For many people, buying any property is the most significant investment they will make in their lifetime. Therefore, we are all looking for that good buy to start the investment on a positive value proposition. Many believe and hope to get that so-called bargain through a foreclosure property sale. However, although it is possible, common difficulties are associated with distressed property purchases.
Adding foreclosures to your buying lists can expand your purchasing options and possibly get a property lower than the default market price. Although foreclosure purchases are primarily similar to traditional home buying, specific notifiable differences add to the complexity. We will look at and discuss the processes in detail.
How To Buy Foreclosed Property:
- Determine Your Property Purchasing Budget
- Get A Home Loan Preapproval
- Acquire Real Estate Agents’ Assistance
- Start The Property Search Process
- Identify The Foreclosed Property You Want
- Arrange For An Appraisal & Inspection
- Make A Comfortable & Realistic Offer
- Approval Process
1. Determine Your Property Purchasing Budget
Many real estate investors buy foreclosed properties in cash; therefore, if you are a foreclosure cash buyer, you can skip the first two steps. However, don’t feel discouraged for the rest, as you can compete on the same level once you have determined your budget and received a pre-approval letter from a mortgage company or lender.
This step should be the first and most crucial step in your property purchasing process. The idea is not to turn the most exciting life event into a future stressful lifestyle. There are two consideration factors to consider when determining your budget – what you think you can afford and what the mortgage company is willing to lend you.
Without getting too technical in discussing front-end and back-end ratios, four general rules guide the potential buyer and mortgage companies in determining affordability.
Rule number 1 or front-end ratio. The percentage of your yearly gross remuneration that you can use as a monthly mortgage payment should not be more than 28%. However, many mortgage companies may increase the value to 30% or even higher
Rule number 2 or back-end ratio. The percentage of monthly gross remuneration that you pay towards your debts should not be more than 43%. For example, if your monthly debt is $3,000, and you earn $6,000 each month, your ratio is 50%, and therefore, equates to more than the recommended percentile
Rule number 3 or mortgage-to-income ratio. You could afford a mortgage that is roughly twice the value of your gross income
Rule number 4 or net-income rule. Many would advise that this rule is more practical and realistic. Your monthly mortgage payment should not be more than 25% of your monthly net-income
2. Get A Home Loan Preapproval
Once you have determined your affordability budget, you can approach a mortgage company for a pre-approval letter. Therefore, they would rubberstamp your estimates according to what they are prepared to loan you according to your financial income and status. Remember, before finalization, they need to add the specific house to the equation.
In addition, most foreclosed properties would require some repairs, and your loan application should preferably include a repair cost value. There are specific loans that cater to upfront home repairs.
Also, a mortgage pre-approval is essential, and it should enable you to compete with real estate investors and cash buyers. So, shop around for better rates and approval values before committing.
3. Acquire Real Estate Agent’s Assistance
So, you worked out your budget and received a pre-approval letter from a mortgage company. You are now ready for the next step. It may be best to acquire the expertise of a real estate agent or somebody familiar with the foreclosure purchase process. For example, they will guide you in identifying the various distress sale types.
Pre-foreclosures – The seller accepts your offer before the bank marks the property as a foreclosure or repossesses it.
Short sales – The bank agrees to a reduced value, although the current owner owes more of the home’s value.
Public auctions – Multiple bidders compete to make an offer on a foreclosed property
Bank-owned homes – The bank has repossessed the property, and it no longer belongs to the owner
Real estate agents know the details of all properties and can save you a lot of time and effort. They know the market, have access to MLS listings, and can shortlist potential properties according to your area preferences, budget, and home requirements. In addition, they can guide you on foreclosure property price recommendations, pitfalls, and risks.
Another option is to browse through foreclosed home websites while searching in your area. Then, identify a property or agent and make contact. Property realtors can specialize in property sale types such as (CDPE) Certified Distressed Property Expert or (SFR) Short Sales and Foreclosure Resource. In addition, you probably would need their help when dealing with an auction, pre-foreclosure, or short sale offer.
Alternatively, negotiate directly with the bank-appointed REO (Real Estate Owned) realtor instead of the seller’s agent if you want to save on commission. However, sellers are keener to negotiate with their realtors, and many homeowners pass the property sale off to an REO agent who works with local property realtors to find a buyer.
4. Start The Property Search Process
Between your realtor, your searches, and the internet, it should not be difficult to set up a shortlist of potential foreclosed properties in your desired area. In addition, also keep an eye on local media publications and social media platforms.
Your acquired property agent will keep you abreast of all properties worth viewing while searching the internet and media platforms. Foreclosed properties will typically be marketed as such on website listings. Below are a few examples of places to search for distressed property sales.
