Understand the options for buying a foreclosed home.
Home buyers often think they want to buy a foreclosure. Unfortunately, as many full-service mortgage lenders can attest, many buyers jump in before truly understanding what the purchase of a distressed property entails in terms of additional costs, repairs paperwork and effort.
Foreclosure is one of the four types of distressed properties. You might possibly save money with any of the four, but the further along the process from original ownership to bank ownership, the more money you, the new buyer, might have to sink into repairs.
Before you decide to go the foreclosure route, become an informed consumer! Speak to a Realtor and a great mortgage lending company like Ark Mortgage. In addition, these tips can help:
Tips for Buying Foreclosed Properties
1. Pre-foreclosure: In a pre-foreclosure, the owners are behind in their mortgage payments and are in danger of default. This is documented by a “lis pendens” notification, filed at the local clerk or record keeper’s office and available for public view. This doesn’t mean the property is necessarily available for purchase. Owners may still come up with the necessary funds or apply for a loan modification before deciding to sell the home to avoid potential foreclosure.
2. Short Sale: In a short sale, the property is typically no longer worth the amount the owners still owe on their mortgage. The owners attempt to sell the home for the highest amount a potential buyer offers, and then ask the bank to forgive the difference between the sale proceeds and the amount they still owe. In a short sale, you are negotiating with the bank, not the owners, and the process can take several months.
3. Foreclosure Auction: Also known as a sheriff’s sale or trustee sale, this is where the bank owns the property and publicly auction it off to the highest bidder. Evicted (and often bitter) former owners may have removed appliances, pipes, wiring, heating systems and more.
4. REO: Foreclosed properties that remain unsold at auction become Real Estate Owned properties. They have been repossessed by the lender, such as a mortgage services company, who is now attempting to sell them through Realtors and other means. Such sales can take years, which means that REOs, left empty and neglected, are often in the worst condition of all. There can be water damage, vandalism, overgrown landscaping and the like.
You can find listings of distressed properties on the Multiple Listing Service, websites like those sponsored by Fannie Mae, Freddie Mac and the Department of Housing and Urban Development, bank websites and specialty websites like RealtyTrac.
If you’ve decided to bid on a foreclosure, be aware that distressed properties are normally auctioned off “as is” and can require varying amounts of repair, especially if former occupants were unable to afford their upkeep. This might be a deterrent for buyers with limited funds for repairs or who need to move in quickly. Purchasers might also be responsible for any unpaid taxes, liens and encumbrances left by the previous owners. These can include fees for utilities, sewer and trash removal, as well as Homeowners’ Association fees and home equity lines of credit.
Do Your Homework Before Bidding
1. Search public records for liens and outstanding taxes, then hire a title company to run a full, insured title search. That way, you’ll have a better idea of the chain of ownership and what you’ll ultimately owe, should your bid win.
2. Hire a real estate agent, preferably one with a Short Sale and Foreclosure Resource (SFR) designation from the National Association of Realtors, as well as a reputable inspector and a lawyer who specializes in foreclosure sales.
3. Have the real estate agent help you set a maximum bid amount, based on comparable sales and values in the neighborhood, so you don’t get caught up in the excitement of the auction.
4. If you can preview the property in advance (often this is not permitted), listen carefully to your inspector’s suggestions so you have an educated estimate as to necessary repair costs.
5. Before the auction, discuss your maximum bid strategy, plus the expected costs of outstanding liens and repairs, with a full-service mortgage lender like Ark Mortgage so you can get pre-approved for your estimated loan amount. Unless you intend to pay cash, you will need a pre-approval letter to participate in the auction. Tell your Home Mortgage Advisor that you intend to buy a foreclosure. That way, they can budget for how much your taxes may increase once the home is in better shape. Understand that the loan amount will typically be based on the property’s current appraised value.
6. Attend foreclosure auctions of other properties before bidding at your own, so you better understand the process.
7. Be sure to register for your auction and reconfirm that morning since it is common for auctions to be postponed or canceled, especially if the owner comes up with a way to cover arrears. If you do plan to bid, arrive an hour before the auction starts and pick up an Auction Bidder Card.
If you do decide that purchasing a distressed property is right for you, we hope these tips help set you up for success. Contact Ark Mortgage for more information.