It’s unfortunate, but buying and shopping for a foreclosure has a few stigmas attached. Why isn’t important because, ultimately, buying a foreclosure can improve your financial footing overnight. From our perspective, that’s the most important bit. After all, apart from protecting you from the elements, real estate only has two jobs: 

• Preserving your wealth

• Growing your wealth

As you’ve probably picked up from our tone, foreclosures are particularly good at both. If you’re here, though, maybe you’re not so sure whether buying a foreclosure is a good idea. That's OK. Like we said, there are a lot of stigmas attached.   

Below, we’re going to talk about why you should consider buying a foreclosure, but we’ll also explain how it’s done.     

Why Buy a Foreclosure?

Let's start with the million-dollar question: why should you consider buying a foreclosure property? 

• Equity: Purchasing a foreclosure presents a unique opportunity to build equity VERY quickly. Because you’re buying the house at a discounted price, it’s more than possible you’ll have to pay very little, if any, mortgage insurance, but it depends on the type of loan you get. Make a few improvements and renovations, and your equity may grow even faster.

  • Also, because you’ll likely acquire equity that far exceeds your down payment immediately after closing, you’ll then have access to home equity loans, which can be used to further improve your financial footing. Many real estate tycoons use home equity loans to secure mortgages on additional properties. Flip the additional properties or start taking in monthly rent!

• Potential for Bargain Prices: This one’s a no-brainer, but foreclosed homes are often sold below market value, meaning you can potentially snag a property at a significantly discounted price.

• Flexibility in Negotiations: Banks and lenders selling foreclosed properties are often more flexible when it comes to negotiations. If a property has been on the market for a while, you may have more room to negotiate on price and other terms.

• Potential for High Returns If You Ever Sell or Rent: With the right strategy, foreclosure properties can offer impressive returns on investment. Whether you plan to flip the property for a profit or rent it out for passive income, there are ample opportunities for financial gain.

• Access to Desirable Locations: Foreclosures happen in all types of neighborhoods no matter where you are in the U.S. Whatever the most desirable neighborhood is in your town or city, wait long enough and a foreclosure is bound to pop up eventually. With a foreclosure, you can enjoy the perks of upscale living at a fraction of the cost.

Types of Foreclosures

There are four types of foreclosures you may find while house hunting:

Pre-foreclosure Properties: Pre-foreclosure properties are homes in the early stages of foreclosure, typically before they have been repossessed by the lender.

• You may find a few listed for sale by the homeowner, who is attempting to sell the property to avoid foreclosure.

• Buyers interested in pre-foreclosure properties can negotiate directly with the homeowner or their representative.

Auction Properties: Auction properties are homes that are sold at public auctions, typically conducted by a county sheriff or trustee.

• These properties are sold to the highest bidder, often in a competitive bidding process.

• Auction properties may have liens or other encumbrances that the buyer will need to address.

• It’s possible to purchase homes bought at an auction using a mortgage, but the process isn’t as straightforward, and many lenders are not willing to do it.

Short Sale Properties: Short sale properties occur when a homeowner owes more on their mortgage than the property is worth, and they are unable to make up the difference.

• In a short sale, the lender agrees to accept less than the full amount owed on the mortgage.

• Short sale properties are sold by the homeowner with the approval of the lender.

• Buyers may need to wait longer for approval on a short sale transaction compared to a traditional sale.

Bank Owned (REO) Properties: REO (Real Estate Owned) properties are homes that have been repossessed by the lender after failing to sell at auction.

• Once the lender takes possession of the property, it becomes an REO property.

• REO properties are typically sold through the lender or a real estate agent representing the lender.

• These properties are often sold "as-is," and buyers may need to make repairs or renovations.

How to Buy a Foreclosure

Buying a foreclosure can be a bit more complex than purchasing a traditional property, but, overall, the process is the same as buying a non-foreclosed property. 

1. Do Your Research: Before diving into the world of foreclosures, take the time to educate yourself about the market and the process. Familiarize yourself with the different types of foreclosures, such as bank-owned properties (REOs) and properties in pre-foreclosure.

2. Get Pre-Approved for Financing: Before you start shopping for foreclosure properties, it's essential to get pre-approved for financing. This will give you a clear idea of how much you can afford to spend and will strengthen your position as a serious buyer. If you want to buy a foreclosure at an auction, however, you will need to find a lender that is willing to finance a foreclosed property without going through the normal underwriting process. Lenders willing to do this will likely require a stronger credit score and higher down payment.

3. Find a Real Estate Agent: Working with a knowledgeable real estate agent who specializes in foreclosures can be invaluable. While an experienced agent is not completely necessary, he or she can help you navigate the complexities of the foreclosure market and guide you through the purchasing process.

4. Search for Foreclosure Listings: Once you're armed with financing pre-approval and a reliable agent, it's time to start searching for foreclosure listings, which is easily done on sites like Zillow and Realtor. You can also find listings through foreclosure auctions, foreclosure websites, HUD Home Store, or directly from banks and lenders.

5. Conduct Property Inspections: Before making an offer on a foreclosure property, be sure to conduct a thorough inspection. Foreclosed properties are often sold "as-is," so it's crucial to know what you're getting into. Hire a qualified home inspector to assess the property's condition and identify any potential issues.

6. Make an Offer: Once you've found a foreclosure property that meets your criteria, it's time to make an offer. Your real estate agent can help you craft a competitive offer that takes into account the property's condition, market value, and any necessary repairs or renovations.

7. Negotiate Terms: If your offer is accepted, you may have the opportunity to negotiate certain terms of the sale, such as the purchase price, closing date, or contingencies. Work closely with your agent to negotiate the best possible deal.

8. Close the Deal: Once all parties have agreed to the terms of the sale, it's time to close the deal. This involves signing the necessary paperwork, paying any closing costs or fees, and transferring ownership of the property.

Conclusion

There are a lot of things to like about foreclosures, but do your best to avoid jumping into a money pit. Wear and tear is expected with any house that’s been lived in, but if you’re looking at a 5 year renovation, you may want to think twice. Look for foreclosures in good neighborhoods, or ones you can pair up with a USDA loan. USDA loans don’t require down payments, so you can use the money you would use for a down payment to make any necessary repairs. From there you can do a cash out refinance or take out a home equity loan. We humbly suggest you use the money to pay off your debts, fund a small business, or buy a second property… essentially anything that will improve your financial footing for the years ahead.

All in all, foreclosures that offer easy or immediate equity are the ones you want!

FAQs for Buying a Foreclosure Property