Get prequalified for a loan and set aside funds, and you’ll be ready to purchase a foreclosed home.
When lenders take over a home through foreclosure, they want to sell it as quickly as possible. Since lenders aren’t in the real estate business, they usually turn to real estate brokers for help marketing their properties. Buying a foreclosed home through the multiple listing service can be a bargain, but it can also be a problem-filled process.
The South Florida area was hit particularly hard with foreclosures. It has a large inventory of bank-owned properties for sale, which represents never before seen opportunities to purchase real estate at low prices.
Should you want to go ahead with buying a foreclosure, here’s a few things to keep in mind.
1. Choose a foreclosure sale expert. Lenders rarely sell their own foreclosures directly to consumers. They list them with real estate brokers. You can work with a realtor who sells foreclosed homes for lenders, or have a realtor find foreclosure properties for you.
2. Be ready for complications. In some states, the former owner of a foreclosed home can challenge the foreclosure in court, even after you’ve closed the sale. Ask your realtor to recommend a real estate attorney who has negotiated with lenders selling foreclosed homes and has defended legal challenges to foreclosures.
Have your attorney explain your state’s foreclosure process and your risks in purchasing a foreclosed home. Set aside as much as $5,000 or more to cover potential legal fees.
3. Work with your realtor to set a price. Ask your real estate agent to show you closed sales of comparable homes, which you can use to set your price. Start with an amount well under market value because the lender may be in a hurry to get rid of the home.
4. Get your financing in order. Many mortgage market players, such as Fannie Mae, require buyers to submit financing preapproval letters with a purchase offer. They’ll also reject all contingencies. Since most foreclosed homes are vacant, closings can be quick. Make sure you have the cash you’ll need to close your purchase.
5. Expect an as-is sale. Most homeowners stopped maintaining their home long before they could no longer make mortgage payments. Be sure to have enough money left over after the sale to make at least minor, and sometimes substantive, repairs.
Although lenders may do minor cosmetic repairs to make foreclosed homes more marketable, they won’t give you credits for repair costs (or make additional repairs) because they’ve already factored the property’s condition into their asking price.
Lenders will also require that you purchase the home “as is,” which means in its current condition. Protect yourself by ordering a home inspection to uncover the true condition of the property, getting a pest inspection, and purchasing a home warranty.
Be sure you also do all the environmental testing that’s common to your region to find hazards such as radon, mold, lead-based paint, or underground storage tanks.
Buying foreclosures is not the for the faint of heart. But they do offer great opportunities to buy properties at low prices, if you can handle the additional complexity involving such transactions. Your realtor will be critical in helping you navigate the purchase process successfully.