There are quite a few potential advantages to buying foreclosed property, namely buying property at less than market value and being able to move more quickly, to name just two. The trick is to figure out the best time to make that real estate purchase. We’ll look at the pros and cons of buying property at different stages of the process so you can make an informed decision.
The Pre-Foreclosure Stage
Early in the foreclosure process, you will work with the current owners of the property to come to an agreement that allows you to take possession of the property. There are a number of advantages to making your purchase at this point:
Purchase agreements that are negotiable – Instead of having to deal with real estate agents and others concerned about their commissions, you’ll be negotiating directly with the owners. This means that you have much more flexibility regarding the arrangement.
reduced purchase price – Due to the bad situation the previous owners have found themselves in, you may be able to purchase the property for much less than it is worth. Prices that are significantly below the property’s market value are normal at this point because the owner usually just wants to get out of debt on the property quickly and is less concerned with making a profit on the property.
Lower down payments– Lenders often ask for a 10% down payment on properties that are not in foreclosure. By buying a property before foreclosure this can be drastically reduced. Sometimes you can even buy with no money down, depending on how quickly the owner wants to get rid of the property and debt.
Faster closing times – Because the property owner is likely eager to get rid of the balance owed and move on, they can often complete the entire deal much faster than they could with conventional property purchases.
Although the list of advantages is impressive, there are some potential disadvantages that you should be aware of before buying in the pre-foreclosure stage.
Homework, Part 1: What is due? – When you buy the house, you will take on all the debt associated with that property, so make sure you know what you are signing up for. An example would be if the previous owner has taken out a second mortgage or if the house is used as collateral for another debt that has not yet been paid, you may end up owing additional money.
Homework Part 2: Finding a Home – The biggest challenge may be simply finding a pre-foreclosure home that you want. Legally, the lender must file a Notice of Election and Demand (NED) with the public record before foreclosure on a home. You can sometimes find these NEDs on lenders’ websites or by checking the public records section of your local newspaper. You can also go to your courthouse and search for the records by hand, but this is time consuming and usually not very fruitful.
Homework Part 3: Coming to an Agreement – Sometimes it can be easier to deal directly with the homeowners, but sometimes it can be difficult to reach an agreement. Make sure the property owner is serious about selling the property and is willing to negotiate. Otherwise, it won’t be worth your time or money.
The Foreclosure Auction Stage
When a property reaches this point, the bank has already foreclosed on and owns the property, and the time to negotiate with the owner is over. Auctions are one of the most common ways for potential buyers to locate properties, usually for the following advantages:
Auctions are easy to locate – Unlike pre-foreclosure properties, auctions involving foreclosed properties are fairly easy to find. They are often advertised online, in newspapers, and sometimes even on television. You can also contact some lenders to find out when and where the auctions will be held.
no guilty feelings – Sometimes, pre-foreclosure home buyers can feel guilty about taking advantage of the homeowner’s hard times. This can be intensified because they sometimes get to know the former owners through negotiations. The auction is completely impersonal, which ensures that this will not be a problem.
bargain prices – It costs money for lenders to own these properties, so they generally don’t want to keep them. However, in only about 1/5 of the auctions does the property actually change hands. Lenders may be desperate to recoup their losses and get rid of the property, sometimes they may be open to very low offers.
As with pre-foreclosed homes, while the potential for savings is great, there are also some pitfalls and potential problems with buying during the foreclosure auction stage.
Competition with other buyers – Foreclosure auctions can draw larger crowds, and you may find yourself bidding against other people who want the same thing. This means that you can pay more for the property or not at all.
Limited research opportunity – Typically, when you bid on a home at a foreclosure auction, you are bidding without even inspecting the property. This can be dangerous because the property may look great from the outside, but there may be issues that are hard to spot, such as termites, mold, an old heating or cooling system that needs to be replaced, etc. which can cost you a lot of money.
spinning your wheels – Nearly half of all scheduled foreclosure auctions end up being canceled or delayed because homeowners are doing everything they can to keep their home. If you have a long drive or flight to the auction or take time off work to attend, these cancellations can cost you time and money. To avoid these types of issues, you should always call ahead to make sure the auction will take place as scheduled.
various problems – Sometimes the auction winner may be responsible for additional costs, including money paid by the lender to advertise the auctioned property. Also, there is a chance that the original owner did not vacate the property, the auction winner may have to go through the trouble of evicting them. This can be a time consuming, aggravating and expensive process.
The REO (Real Estate) Stage
As mentioned, only about 20 percent of foreclosed properties ever sell at auction, so the lender often keeps the property. At this point, they will usually make any necessary repairs to the property, pay any taxes owed, and do whatever they can to make the property more attractive, then the home will go on the market.
Abundant – With recent changes in the real estate market, foreclosures are increasing in number. This means that you can often find REO properties quite easily. For example, in one Midwestern county at a single listing agency, about 125 REO properties were for sale.
easy to locate – REO properties are advertised like any other home sold through real estate agents. Advertising won’t always specify that the property was foreclosed on, but sometimes it does.
money for repairs – The lender wants to recover as much money as possible, so they will often cover the costs of repairs needed to make the home more attractive. If they don’t, they will sometimes discount the price so the buyer can bear the costs of those repairs.
lower risk – Since the house is owned by the lender and all other liens have been extinguished, you don’t have to worry about finding out that you have to pay more money to be able to do something with the property.
Although this option provides the lowest risk when you’re buying a foreclosed property, there are still some drawbacks.
Similar to Buy Conventional Property – Many of the benefits of buying a foreclosed home, including lower down payments and more flexible contracts, do not apply at this stage. You’ll be dealing with both a lender and a real estate agent, so the process will be more like buying a traditional property.
Less profit margin – When lenders reach this point, they are less likely to let the property sell for next to nothing, so incredible deals are generally not available during this stage. At best, you could pay 15% less than market value.
It really is up to you to figure out what is most important to you when buying a foreclosed property. If you want a combination of low price, average risk, and a flexible arrangement, and are willing to put in the extra work, you’ll find pre-foreclosure to suit you. If you’re not averse to taking more risk, you can save more money by taking a chance on a foreclosure auction. If you just want to save a little money but don’t want to risk a loss, you may be better off waiting to buy an REO home.
