How to buy a foreclosed home
It can be an exciting and sometimes overwhelming process to find and purchase a home. You want to ensure the home you purchase is right for you and that you have a seasoned real estate agent to help guide you through the process.
If you are house hunting, you may want to consider buying a foreclosed home, also called a real estate owned (REO) property. An REO property is owned by the lender as a result of the previous owner defaulting on the loan. This is also known as a foreclosure property or a bank-owned property.
Engage a real estate specialist
There are many factors to consider when buying a foreclosed home compared to a traditional home purchase. REO properties are an affordable housing option, but there are also more things to watch for with this type of home purchase. Use this guide to better understand the steps involved in buying a foreclosed home and to increase your likelihood of success in finding one that is right for you.
HideDifferences between a typical real estate transaction and the purchase of an REO property
Negotiating the purchase price of a foreclosed home may take a little longer than a typical real estate transaction because the process may require multiple levels of approval. First, the bank will have to approve the offer. In some cases, an investor may own the property and will have to provide approval as well.
Pricing for a foreclosed home is typically set at market value in an effort to move the property quickly. You will want to submit a fair and reasonable offer, as most banks will list properties at a fair price.
There are several considerations to keep in mind when purchasing an REO Property:
Unknown property condition
Given that the bank has not maintained or had first-hand knowledge of the foreclosed home prior to acquisition, there may be no record of property repairs or maintenance that would assess the true property condition. As a result, the bank is often unable to verify the condition of the property or complete a Seller’s Disclosure.
Buyers are allowed and encouraged to complete professional home inspections on the property.
As with a typical real estate transaction, out-of-pocket expenses can occur before and after an offer to purchase a property has been submitted. These out-of-pocket expenses may include lender required documentation such as an appraisal or home inspection and bank-required minimum earnest money. Earnest money is a “good faith” deposit demonstrating the buyer’s interest in the property and may be an indicator of how much money will be deposited as a down payment.
Prior to closing, a buyer should work with their agent to coordinate the date on which they may take possession of the property. Title issues may be discovered during the closing process and will need to be addressed and resolved, along with completion of all necessary paperwork to support the transaction. An extension of the close date may be requested by the seller if these issues cannot be resolved by the contract close date. Because of this, the buyer should allow adequate time after the scheduled contract close date to schedule movers, furniture deliveries, utilities, etc.
Get the property inspected
Getting a home inspection is always a good idea, but it is particularly important when buying a foreclosed home. Given that the bank has not maintained or had first-hand knowledge of the REO property prior to acquisition, there may be no record of property repairs or maintenance that would assess the true property condition. As a result, the bank is often unable to verify the condition of the property or complete a Seller’s Disclosure. Be sure to have a licensed home inspector evaluate the condition of the house. Most REO homes are sold as-is, and the cost of repairs typically becomes your responsibility. Make a list of everything that needs to be fixed, research the costs, and factor in those costs to any offer you make to ensure you could cover the costs on top of your new mortgage payment. Please keep in mind, de-winterizing a home may be necessary to complete the inspection.
A property inspection is encouraged and will help you determine:
Condition of the home
Estimated cost of repairs
A fair and reasonable offer
Funding the purchase
If you find that repairs are needed for your REO purchase, you may want to consider an FHA 203(k) Renovation Loan. An FHA 203(k) Renovation Loan is a mortgage that can cover the purchase price minus your down payment, plus funds for renovation by financing the “as improved” value of the home.
Get the most up to date title information
A title search is always recommended for any real estate transaction. A title company will check the property for liens (outstanding debts someone is attempting to collect against the property) as well as verify that the deed to the home is correct. A title search is especially important when buying an REO property due to the unique transfer of ownership at foreclosure. There may be liens on the title that may not be uncovered until the closing process begins. Again, a real estate professional who is experienced in foreclosed homes can be a valuable resource in guiding you through this process.
Engage a real estate specialist
You should work with a real estate agent who is experienced with REO properties. An experienced professional can guide you through any additional paperwork that may come with buying a foreclosed home and can help you determine if the price is a good value.
Is a foreclosed home right for me?
Only you can decide if buying a foreclosed home is a good match for your current situation. Foreclosures can vary on how quickly the bank is able to deliver a free and clear title enabling the Buyer to close. This process can take on average 30-120 days and sometimes longer. It is always recommended to have a licensed outside title company or Florida attorney to review the title search, title insurance policy, lien search and code violation search to be certain that nothing was overlooked. All government owned properties require buyer’s to sign a Hold-Harmless document prior to closing, so choosing the right real estate team is very important to do. Finally, weigh the pros and cons, do your research and work with qualified professionals through each step to help you make the decision that’s right for you.