Leaning foreclosure sign in front of a modern single family home on a cloudy cold day
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Often, when buyers are searching for a deal, they gravitate toward the idea of purchasing a foreclosure. However, while these homes often look like a steal at first glance, they also come with a lot of red tape. If you’ve been thinking of buying a foreclosure, read this first. I’ve laid out the things you need to know before taking the plunge.
There are two ways to buy a buy a foreclosure
There are two separate that you can go about buying a foreclosure. They are as follows:
Auction
Typically, when a bank first forecloses on a property, it is put up for a “public foreclosure auction”, where the bank attempts to sell the property to the highest bidder. These auctions may sound like a convenient way to buy a home, it does come with risk. Often, auctions do not give you the opportunity to see or perform any inspections on the property before you buy it. Also, auctions typically require you to be able to buy the property with either cash or certified check.
REO properties
When a property does not sell at auction, it becomes a real estate owned, or REO, property. The process of buying an REO property is more similar to buying traditional real estate. Here, you can work with a real estate agent, perform inspections for your own benefit, and finance the property through a mortgage.
They’re typically sold as-is
When a bank forecloses on a home, it’s because the previous owner stopped making their mortgage payments. Therefore, when the bank puts an REO property on the market, they’re already operating at a loss. Their goal is to recoup as much of that loss as possible. As such, foreclosures are typically sold in as-is condition, meaning that the bank is not willing to cover the cost of any necessary repairs.
With that in mind, if you’re thinking of buying a foreclosure, be prepared for any repair costs to fall on your shoulders. Depending on the state of the property, you’ll either need to have extra cash on-hand after your down payment and closing costs or you’ll need to investigate getting a renovation loan, which will allow you to roll the costs of any repairs into your mortgage.
You should perform an inspection and a title search
However, just because the property is listed “as-is” doesn’t mean you should skip your inspections. If anything, it’s all the more reason to go in with eyes wide open about how much work the property needs.
Luckily, you can still do inspections for your benefit, meaning that they’re for informational purposes only, to give you an idea of the scope of work that needs to be done. It’s in your best interest to include this contingency in your offer. That way, if the property needs more work than you can handle, you have the option to walk away from the sale.
In addition, you’ll want to perform a title search before you buy. Sometimes foreclosures can be sold with liens attached, meaning that any debt against the property will become the new buyer’s responsibility. The title search will tell you if there is any debt against the property and how much you will be expected to pay if you accept responsibility for it.