Want to buy a house but don’t have much money? Now we will reassure you a little — believe us, you are not the first person to face such a situation.
In this text, we will understand how foreclosed homes or ‘buying at auction’ works: what types of transactions are there, all their pros and cons, and also answer the question — is it possible to buy real estate with a minimum amount of money?
What is a foreclosed home?
Foreclosure is the process when real estate passes to a lender due to non-payment of mortgage fees. Foreclosed homes go through the ‘judicial sale’ process (the owner can be a bank or other individual or legal entity). Prices for such real estate are usually low, as banks or investors make money on a quick (or not so) resale — while making a minimal investment in the form of repairs to housing.
Let’s imagine that someone, let’s call him John, stopped paying on the loan and could not pay off the debt for a long time — in this case, the house becomes foreclosed. And ownership passes from the homeowner, that is, John, to the bank or lender that provided the loan. Because part of the house (or any other property) has already been offset, it can often be bought for less than market value.
Multiple ways to buy a foreclosed home
1. Pre-foreclosure
The owner of this home has already defaulted on their mortgage, but has not yet moved out of their home. That is, the foreclosure process has not started. This path is beneficial for new buyers if they can convince the owner to sell the home — in turn, this is beneficial for the sellers because they can prevent the foreclosure process.
2. Public Auction
Everything is simple here. Foreclosed houses are sold at public auction to the highest bidder. You can find sales advertisements in newspapers or simply on the Internet.
3. Short Sale
Purchasing properties marked ‘short’ implies that the asset is financially deficient, meaning the current homeowner cannot keep up with mortgage payments. When the actual owner receives a Notice of Default from the bank, he has the right to sell the object within 90 days to pay off the mortgage to the lender. The lender confiscates the property and forcibly sells it at auction. Distressed real estate marked ‘short sale’ allows the investor to purchase the object at a cost equal to the debt. True, the name can be deceiving — the purchase most likely will not be quick. The old owners are not always in a hurry to sell the house faster, but rather, on the contrary, delay the sale in every possible way.
4. Bank-Owned Properties
The lender confiscated these houses and are now it’s the property of the bank.
5. Government-Owned Properties
Some properties are purchased with loans guaranteed by the Federal Housing Administration (FHA) or the US Government’s Department of Veterans Affairs (VA). When it comes to foreclosed homes, the government seizes them and sells with the help of federally licensed brokers.
How to buy foreclosed homes with no money
In theory, it is possible to buy a mortgaged house and not spend money at the same time — for this, there is an assumption of a mortgage. In such a case, the buyer assumes the obligations of the seller’s loan, including all terms and conditions set by the original borrower.
In other words, the buyer undertakes to pay the bank the remaining amount for the property.
Benefits of a loan assumption:
- maintaining the interest rate, and the buyer does not have to pay interest on the original loan;
- the buyer gets rid of many taxes that he must pay when obtaining a new loan;
- the seller’s credit rating is not spoiled by the foreclosure of the house.
But the disadvantages of loan assumption are enough:
- of course, such a purchase won’t cost you absolutely zero. The owner of the house will have to receive compensation — for example, if he has already paid off 50,000 on his mortgage, then you must reimburse him that amount;
- assignment of a mortgage may be rejected. The reason for this is simple — the lender’s desire to increase their profits, because the lender does not want to lose interest that a new loan could bring them.
Investments in foreclosed houses
There are two main categories of foreclosed home buyers — ‘those who buy to live’ and ‘those who buy to invest’. And if the first category is just people who want to save. The second one is the opposite, buyers who want to increase their capital in such an extraordinary way.
For example, in the famous American show ‘Flip or Flop’, real estate agents buy houses foreclosed from banks. In each episode, they work with a new home: track sales, develop a home renovation project, and end up selling it for a big profit. ‘Flipping’ is the name of this investment strategy — in this case, the investor does not acquire real estate for use, but to improve and sell to make a profit.
Flipping can generate a return on investment between 20% and 50% per year depending on the type of property chosen. The average return on investment for an object is 32%.
How to buy a foreclosed house:
- Find a representative — this could be a real estate agent or well-versed mortgage broker.
- Get mortgage pre-approved — because most real estate investors always pay cash for a foreclosed home, they make this market extremely competitive. So, if you can’t afford the property upfront, you’ll have to finance it. You must be pre-qualified or pre-approved for a loan and understand how much you can borrow before purchasing any foreclosure property.
- Do your research and look at prices — look at auctions, profile sites, and Facebook groups. Be sure to compare different housing options in your area.
- The negotiation stage — is working with your broker to arrange a price with the property owner or lender. You can bid at the auction depending on the circumstances.
- Hire a house inspector — this specialist will help you make the final decision. Together with them, you will inspect the house and you can make sure that the price is worth it.
- Closing the deal — sign the documents and become the owner! Done!
Benefits of buying a foreclosed home
The most obvious and attractive is, of course, the price. In fact, that is why you are reading this text!
Why is this happening? Because the lender sets the price, and wants to remove the house from their accounts as quickly as possible. Even though the process of bidding and buying a mortgaged home may be slightly different, you should still be able to choose from several different lending alternatives — as long as the auction is not limited solely to cash payments.
You have the option of obtaining several loans to finance the home you are considering:
- conventional loan
- government-backed loan
- in the form of a VA loan
- FHA loan
- USDA loan
Also, homeownership can be made cheaper with government-backed loans — but if the house is in bad condition, the government may require repairs.
Disadvantages and risks of buying a foreclosed house:
- poor condition, the property often needs renovation. If the house is in the process of foreclosure, this does not mean that no one lives in it. As you understand, most often, previous owners have low motivation to care for such housing;
- if the buyer participates in the auction and wins, he must immediately pay 25% of the cost. All transactions are carried out according to the ‘cash only’ scheme;
- in many cases, you won’t have any chance to inspect the item before buying it — only from the outside. It can be said that you are buying a kind of pig in a poke. After participating in the auction, you can conduct a home inspection and cancel the deal;
- buying a foreclosed home takes much longer, most often because the seller has to settle things with the bank or other parties.
A few things you should also pay attention to:
- put in your budget the amount for repairs — so that this does not come as a surprise to you;
- hire a real estate agent with experience in buying foreclosed homes.
Conclusion
In general, buying a foreclosed home is always more difficult than a regular purchase. The potential savings in such a deal could be significant. But, do not expect that you will be able to buy a home for next to nothing.
Treat the study of this issue responsibly and slowly. Especially if you are buying a house to live in and not to invest in — be patient and get ready to learn a lot of new information. After all, finding a good deal is also a kind of work.
To understand all the intricacies of buying real estate, work with a qualified specialist. This is a person who will help you make a reliable investment!
Let’s start exploring real estate in your area and find your dream home! Contact LBC Mortgage for a free consultation today.
