Written by: Susan Myers, Georgia REALTOR
Are you thinking about purchasing a foreclosed home? Before you buy a foreclosure, you should know what you’re getting into and understand the pros and the cons when purchasing a foreclosure.
What exactly is a foreclosed property?
A foreclosure is a process in which a lender, or mortgage holder, takes possession of a property when the owner is in default. However, there are a few things that must take place before the bank can foreclose. For starters, the bank will mail the owner a notice of default. Banks aren’t in the business to own real estate and allow the owner to catch the payments up. If the owner isn’t able to make the payments, the bank will begin to foreclose and take possession of the property.
There are two types of foreclosure. A judicial foreclosure requires the bank to go through the courts to foreclose. A non-judicial foreclosure allows the bank to foreclose quicker. In non-judicial foreclosure states, the bank will publish a notice in the county’s newspaper where the property’s located. This notice will run for four consecutive weeks before the bank moves forward with foreclosing on the property.
When the bank forecloses, they’ll likely attempt to sell the property at an auction. Many investors purchase foreclosed properties at an auction and prefer it. Buying at an auction is simpler than negotiating with a bank. Auctions are typically cash purchases, so you’ll need to have a large sum of money to ensure you’re ready to purchase. A few auctions will allow buying with a mortgage, but you’d better be prepared and have your lender pre-approval with you.
The best thing about purchasing a property at an auction is getting a good deal! You need to know, buying at an auction is very risky because you can’t get an inspection or appraisal until after you’ve purchased the property. You are purchasing the property in “as is” condition. If you don’t have the funds to cover major repairs such as a new roof, HVAC, electrical, plumbing, and possibly structural issues, then perhaps buying a property at the auction isn’t a good idea.
What if the property doesn’t sell at the auction? If the property doesn’t sell at the auction, it then becomes the bank’s property. The bank will hire a real estate owned (REO) agent to list and sell the property as quickly as possible for as much as possible. If the property is in good condition, the bank will have the real estate professional list the property at market value. If the property needs many repairs, the bank will have the real estate professional list below market value to compensate for the property’s condition.
Remember, when purchasing a foreclosed property, banks are selling the property “as is” and will make no repairs, which is why it’s crucial to have a home inspection when purchasing a foreclosure. If the home inspection shows the home needs more repairs than you initially thought, have contractors provide estimates for those repairs and negotiate a lower price with the bank. The bank may not make repairs, but they will reduce the price if you can show the property needs extensive repairs and the cost of those repairs.
If you’re purchasing any property using a loan you should always have a lender preapproval before you begin your search. Having a lender pre-approval enables you to know what a bank will allow you to spend. You’ll also avoid wasting time looking at properties you can’t afford.
So, you’ve found the perfect property, have an accepted offer, and now under contract. What’s next? Getting a complete home inspection, possibly a radon test, test for mold, sewer scoped, or the septic inspected, if the property isn’t connected to the public sewer. Not all of these tests are required; however, you want to get a home inspection. Lastly, there’s the bank’s required appraisal to ensure you’re not overpaying for the property. If the home appraises for less than the contract price your Realtor® will advise you on how to request a price reduction based on the appraised value.
Let’s review the benefits of buying a foreclosed property listed by a real estate owned (REO) agent that you won’t get when purchasing at the county auction:
• Title is clear
• Buyer takes on NO liens
• Home Inspections authorized
• Appraisals are allowed
• Due Diligence period is permissible
• Financing and Appraisal contingencies accepted
• Property is more likely to be vacant
• REO agent negotiates on behalf of the bank with the buyer’s Realtor®
Working with a dedicated and knowledgeable Realtor® is priceless and can make your experience pleasant and possibly stress-free. A Realtor® will not only locate properties, but they will also provide you with reputable inspectors, contractors, lenders, and many other services you don’t realize you need until you begin the process or are under contract. If you’re one that prefers searching for foreclosures on your own, visit www.HUDHomeStore.com, www.Homepath.com, and www.Homesteps.com. For auctioned properties online, visit www.Hubzu.com, Auction.com, and www.Xome.com.