Learning how to buy a foreclosure is not all that different from buying any other home – but the small differences can make the difference between getting the property you really want and be left with nothing. This post will walk you through the proces of buying a foreclosure for either your personal use or as a real estate investment.
How to Buy a Foreclosure: The Foreclosure Process
Before diving too deeply into the details of how to buy a foreclosure, let’s first make sure we’re all on the same page with terms. A foreclosure is the process where the lien holder takes ownership in a property due to a variety of possible reasons, but most commonly the lack of payment on a loan. The foreclosure process differs in each state, but it generally begins with numerous notices given to the property owner and a legal set of steps leading up to the actual foreclosure. There are generally three places in the foreclosure process where it is possible to buy a property: pre-foreclosure, at the courthouse steps, and after the foreclosure.
Buying a Pre-Foreclosed Property
It is possible to buy a home before the foreclosure is finalized and the homeowner is kicked out. Buying a property during this period known as “pre-foreclosure” is a common technique used by many real estate investors and can be a good way to find motivated homeowners. After all – few things in life are more motivating for a homeowner than knowing they will soon be physically removed from their home.
If you are interested in finding properties in pre-foreclosure, be sure to visit Foreclosure.com
At the Courthouse Steps
In most states, once the legal process has been carried out the property is sent to the county for a public auction on the “courthouse steps” (sometimes figuratively but often literally) and sold to the highest bidder. This process is known as the “Trustee Sale.” The bidding generally opens with an automatic starting bid of whatever amount is owed on the property, so no – it’s generally not possible to simply go and bid $1 on a property at the courthouse. If a homeowner owed $80,000 on a loan secured by the property, the bidding would start at $80,000. If no one bids higher, the lien holder will be awarded the property and be given title.
To buy at the courthouse steps, there are several tips to keep in mind:
- Buyer Beware- When you buy a foreclosure at the courthouse, you do not receive any guarantee that the property is free of any liens or encumbrances. This means you could be buying a property that has hidden liens (such as a lien placed by a contractor, a disgruntled ex-spouse, or any other reason.) For a great article on discovering how to find what liens are on a property, read Property Lien Search: How to Find out if there are Liens on a Property.
- Condition – Because up to this point the property is still owned by the homeowner, you probably will not get a chance to get inside the property and check it out (unless you go to the property and knock on the door and ask.) There may be hidden defects with the home, and you generally will not have the time do a formal inspection.
- Cash Only – Finally, when buying a foreclosure at the courthouse steps, you will need to have all the money the same day to purchase this property. This means you cannot use a conventional loan to buy the property. There are some hard money lenders who fund these kind of deals, but be sure to make sure the other two steps are okay before buying a property on the courthouse steps.
After the sale on the courthouse steps, the new owner of the property will next need to evict the “tenants” (former homeowners) who may still reside at the property. If it is a bank that forecloses, the bank will generally go through the process of evicting the tenant and getting the home listed with a real estate agent to sell. The remainder of this article will focus on how to buy a foreclosure after it has been filtered through the foreclosure process and is now available for sale publicly.
When a bank takes back the property and begins to sell it, the property is now known as an REO, or Real Estate Owned.
Shopping for a Foreclosure
There are several ways to shop for a foreclosure to buy. This section is going to look at several of the more common ways to shop around.
1.) The MLS –
By far, the most common source of finding foreclosures is through the Multiple Listing Service (MLS.) The MLS is a collection of lists put together by local real estate agents of all the properties currently for sale in their offices. In the old days, these lists were kept in file cabinets and each office kept their own lists private. Today, real estate brokers work together to share all the information freely amongst each other using the MLS.
The MLS is fully accessible for any real estate agent, so it is highly recommended that you either get your own real estate license or work closely with an agent you like and trust (after all, a real estate agent is generally paid by the seller, so it’s free for you to use an agent!) However, you don’t need to only rely on your real estate agent to tell you what properties are listed – because you can generally get that information online through many different websites such as Realtor.com, RedFin.com, Zillow.com, or Trulia.com. These sites will help you sift through nearly all the listings and give you at least some of the information about the property. Keep in mind, however, that these lists can also be slightly delayed so in a hot market, you could miss out on some deals if only relying on the internet.
2.) Bank REO Departments
Banks typically have an “REO Department” and someone in charge of working with those properties. While most REO properties end up on the MLS (see above) it is possible to make connections with an REO Department and have access to properties before being placed on the MLS. This is especially true with smaller, community banks.
3.) HUD Store
Some properties that have been foreclosed on by the US Department of Housing and Urban Development (HUD) are not listed publicly on the MLS but instead are just listed privately on the HUD Home Store.
Putting in Your Offer
Once you find a property you want to buy, it’s time to submit your offer. Again, this is when a good real estate agent comes in handy. Typically, you will meet with your agent and let them know the terms you want to offer. Your agent will submit an offer to the seller and the bank will look it over and either:
- Accept It (yay!)
- Deny It (boo!)
- Ignore It (In other words, “Deny!”)
- Counter It (most common)
For a great article on tips for getting your offers accepted, check out 3 Easy Ways to Get Your Offers Noticed and Accepted
Highest and Best
Many times, if there are multiple offers on a property, the seller will ask for you to submit your “highest and best” offer. In other words, the bank is asking you to bid on the property against others. At this time, it can be easy to fall into “auction mode” and overpay because of the hype, but if you follow all the steps I preach on often about buying smart you’ll know your max price and won’t let emotion take over.
Doing Your Due Diligence and Actually Buying the Foreclosure
Once your offer is accepted, it’s now time to do your “due diligence” and make sure all your ducks are in a row. This is the time where you hire an inspector to check out the property and get your financing fully in place. In most states, the closing process is handled by a “Title Company” who will prepare all the documents and arrange for the signing of both parties. However, in some states an attorney is responsible for this procedure, but the steps are nearly the same.
After both parties have signed the documents and the new deed has been recorded with the local county, the property is officially yours! Congratulations – you just learned how to buy a foreclosure.
What questions do you have about the process? Or have you learned any lessons in your experience that can help others with buying a foreclosure? Leave your comments below!
Photo: Jay Santiago