If you plan to buy a home in foreclosure – either to live in or to fix and flip – you need to pay attention to several aspects of the home buying process. While you need to be realistic in your expectations, you also need to take time to understand the process and research your alternatives. Read this page in its entirety to get some information that could be helpful to you when buying a home in foreclosure.
Simply put, a foreclosure refers to the process of a lender seizing a home upon non-repayment of a mortgage. This is because a mortgage function as a lien against a property. This gives a lender the legal right to take ownership of the said property in case a borrower defaults on their payments for the obligation. The lender then sells the property to tries to recoup its financial losses.
Not making timely payments toward a mortgage can result in foreclosure. Reasons for non-payment vary greatly, and may include, but are not limited to, a drop in income, loss of job, disability, divorce, or bankruptcy.
When considering buying a home that is involved in foreclosure, it is important to understand that there are several stages in the process, including:
You don’t have to wait for a home to be foreclosed before you may think about buying it, because these homes can be put up for sale at different stages.
Unless you plan to buy a foreclosed home at an auction, there is a good chance that you will need to fund your purchase by getting a mortgage. Getting preapproved for a mortgage gives you a fair indication of how much money a lender is willing to lend you. However, it is important that you discuss just how much you can afford to borrow with your loan officer, because you do not want to end up with a loan that you have problems repaying. Then, you can look for homes based on your budget.
Your lender will require an appraisal of the home you wish to purchase to determine its actual worth. Lenders ask for appraisals because they want to ensure that they do not end up lending excessive amounts. This step also gives you an indication of whether the selling price of a house is in line with its existing market price.
A professional inspection entails taking a closer look at the house. Licensed home inspectors have the required training to identify just about any kind of flaw or problem a house might have, and they make note of all that needs repair or replacement. Since homes generally reach foreclosure because of their owners’ financial duress, it is possible that the previous owners did not spend much money on upkeep. An inspection gives you the ability to identify many of the problems that a home may have, be it in the form of plumbing, wiring, or appliances.
The main reason why foreclosed homes find favor with buyers is they are usually marked down in price. It is fairly common for such homes to sell at noticeable discounts below their market values. As a buyer, you could benefit from the lower purchase price in the form of a lower down payment and reduced monthly repayments.
Homes involved in foreclosure tend to sell for lower than other comparable homes because of the time factor. When a home is in pre-foreclosure, its owner is generally pressed for time. In short sales, banks and homeowners are both in a hurry to get the deals through. When a lender repossesses a home, it wants the sale to go through as quickly as possible because it does not want to spend money on the home’s upkeep.
Bear in mind that foreclosed homes typically sell on an “as is” basis. This means that you are responsible for all the repair costs that follow.
If you plan to buy a foreclosed home with the intent of flipping it, it is important that you calculate its after-repair value (ARV). This gives you an easy way to determine if a deal might work well for you. By calculating a home’s ARV, you will know how much it might be worth when you put it on the market, as well as where it stands vis-à-vis comparable homes in the neighborhood. You should ideally look at figures from sales of around five comparable homes, calculate their average selling price, and use that as your ARV.
Consider this example – you arrive at an ARV of $250,000. Investors, as a norm, avoid paying more than 70% of a home’s ARV. In this case, it would be $175,000. Then, you need to subtract estimated repair costs, which can be difficult to determine if you cannot inspect a home. Let’s say repairs might cost around $30,000. Subtracting $30,000 from $175,000 gives you $145,000. This is the maximum you ought to pay for the home to increase the possibility of coming out on top.
Buying a home that is involved in foreclosure may bring with it a number of risks, and these extend beyond paying more than a home’s ARV. Once you know of the possible pitfalls, you may take measures to deal with them in the right manner.
If you think you are getting a great deal, expect some form of competition. Do your groundwork ahead of time, and have your funding in place as well, even if it is in the form of a preapproval letter. You can also minimize your risks by:
Estimates suggest that up to 500,000 American homeowners might have to deal with foreclosure in 2021. While this does not bode as good news for many, a number of homebuyers will try to make the most of the situation. If you think buying a foreclosed home might work well for you, make sure you approach the process with due diligence.
Seeking professional assistance from a real estate agent and a real estate attorney is always a good idea. Determining what you can do to minimize your home loan expenses will also hold you in good stead.
Considering homeownership but not sure where to begin? The Meadowbrook Financial Mortgage Bankers Corp. guide to home buying will make the process easy all in one packet.
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