A Guide to Buying Foreclosed Homes
Real estate investors can use seemingly countless methods to make money, and WealthHunters is here to talk about one of the trickier ones: buying foreclosed homes. One popular approach is the “fix-and-flip,” which involves buying a home with the goal of selling it at a profit. The investor will purchase a property that requires repairs, cleaning, or cosmetic replacements. Ideally, the work you do costs less than the increase in the home’s after repair value—leaving a profit. Some real estate investors want to maximize their profits, which is why they consider buying foreclosed homes.
A foreclosed home typically brings lots of opportunities for improvement along with it. Learning how to buy a foreclosed home can be a powerful tool to add to your real estate investing arsenal. So, if you aren’t familiar with the process of buying foreclosed homes, you should be.
With that in mind, let’s explore what a foreclosed home really is and how to buy a foreclosed home. We’ll also review the advantages and disadvantages of buying foreclosed homes so you know what you’re getting yourself into.
What is a Foreclosed Home?
A foreclosed home is a home that has been repossessed by a lender after the borrower defaulted on their mortgage loan.
When a borrower takes out a mortgage loan, they sign a mortgage agreement. This spells out all the details of the loan, including what happens if the borrower misses payments. If they miss enough payments, the lender can repossess the property (the foreclosed home) as collateral.
The foreclosure process typically takes a few months and ends with the foreclosed home’s repossession. If the borrower ultimately fails to pay any late payments and associated fees, a bank can evict the borrower from the property and repossess the foreclosed home.
To a bank, a foreclosed home is often a source of greater financial burden than benefit. The bank has already spent the mortgage loan total on the property, and hasn’t been completely repaid the principal or interest on the loan. Typically, the best avenue the lender has to recoup any losses is by someone buying a foreclosure. Therefore, a bank will often list the foreclosed home or put it up for auction. In either case, you can typically try buying foreclosed homes soon after they’ve been foreclosed on.
How to Buy a Foreclosed Home
Since the majority of foreclosed homes are bank-owned (referred to as REO, or real estate owned), we’re going to break down the process of how to buy a foreclosed home from a bank. It’s not that different from how you might go about buying a home normally. However, the process of how to buy a foreclosed home brings a few extra considerations with it.
Steps to buying a foreclosure:
- Get a Sense of the Market: This is maybe the most important part of the process. Buying a foreclosure carries enough risk that you need to ensure it will be a financially wise risk to take. If homes in your area aren’t selling, or the market values have dipped, your revitalized property may not sell right away. Get a sense of what homes are selling, which foreclosed homes are being listed, and the values of comparable properties.
- Find an Agent: A local broker or real estate agent who specializes in buying foreclosed homes will be more experienced than you. They can help you identify deals and may even have relationships established with lenders in your area. Generally, they’ll be able to help walk you through buying a foreclosure—which is a huge plus.
- Find a Foreclosed Home: Popular sites like Zillow and Redfin list foreclosed properties, but most banks have a database of their REO properties. If you haven’t already located a foreclosed property, search there.
- Get a Loan: While cash definitely serves an advantage in buying a foreclosure, many lenders offer financing specifically for REO properties. To ensure you don’t miss out on a deal, it’s a good idea to seek financing early on. Understand what financials they’ll be looking at and what info they may need on a foreclosed home.
- Get an Inspection: Getting a foreclosed home inspected and appraised can give you a huge advantage when buying a foreclosed property. Unfortunately, it isn’t always possible—for a number of reasons. If you don’t have access to the property, do a curbside inspection before you make an investment.
That about covers the basics of how to buy a foreclosed home. Now let’s discuss the advantages and disadvantages of buying foreclosed homes.
Benefits of Buying a Foreclosure
Buying a foreclosure brings a fair share of both advantages and disadvantages with it. There are some distinct benefits to buying foreclosed homes, which is why some real estate investors specialize in them.
A couple benefits to buying foreclosed homes:
- You can get a great deal: Buying at 15% or more under the after repair value can offer great upside. If you get a deal on a foreclosed home and the repairs it needs, you can capitalize on the fix-and-flip approach. Buying a foreclosure can be a great opportunity to save money.
- You can time the market: Having a great sense of the market and how to buy a foreclosed home can give you an advantage. If you’re buying a foreclosure as home values are increasing, you may be able to match your sale with market moves and capitalize on appreciation.
Disadvantages of Buying a Foreclosure
First-timers tent to view buying a foreclosure through rose-tinted glasses. As great as it may seem, buying a foreclosure is also fraught with risk. Before you jump in and start frantically searching for a foreclosed home in your area, you need to understand the disadvantages.
Some dangers of buying foreclosed homes:
- Homes are sold as-is: Foreclosed homes aren’t always in great shape. The property’s maintenance may have been neglected, and vandalism or vacancy distress is common. Unfortunately, it’s very easy to get into a property that has a lot more repair needs than you expected. If you purchase a property that has issues you weren’t planning for, your financial plans may be thrown off. Unfortunately, you can’t always find out about some of these problems until after you’ve made the purchase.
- Financing can be tricky: While many banks offer financing specifically for REO properties, cash has its advantages when buying a foreclosed home. If you’re starting out, experienced buyers may have an edge with more cash on hand and financing ready.
Learning How to Buy a Foreclosed Home
Purchasing, revitalizing, and selling a foreclosed home is a challenging process. It’s a lot harder than most people first assume, which is why people can easily lose money buying a foreclosure. Even at a discount, you’re still buying a home—and you’re likely financing your purchase, too. If you’re learning how to buy a foreclosed home, you need to make sure that you’ve done your research. Buying foreclosed homes isn’t for everyone!
While we don’t recommend buying a foreclosure as your first real estate investment, buying foreclosed homes can be a viable investment path. Some investors love the process of putting in the work to revitalize a home and make it shine. And because every home is different, they learn something new about how to buy a foreclosed home every time. As long as you’re savvy about the homes—and repairs—you’re willing to take on, there’s money to be made buying foreclosed homes.
Like any investment vehicle, you need to learn the basics and be able to identify a smart investment from a silly one. Once you can do that, you’ll light up when you see that perfect fixer-upper pop onto the market nearby. Keep in mind how to buy a foreclosed home as you continue down your real estate investing path to wealth, and you may just find buying a foreclosure useful someday!