Foreclosures are a great type of property to consider. That’s because unlike homes associated with the traditional home buying process, they may be more affordable. This is due to the fact that lenders are trying to make up for any losses they are facing! What a lot of people don’t realize is that there are different types of foreclosures, and different factors to be aware of. We are going to dive into this information in this article to hopefully provide more clarity!
As we mentioned earlier, foreclosed homes are usually sold at low prices. However, before we discuss why, let’s talk about how a house goes into foreclosure. Let’s say a borrower fails to pay back their debt. Directly after, the bank or their lender seizes and acquires the borrower’s home. In this case, this is known as foreclosure. After seizing the home, the bank will list the house again on the market and offer it for sale. Generally, this is all done soon after the borrower vacates the property. In this manner, the bank can minimize the losses caused by the borrower’s failure to repay the mortgage. To clarify, a borrower is often the person who resides in the home, whereas a lender could be a mortgage company or any other loan servicer. So, this brings us back to the state of houses in foreclosure, and the question now is: why are these houses generally in bad condition? The answer is that families who are unable to pay back their mortgage debts will most often lack the finances to take care of their homes. For this reason, anyone who purchases a property that is in foreclosure should be ready for potentially extensive house renovations.
The Reason Some People Like Foreclosures
The low price of foreclosures is one of the primary factors that attract people to look into them. Essentially, foreclosures may help some people achieve their goal of owning a property. It should also be noted that homebuyers will benefit more if they buy a foreclosed home from its existing owners. That’s because foreclosed houses are generally offered in their present state. It’s what makes these properties less expensive. In fact, the reduced prices on foreclosures also include other reduced costs associated with them. That could mean lower interest rates, a smaller down payment, and fewer closing costs.
Another reason homebuyers choose foreclosed houses is that they play on the assumption that the sellers are likely to be in financial trouble. In other words, when a house is in foreclosure, it gives the impression that the owners are in a hurry to sell it. Usually, this situation gives homebuyers an advantage when making a deal on the asking price for the property.
Searching for a Foreclosed Property
There are many different ways that may help people locate foreclosed homes. For one, they could contact a real estate agent to ask about any offers they may be aware of. People might also find foreclosed properties via websites of multiple listing services (MLS) or newspapers. In fact, some websites online may have foreclosed home opportunities.
We have now discussed some important points about foreclosures. The requirements to acquire a foreclosed home differ depending on the lender and other factors. Some different forms of foreclosure are auction homes, government-owned properties, properties bought straight from the bank, and short sales.
Generally, the aim of an auction is for the lender to make up for any losses. So where can people find these auctions? These auctions are held in many settings. That could be outside of a government facility. In fact, a person can expect that there will be signs in the streets promoting these auctions.
This brings us to when these auctions are held. As we said, the lender files a notice of default on the home. Next, the borrower gets a grace period to pay back their mortgage. Following that, a sheriff’s sale auction occurs if the home is unable to sell.
Anyone interested in buying government-owned properties can browse them on the website of the U.S. Department of Housing and Urban Development (HUD). However, let’s first discuss how the government owns these properties. Sometimes properties are bought using a loan that is guaranteed by the federal government. These could be an FHA loan or a VA loan. If this is the case, then the government in this scenario takes possession of the property. That said, the only way people could buy a government-owned property is through government-registered brokers.
Properties Bought Straight from the Bank
People can avoid the headache of attending auctions and instead buy a home straight from the bank. How do banks acquire these properties in the first place? Basically, sometimes houses don’t sell at auctions. In this case, the bank will receive it back, and the home will be an REO (real estate-owned) property.
People researching houses in foreclosure will find short-sale homes labeled as pending bank approval. So is buying a short-sale property different from buying a regular home? Well, the short answer is no! However, the language used in the contracts differs. Also, the short sale purchase procedure might often be more time-consuming than buying a regular property. Because of this, people should do their research before getting started to know what they’re getting into.
However, the question now remains: what is a short sale? In the event the lender takes less money for the house than what is owed on the mortgage, this is known as a “short sale.” Basically, for a lender to approve a short sale, the present owner must offer evidence of their financial difficulty. The evidence has to be in the form of documents either proving financial stress or job loss. A lender might accept a short sale even if the borrower is not in trouble.
A Foreclosed Property’s Disadvantages
There are several options when it comes to foreclosed homes. This is why anyone interested in purchasing these types of homes should do their research first. Additionally, people should contact a professional to help them based on their situation. Buying a house that is in foreclosure is not without its drawbacks, and some are:
- Market Wars
- Time-Consuming Purchase Process
- Unexpected Property Issues
Foreclosures are generally available for less money, which can make these homes sound like a bargain. This is why the competition for these properties may get very high. When we say “high,” we mean multiple offers on a property. This is not the best scenario, because a high demand for something can make it overvalued. Thus, all of the competition can be intimidating for someone who wants to be a homeowner. Nevertheless, it’s wise that people keep checking regularly for other foreclosure offers.
Time-Consuming Purchase Process
As we said, foreclosed properties are houses that were neglected by their owners. Other than the renovations that new homeowners are forced to do, they can also face difficulty obtaining funding. Let’s say a home is in bad condition. The home’s evaluation value will be low. As a result, this can make it hard for people to get the necessary funds. It’s also wise for anyone who takes the foreclosure route to be patient. That’s because foreclosure is a time-consuming process that requires plenty of documentation.
Unexpected Property Issues
One common issue that homeowners may face is being forced to repair and renovate the property they purchased. Let’s not forget that foreclosed properties are given up by owners who can’t afford their mortgages. As a result, it’s not unusual for a person who is facing foreclosure to damage the house before the bank seizes it. So on top of not handling regular home upkeep, it can have additional damages! This basically requires the new homeowner to repair the harm done by the previous owner.
Anyone looking to buy a foreclosed home should take these steps before getting started:
- Do their own research
- Contact a real estate lawyer.
So, are foreclosed homes cheaper than regular homes? The answer is yes (well, usually)! It’s because the previous owners of these homes likely didn’t take good care of their properties. On top of that, they were not able to keep up with their financing. Thus, the lender attempts to make up for any potential losses by reselling them. It’s important that those interested look for the option that suits their situation best.