How to Buy a Foreclosed Property

The condition of foreclosed homes vary between properties, but most need at least mild to moderate repairs.
The condition of foreclosed homes vary between properties, but most need at least mild to moderate repairs.
iStockphoto/Thinkstock

Homes at half price? While it may sound too good to be true, a sharp increase in the number of foreclosures means that there's never been a better time to score some serious bargains on real estate. Even better, the sheer volume of foreclosed homes on the market means that you're sure to find a property that's just right for you, whether you want a house that's move-in ready or a fixer-upper you can put your own spin on.

Worried that buying a foreclosure is only an option for investors or wealthy buyers who can afford to pay cash? The truth may surprise you! With foreclosed properties making up more than half of all home sales in some states, there are plenty of resources to help you find and pay for the perfect property, even if you know nothing about real estate.

When homeowners fail to make mortgage payments, the bank or lender may take over ownership of the property in a process known as foreclosure. Once the homeowner has been evicted, however, the lender is fully responsible for all costs associated with the home, including maintenance, taxes, heating and countless other expenses. Instead of holding on to a foreclosure and shelling out big bucks to maintain an empty house, many lenders place the property back on the market, often at a deep discount.

Because the banks are usually eager to sell, foreclosures represent an excellent opportunity for buyers and investors looking to purchase homes at reduced prices. In 2011, the average foreclosed property sold at 28 percent below its list price, and some savvy buyers saved 50 percent or more. Of course, even though foreclosures are often inexpensive when compared to new homes, they aren't a good choice for everyone. Many require special considerations in terms of financing, and most foreclosed homes are sold as is, which can lead to big headaches for buyers who are unprepared for the reality of these types of properties. Above all, foreclosures require plenty of patience, as the buying process can be much more time-consuming and complex than a standard property purchase.

So, how much can you really save by buying a foreclosed home? Of course, prices vary by state, area and community, but according to CNN, in 2011, the average conventional, non-foreclosed property in the U.S. sold for $259,000. The average bank-owned foreclosure, on the other hand, sold for $190,000. Distressed foreclosures that required significant work or renovation averaged $99,000.

Still think you might be interested in buying a foreclosure? Read on to learn the best way to locate foreclosed properties in your area.

Finding the Right Foreclosure

To begin with, take the time to decide which type of bank-owned property is right for you. In some areas, foreclosed properties are sold at auction and are advertised by the local court or sheriff's department. These homes are easy to find and are often listed in the newspaper or local public records. Buying a property at auction is the best way to score a serious discount but can also be particularly challenging for new or inexperienced buyers.

Property auctions are often dominated by professional buyers and investors, who can put up stiff competition when it comes to bidding on real estate. Another drawback to auction listings is that they generally require the winning bidder to pay cash for the property. This means that buyers are unable to rely on traditional mortgages and loans, which put these properties out of reach for the average home buyer.

If you can't afford to pay cash for your property, or you want to avoid the challenges of an auction, look for foreclosures owned by banks or other lenders. Known as real estate owned (REO) properties, these homes can be purchased using traditional mortgages and don't require the buyer to participate in an auction bidding war. One of the easiest ways to find REO properties in your area is to simply call local banks and ask about foreclosure listings. Some banks will provide you with lists of homes for sale, while others may direct you to real estate agents who maintain the bank's listings.

Newspaper and Internet ads represent another source for foreclosure listings. Some sites, such as those provided by Fannie Mae and Freddie Mac, provide free listings. Others charge a small fee, but typically offer free trials so you can decide if the site is worth the cost before paying.

The U.S. Department of Housing and Urban Development, or HUD, serves as another great resource for those looking to buy foreclosed properties. All properties listed on the HUD Web site are offered first to buyers who are looking to purchase a home they will occupy themselves. This gives home buyers an advantage over the real estate investors and professional buyers who often make it difficult to purchase houses at auctions.

If you find your foreclosure search has stalled, it may be time to consult a professional real estate agent. Some agents specialize in bank-owned homes and can help you not only track down the perfect property, but also assist you with securing financing and completing all the necessary paperwork.

Financing Your Foreclosure

So you've found the right property, and you've already started dreaming about what you'll do with the place after you buy it. Now it's time to make an offer and figure out how you're going to pay for your new home. While the average foreclosure sells at more than 25 percent under the list price, keep in mind that this represents an average across the entire country. When deciding how much to offer for a bank-owned property, it's important to take a look at the condition and features of the house. Consider what type of repairs, if any, you'll need to perform to make it livable. Research similar properties in the area to get a feel for what they've sold for and what the home might be worth.

