Looking for a bargain? Buying a home in foreclosure is one way to find one. But understanding exactly how to buy a foreclosed home is important before you get started. Here’s how to be informed, prepared, and ready to make smart moves if you want to buy a foreclosed home.
Understand what foreclosure is.
The foreclosure process allows a mortgage lender to recover as much money as possible after the homeowner stops paying their mortgage on schedule. It all begins when the owner misses their loan payments for three to six months. The lender can then file a public notice of default, which starts the pre-foreclosure process.
If you’re interested in learning how to buy a foreclosed home, it’s important to know that doing so works differently depending on the stage of foreclosure the home is in. You’ll also want to know how to find them: you can use filters on your Trulia search to surface foreclosed homes, and the results will tell you which stage of foreclosure the property is in.
Learn the different stages of foreclosure.
Buyers can purchase a home during or after the foreclosure process. In most cases, these are the stages of foreclosure:
- Pre-foreclosure: When a home is in pre-foreclosure, it basically means the lender has issued a warning to the owner that they are in default and the foreclosure process is technically beginning. Buyers can approach the homeowner and offer to buy the home from them at this point, but is typically something only real estate investors will do. Buying a home in this stage is not easy. There’s no guarantee the owner even wants to sell (they could plan to get caught up financially or have their loan modified and continue to own the home). If they do, there are still a lot of unanswered questions. No price has been set, and you are bargaining with both the owner and lender. The timeline can be unpredictable: because there are so many variables—state laws, lender policies, homeowner behavior, etc.—homes can stay in a state of pre-foreclosure anywhere from weeks or a year or more.
- Short Sale: If the homeowner owes more than the house’s current value, their lender might let them sell it for less than they owe, which is called a short sale. This allows the owner and lender to avoid the foreclosure process. While short sale listings look like other home sales, the process is more complicated: you’re buying from the owner, but the lender must approve the terms. And the lender can afford to be picky about those terms, because if they don’t feel like they’re getting a good deal, they can still sell at auction or in a bank-owned sale.
- Auction: At the end of the pre-foreclosure period, a public auction is held to sell the property. While buying at auction is less complex than during pre-foreclosure, it comes with a lot of risk. Auction winners are typically expected to pay in cash that day, and they buy the home in whatever condition it’s in. This is why real estate investors are often the buyers at auctions. You can find out when an auction is by doing some research on sites like RealtyTrac or Auction.com. Some are in-person and others are online—and in most cases, you have to register in advance with proof you have the cash to participate.
- Bank-owned foreclosure: If no one buys the house at auction, ownership reverts to the mortgage lender and the lender resells it. This is when most buyers figuring out how to buy a foreclosed home for the first time are in the best position to buy it because the process is more like a traditional home buying experience—though it does still have its quirks. We’ll walk you through them.
1. Find a real estate agent who knows foreclosures.
Buying a foreclosure is no ordinary home purchase, so you’ll want to work with an extraordinary agent. Find a real estate agent who has experience with foreclosure purchases. As you’ll learn below, everything from the timeline to what to expect from the seller is different with foreclosures, and the more experience your agent has with them, the better advice they can give along the way.
2. Be prepared to make an as-is purchase.
Most foreclosed homes are sold as-is. That means no matter what an inspector turns up, it’s unlikely to be fixed. But knowledge helps. First, make an offer that gives you room to deal with the unexpected, and try to include a home inspection contingency, which allows you to walk away from the deal if a major issue is found.
If your offer is accepted, take advantage of your contingency period to learn as much as you can about the property. Each lender will have their own stipulations about the contingency period, but if you can, get as many expert opinions on the place as you can. These pros might include a home inspector, a structural engineer, a pest inspector, or a hazardous materials inspector. Depending on what you learn, you may want to walk away, or you may try to negotiate for a lower price.
3. Make sure you have the time for a foreclosure.
A flexible timeline is a huge help. The process of a buying a foreclosure is much less predictable than a regular home on the market. A regular seller is typically motivated to sell quickly because they want to move on with their lives. If you have a question about the property or want a response on your offer, you can expect to hear back soon. A mortgage lender isn’t often so motivated. As a business, they have a bunch of priorities, and moving the sale of one foreclosure along is just one of them. A question or your offer can sit on someone’s desk for days or weeks as the person communicating with your real estate agent waits for an answer or approval from elsewhere in the organization.
If you are planning to live in the home, having a flexible living situation, like a month-to-month lease or staying with family, can give you the time and space you need to wait out the process.
4. Prep your finances.
You’ll need your pre-approval letter ready to go before you make an offer, just like with any other home purchase. It’ll assure the lender that owns the property that you’re a serious buyer. Once you assemble all of the relevant documents to apply for pre-approval, keep them handy, even once you have your letter in hand. Most letters expire after 60-90 days, and because foreclosures can take a while, if you want to you keep your house hunt active, you may need to reapply.
5. Be willing to walk away.
In a regular home sale, buyers and sellers are typically both motivated to close a deal, and that benefits negotiations on both sides. Mortgage lenders are as detached as a seller can be in terms of closing any one particular deal, so buyers lose that advantage during negotiations. After investing so much time and often a lot of emotion into trying to close a deal on a foreclosure, it’s easy to find yourself settling for terms you’re not happy with just to get into the house.
Your real estate agent can help you stick to your guns and make smart decisions—and can help advise you when it’s time to walk away if necessary.
If you’re patient and make smart moves, you could become the proud owner of a formerly foreclosed home that was priced just right.
A foreclosed home is just one special type of home purchase. Here’s how to make another—and very different—purchase, a new construction home.