Buyers are often attracted to the idea of purchasing a foreclosed home because of the low price. First-time homebuyers may be able to get a bigger house than they could otherwise afford. However, to be prepared for what lies ahead, it’s important to understand the process and appreciate what differentiates a foreclosed home from other properties.
Types of Foreclosures
All foreclosures are not the same. In fact, you should know about three different kinds of foreclosures:
- Strict foreclosure – A strict foreclosure is allowed in only a few states. In this scenario, the lender can file a lawsuit as soon as the law permits the lender to do so after the homeowner has defaulted on a loan. Once foreclosed, if the homeowner is unable to pay within the court-ordered timeframe, the mortgage holder becomes the owner and the property can be sold immediately.
- Judicial foreclosure – This type of foreclosure is allowed in all states and required in some. The process begins when the lender files a law suit against the borrower demanding repayment of the delinquent payments on the mortgage. If not repaid or the borrower does not have a defense or does not appear in court, a judgment is granted by the court to the lawyer. The borrower is given time to redeem the property and if this doesn’t happen, the lender begins the process of selling the property at an auction.
- Non-judicial foreclosure – With this process, also called a power of sale, no court is needed to handle the foreclosure. The lender sends out notices to the homeowner until the end of the waiting period. The mortgage company then holds a public auction without the assistance of a court or sheriff.
How Are Foreclosures Different from and Similar to Buying Other Properties?
The primary difference between buying a foreclosure and a regularly listed property is that with a foreclosure, the seller is the bank. This will impact all aspects of the selling process. The time frame is much shorter than with a traditional sale, so you need to be ready to buy with financing already secured.
When foreclosed properties are sold at an auction, cash is usually required. This may just be a larger down payment with the remaining balance to be paid by a certain date, or it could mean paying for the entire purchase up front.
In other cases, properties have already been through an auction and the bank was the winning bidder. These properties, called real estate owned (REO), can be purchased through a real estate agent similar to a traditional purchase.
Another big difference is that you are buying the property “as is”. You should still get an inspection; in fact, a thorough inspection is recommended to determine what issues the property may have. Previous owners may have left the home in a bad condition or taken things of value before they vacated. In other cases, an empty home may have invited vandalism or theft that isn’t obvious without a sound investigation from a knowledgeable inspector.
Keep in mind that the bank generally will not pay for repairs or reduce the price to compensate for problems found in the inspection. In making your purchase decision, be sure to establish a budget that includes not only the purchase costs, but also expected near-term and long-term repairs.
If you are not familiar with the foreclosure process, it is a good idea to work with a real estate agent who knows the process well or an attorney specializing in the area. You also need to get preapproved and let your lender know you are focusing on foreclosures.
A foreclosure may look like a big bargain; be sure to make a balanced analysis of the risks and opportunities of purchasing and possibly improving a foreclosed property before you take on this financial obligation.