How to Buy a Foreclosed Home From Start to Finish

How To Buy A Foreclosed Home

The buying process for a foreclosed home is reasonably straightforward. But knowing where you can find these properties isn’t—mostly because investors quickly buy them.

Like all things in real estate, tricks of the trade exist. This article is designed to help you purchase your first foreclosed home while not loading you with tons of jargon and industry based terminology.

Why Buy a Home in Foreclosure?

Foreclosed homes are an exciting opportunity for real estate investors because they almost always sell for a much lower price than market value. The reason is simple—the bank only wants to make back the money owed to them for the property and rid themselves of the burden as quickly as possible.

If this amount is less than the property is worth, you can flip it for market value and make a profit. Or you can find your next personal residence for a low price.

Where to Find a Foreclosed Home

Below are some of the places you can find foreclosed homes:

  • MLS or Traditional Real Estate Listing Sites (Zillow, Realtor, Redfin, etc.)
  • Foreclosure Databases like county websites, or GreatDCDeals
  • Banks REO Department
  • HUD Store
  • Networking with Industry Professionals (Repo men, Bank REO personnel, other Agents)

But there are things to keep in mind before purchasing a foreclosed home.

The first thing to remember is that there is a significant difference between a home that is foreclosed and one going through the foreclosure process.

A foreclosed home has already gone through the legal process of being foreclosed upon. At this point, it is owned by the bank. When a home is foreclosed, it is the bank’s or lender’s property to sell. A house that is going through the foreclosure process is not.

In many cases, the owner knows a foreclosure is imminent and is looking to sell the home before it is genuinely foreclosed. Once they receive their Notice of Default, they may strike a deal with the lender to sell the house for less than what is owed. This is known as a short-sale and is another great investment opportunity you may consider.

But once a home has been foreclosed upon, it can still be a great investment opportunity. You’ve heard countless peers talk about great deals they got on foreclosures. But where do you look to find them?

What to Know About the Foreclosed Home Buying Process

One thing to remember is that a foreclosed home that makes its way to listing pages is known as an REO (Real Estate Owned) listing. These are sold by a bank’s REO department representative, with a real estate agent’s help.

Having friends in a bank’s REO department is a great way to get leads on properties and make an offer before those properties are listed. Otherwise, you run the risk of getting into a bidding war with other buyers and lower the overall profitability.

Before a foreclosed home is sold through a traditional listing website, it goes through a Trustee Sale at the county courthouse. Here the house is auctioned with the starting bid being for precisely what is owed on the property. That means bidders have the chance to buy a property before it even makes it to the listings.

The advantage of buying a home through an auction is that you will have the best chance to buy a property at the lowest price possible. But, there are some risks. First, you are purchasing the home without seeing its interior and the overall condition.

Remember that just because a home is being sold as a foreclosure doesn’t mean it’s going to be an outstanding investment opportunity—especially considering the homes are sold “as-is” and may have issues you must address before it can be deemed to be in livable condition.

Once the home has been acquired at an auction, you are typically expected to close on the property within 1 to 2 weeks. It is prudent to have financing in place prior to bidding on a property at an auction.

Foreclosed Home FAQ’s

How do you buy a foreclosed home from the bank?

The first opportunity you have to buy a foreclosed home is through a Trustee Auction. Otherwise, you may have a chance to make an offer to the bank before they can list it with the aid of a real estate agent.

What is the cheapest way to buy a foreclosed home?

The cheapest way to buy a foreclosed home is typically at the trustee auction. If you are the only person to bid on a home, you may be able to purchase it for precisely what is owed or slightly more. While this is a rare occurrence, it is still very possible.

What credit score do you need to buy a foreclosed home?

If you buy a foreclosed home through an agent, and not at an auction, you still have the opportunity to use an FHA loan so long as you are a first-time buyer and have a credit score of 500 or better. Otherwise, you will want to improve your credit score before you try to acquire a loan through a lender.

Is it smart to buy a house in foreclosure?

Yes and no. The critical thing to remember is that a foreclosed home doesn’t always sell for a good deal. It just means the owner did not make payments, and the bank is selling it for what is owed, which can be more than the home is worth. Landing a good deal does depend on a keen eye and a little bit of luck.

Can you inspect a foreclosed home before buying it?

If the home is being sold at an auction, the answer is no. But if it didn’t sell at the auction and a real estate agent is handling the sale, you will have the opportunity to inspect it before you purchase it. However, time to do so is likely minimal if it is a good deal.

What are the downsides to buying a foreclosed home?

If you are buying the home from an auction, you aren’t allowed to inspect the home before purchasing. You will likely need to have the cash for the property on the day of sale at an auction.

Suppose you are buying a foreclosed home from an agent. In that case, the only downside is that you may experience a delay in the closing process because the bank has a lot of paperwork to sort through to transfer the property legally. You are also buying the home “as-is,” which means you may need to address a few issues before moving in or selling the home at market value.

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