Buying a Home in Foreclosure
Unfortunately, sometimes a person or family purchases a home and things don't work out as planned. If the mortgage payments are not kept up-to-date, the mortgage lender can start foreclosure proceedings. Most lenders would prefer that you actually pay your mortgage, so they will normally work with you in order for this to happen. After all, a lender doesn't want to be a homeowner; they make their money by lending. However, sometimes a financial problem is so severe that the lender will foreclose on a home, and sell the home to cover the loan.
Who can you buy such properties from? In most cases you are either buying from the lender directly, or you are buying from a third party who is acting on behalf of the lender. The lender could be a bank or it could be a government agency like HUD, which has acquired the property because of its mortgage programs.
Some small lenders may only have foreclosures in certain regions. The Department of Housing and Urban Development (HUD) residential foreclosures are available throughout the United States, wherever the FHA has provided mortgage insurance on properties. The sales process for purchasing a HUD home differs from other home buying, so take a few notes before you go shopping if you are interested in buying from HUD.
HUD foreclosures are sold using a bidding process. There's an Offer Period, during which you can submit a bid for a property. Sealed bids are only accepted from your real estate agent. At the end of that period, all offers are opened. HUD will generally accept the highest bid. So it's a bit of a gamble and you aren't guaranteed a home at the end of the process.
Your chances become better if the home remains unsold after the initial bidding process. After the initial period, bids are opened as received and your bid may be accepted immediately. If your bid is accepted, your agent will be notified within 24 to 48 hours. At that time, you will be given a settlement date, which is usually 30-60 days from the date of your accepted contract.
What if you aren't buying from HUD? Well, it may take you more time to identify a property but it can be worth the effort. In most cases, foreclosures will save you in the range of 5 % of the regular market price. However, if you manage to find a property that is still being held by the lender who foreclosed, you may be able to save up to 10%. In addition, that lender could be willing to waive some closing costs, or maybe even offer a break on the interest rate or the down payment.
So how do you find these properties? When a lender decides to foreclose on a property, a notice of default is generally filed, depending on the state. This document is a public record, and for potential buyers, it's your first chance to locate a property in foreclosure. A buyer looking for foreclosures also can buy magazines and newsletters that list properties in default, although this may mean that a third party is already involved and the savings may be minimal.
Once a home has been located, then you need to search public records. Look for liens on the property, because they can drive up the purchase price. After all, the proceeds of the home sale will be used to pay the lender and all liens. Keep in mind that liens are typically placed on a house for unpaid property taxes and such liens can be expensive.
After doing all your homework, then you need to decide: are you getting a bargain or not? Check assessed values and sale prices of neighboring properties in order to be sure. Just because a property is in foreclosure does not guarantee a good deal.
Then, there is the process to purchase. Research local state foreclosure laws, since they differ. Some states -- such as Florida, New York, Ohio and Pennsylvania -- require the lender to sue the borrower and get a court order for the sale of the property, a process known as judicial foreclosure. Other states -- including California and Texas -- follow the non-judicial foreclosure process, which doesn't require a lawsuit. If a lawsuit is required, it will mean more time and potentially a higher price for the property in the end. After all, the lender will want to recoup the monies lost to legal action.
In general, if you can buy directly from the lender, it is the safest way to buy.
If the bank has already hired a real estate agent to sell foreclosed homes in the traditional manner, the savings could be minimal. But sometimes you can successfully buy a property before the bank gets an agent by pestering bank loan officers with low offers (as long as you know the property is in the early stages of foreclosure). The process of submitting a bid can be simplified if the lender has an REO or real estate owned officer. If you can get a low yet reasonable offer to such an officer on a property before the problem has to be reported to supervisors, you might get a real deal.