How to – Buying a Foreclosure
Thinking of buying a foreclosure? Maybe you’ve already got your eye on a property that’s been foreclosed on and you think you can get a great deal? Buying a foreclose can be a great deal but there are some traps you need to avoid to make sure the deal you think you’re going to get is what you ultimately end up with. If you’re going down the foreclosure path, here are some things you need to be aware of beforehand prior to getting close to making an offer.
When a lender forecloses on a home it’s typically the option of last resort. Lenders make money collecting interest on mortgage payments each month and selling mortgages they’ve made for a profit. They’re not in the real estate business of selling homes. Foreclosure is an expensive, lengthy process and is a path the lender is reluctant to travel. Before a lender officially forecloses on a home, there are some legal actions that first must be taken. If the property is located in a “judicial” foreclosure state, the lender must sue the borrowers and set a court date before a judge. This is a costly and time consuming process. During this period, lenders receive nothing in the form of income. In non-judicial states, the lender must still conform to state and local laws pertaining to the foreclosure process.
When a borrower misses a monthly payment, the lender will send a late payment notice and a late fee will be assessed. When a borrower misses two monthly payments in a row, the lender will send a Notice of Default, or NOD. In some states, the document is termed as a “lis pendens” which means a pending lawsuit is on the horizon. When a borrower misses three payments in a row, the lender can then file a foreclosure suit. During this period, the lender can list the property for sale. The lender wants to get the property off its books as soon as possible and can lower the price for a quick sale.
Buying a foreclosure also means you need to have your loan application approved and fast-tracked which means all you need is a property address and an appraisal. Once you find a foreclosure you’re interested in, you can make your offer much like any other real estate transaction. However, when homes are in foreclosure and the lender owns the property, it can take longer for an answer because the offer must be evaluated by the department referred to as the Real Estate Owned, or REO department. This is a separate division within the lender’s operation whose sold job is to manage foreclosed properties, prepare them for sale and review the offers as they come in.
Finally, take note that foreclosed homes may not be in the best of shape. Owners who can’t afford the mortgage may not also be able to properly maintain the home leaving a home in very poor condition that could cost more in repairs than the discount on the property. Make sure you get a proper, thorough inspection of the home before finalizing the sale. Once the home meets your approval, buying a foreclosure really can save you some serious cash. But due diligence is required.