had other financial obligations go awry as well. Because of this, some foreclosed properties may have liens attached to them from other creditors.
If the property is part of a bankruptcy filing, settling the purchase could take years to resolve.
A few states allow borrowers to pay the full balance at any point prior to auction, effectively stopping the foreclosure.
If you are considering a foreclosed home, verify the home is unoccupied, free from liens and not subject to any settlement agreements. Of course, if the price is substantially below market-value, you could make an offer, providing you have protection against loss if the property is pulled from the market for any reason.
Auction-ready
After lenders satisfy all legal requirements for foreclosure, homes go on the auction block. Typically the auction is held on the court house steps at the county seat where the home stands. Starting prices may be fixed or open.
A fixed starting price means that the bank sets a base price that is the lowest amount they are willing to accept. This might be the balance due on the original loan or a discounted figure based on property condition.
An open bidding platform means that the bank is ready to get the property sold and is willing to accept the highest bid offered — even if it does not cover the loan balance. Some banks do this because the state where the property is located allows banks to recover the difference through a judgment against the prior homeowner. Sometimes the property needs extensive repair and it is a financial liability to the lender. In either event, these are often very good investment opportunities.
Buying property at auction means that you have cash in hand, a certified check or a letter of credit from your bank. Loans are generally not accepted on this type of purchase.
Pre-foreclosure
When a bank notifies a homeowner that foreclosure is imminent, but not in progress, this is called pre-foreclosure. Homeowners can legally list the property for sale themselves or list with a licensed realtor, as long as they disclose the mortgage status to potential buyers.
Finding property for sale in pre-foreclosure status generally means you should be ready for a quick closing. Sellers who want to avoid bankruptcy or repossession are usually willing to discount the property. Financing options for homes in this category are similar to other on-the-market homes. Most qualify for FHA, VA or Conventional loans if they are well-maintained or need minimal repairs.
It might seem harsh to haggle for a bottom-dollar price when someone else is struggling financially. The best way to approach this type of transaction is with the understanding that it can be beneficial to both parties.
Things to Keep in Mind
- Inspect all property before you bid or make an offer, extensive damage must be repaired before FHA, Conventional or VA loans receive approval.
- If you need financing, check with your lender to find out what type of loans are available for distressed property.
- Understand your state and local laws about occupancy. Some states do not allow eviction if a tenant has a current legal lease.
FaithWorks Financial provides counseling services for debt management and financial planning. If you are trying to get your financial house in order before you can purchase a home, contact us for a free debt relief consultation.