For the average property, CNN recommends making an initial offer of 10 to 20 percent below the list price. Keep in mind that the longer a foreclosure sits empty, the more money it costs the bank. If you spot a property that's been uninhabited for months or one that's in particularly poor condition, the bank may be willing to consider selling the home for more than 20 percent below the list price. By the same token, don't make a low-ball offer on a hot property in a great neighborhood and expect to have your proposal accepted.

When it comes to financing a foreclosure, many buyers go with standard mortgages. Be ready with a down payment of 5 to 20 percent, depending on how good your credit is and what your bank's requirements are. You may wish to hire a real estate agent to help you choose the right mortgage and hammer out a deal.

If you're purchasing a property that needs work or you simply can't manage a large down payment, special loan programs by the Federal Housing Authority, or FHA, might be just what you need. The FHA 203k loan requires just 3.5 percent down, and allows buyers to wrap up the cost of the property and the cost of repairs or renovation into a single loan. Fannie Mae offers a similar program called Home Path, which features a lower than average down payment and the ability to consolidate repairs and mortgage costs into one loan.

Potential Pitfalls

Without title insurance, a lien holder may be able to claim ownership of your property, even if you just bought it.
Without title insurance, a lien holder may be able to claim ownership of your property, even if you just bought it.
Peter Dazeley/Photographer's Choice/Getty Images

Although foreclosed properties can often be purchased on the (comparable) cheap, they also often come with major headaches. One of the biggest unknowns when it comes to purchasing a foreclosure is what type of condition the property is in. The majority of foreclosures are sold as is, which means you're stuck with the cost of handling any repairs and surprises that may pop up. If you decide to buy a property at auction, you won't even be able to step inside the place, much less get a home inspection before you hand over your cash.

If you're looking at REO properties, you'll most likely be required to undergo a standard property inspection, which can provide some information into the state of the house. If the inspection reveals a problem, however, don't expect the bank to handle the repairs. In fact, CNN states that only about 25 percent of banks will fix a problem found during an inspection of a foreclosed property. The rest of the time, it's up to the buyer to cover the cost of repairs. Even more troublesome, banks aren't required to disclose potential problems with a foreclosed property the way everyday homeowners are.

For buyers who've never experienced buying a fixer-upper, these may not seem like major concerns, but the costs of repairing a foreclosure and making it livable can quickly add up. Keep in mind that people who are unable to make their mortgage payments probably have little left over for routine maintenance and repairs. Some angry homeowners even intentionally damage their home prior to an eviction. Add to this the problems that could pop up as a house sits empty, particularly in extreme climates, and your great deal might end up costing you more than a standard property that has not gone through foreclosure.

Protect yourself from big repair bills by taking a contractor with you when you look at foreclosed homes. An experienced professional can help you spot potential problems and provide an estimate of how much they'll cost to fix. To be safe, most sources recommend planning an additional 10 percent of the purchase price into your budget when investing in a foreclosure.

Another way to avoid surprises is to invest in a title search for the property before you buy. It'll cost you around $100, but you'll learn about any liens attached to the title. These liens -- which can include past due property taxes, second mortgages, delinquent homeowner's association dues and unpaid contractor fees -- come with the house. That means you're responsible for paying them before you move in. A title search will reveal any hidden liens and could save you big bucks when buying a foreclosed property.

Finally, make sure to invest in a solid owner's title insurance policy to protect your new purchase. This policy takes the heat off if anyone ever steps forward claiming ownership of your property. While most mortgage companies require you to take on title insurance, buyers who pay cash may have neglected to purchase this policy, leaving themselves open to big problems down the road.

Related Articles

Sources

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  • Christie, Les. "Foreclosure Sales Still Pummeling Home Prices." CNN. Dec. 21, 2011. (Feb. 5, 2012) http://money.cnn.com/2011/12/21/real_estate/foreclosure_sales/index.htm
  • Gibbs, Lisa. "It's a Good Idea to Buy a Foreclosure. Here's How." CNN Money. April 11, 2011. (Feb. 5, 2012) http://money.cnn.com/2011/04/06/real_estate/why_to_buy_a_forclosure.moneymag/index.htm
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