- MLS listing Websites
- Real Estate Realtor listing Websites
- Auctioneers will post notices of sheriff’s auctions
- Some Home Auction Websites market foreclosed properties
- Some government-sponsored enterprises advertise and sell foreclosed
5. Identify The Foreclosed Property You Want
Unfortunately, when you have identified your dream home, it does not mean that the offer and approval will be successful. Firstly, the bank or the seller needs to match your purchase offer with their property valuation and the minimum amount they will accept concerning the outstanding mortgage. Secondly, you may withdraw after the property inspection reveals too many necessary repairs.
The old saying in the property business is that area is more important than the property. So don’t be too hasty; keep searching until that specific property becomes available on the market. You will probably know as soon as you walk in the front door if it is the one. Keep to your budget, and do not be afraid to ask questions. Your real estate agent will guide you with each foreclosed property detail.
6. Arrange For An Appraisal And Inspection
Typically, foreclosure homes have a higher risk of neglect and needed repairs than default home sales. Therefore, your prerogative may be to ask for an inspection before buying a foreclosed home. However, the seller would probably not be able to comply, and usually, the buyer selects and pays the home inspector.
A foreclosure property is a typical example of an As-Is purchase, and any repairs will be for your pocket. Therefore, it’s most crucial that you inspect the property and make it part of your offer subjective conditions. In many cases, you could first make an offer, and once your offer is accepted, you will have a particular time to arrange an inspection.
Although an inspection is not a foreclosure property purchase requirement, it could protect you as a buyer from unforeseen expenses. In addition, once you have all the defects listed, you can make an informed decision on the offer price and plan any repairs.
In addition, your mortgage company may require an appraisal to assess and match the home’s value to your pre-approval and possible offer value. Remember, the lender or mortgage company needs to mitigate the risk and allow for surety as it is ultimately their money buying the property.
Therefore, plan for an expense of a few hundred dollars for the inspection and appraisal upfront. Usually, unless otherwise negotiated, the lender or mortgage company selects the appraiser, and the buyer pays for the appraisal.
7. Make A Comfortable And Realistic Offer
When you get to this step, you will again appreciate the services from your real estate agent or assisting property expert. The agent can draw a (CMA) comparative market analysis report to compare recent sales, price indexes, and more. Again, you will need to find that sweet spot between what you are prepared to offer and what the selling party would accept while keeping it as low as possible yet realistic.
Remember, there is fierce competition between buyers for worthy foreclosed homes, and you need to be assertive, quick, and knowledgeable to work strategically. The property offer mix may be cash offers and property investors. Although there is no exact science to making the correct offer, you need to present or bid a strong offer while keeping it well within your budget.
Many foreclosure homes are already at a lower valuation price; therefore, a low offer may eliminate you as a contender by the bank or mortgage company. So, your offer to purchase, accompanied by your pre-approval loan letter, should ensure your position as a viable contender for the home. Of course, the cherry on top is when you bid, submit or present the offer, and the seller’s party accepts it.
In addition, each distressed property type has different offer processes and requirements. Examples of the other offer approaches are below.
For pre-foreclosure properties, you, or if you have an agent, will need to present the offer to the seller or current homeowner.
For auction foreclosure homes, you need to get in contact with the attorney in charge of the auction to gain all the necessary information before participating in the auction process
For REO or real estate-owned homes, you, or if you have an agent, will present your offer to the bank listing agent. Therefore, you or your agent must work through the REO agent and never directly with the bank
For government-owned homes, you, or your estate agent, will present your offer to the agency responsible for listing the foreclosed home
8. Follow The Offer And Finance Approval Processes
Once you get to this step, your offer is submitted, and you are almost there. Typically, most proposals have an acceptance deadline varying from three to seven days, depending on the foreclosure sale type. So, it should not be long before receiving the good news that your offer was successful.
However, unfortunately, there are still things that can go wrong. In addition, although everyone strives to speed up all the processes, home bond purchases require the lender’s approval, which can take time. In addition, allow time for the inspection and appraisal processes as it will ultimately comply with your and the mortgage company’s approval prerequisites.
Lastly, you may receive a counteroffer. For example, if your offer was lower than the appraisal value, you may have the opportunity to up your price if the seller or bank does not have a higher bid on the table and won’t accept your lower offer. You bought the property you wanted at the price you anticipated. Now you can move in and start the required repairs or upgrades.
Conclusion
Buying a foreclosed home can be viable for many with a tight budget who are not afraid to put in the fixer-upper efforts. Typically, many foreclosed homes are below market price but are neglected and in need of tender love and care. However, determining your available budget and getting a pre-approval letter from a mortgage company are critical as the first two steps.