Whether you are searching for a home to live in or one to invest in, you likely are facing a lot of competition and still are hoping for a bargain. Home prices have climbed 19.9% in the past year and are predicted to rise 17.3% in the next year, according to the Zillow Home Value Index.
But there is one obscure category of the real estate market that offers homes for as much as 25% to 30% less than the going rate—homes facing possible foreclosure. Sadly, even though recent changes prohibit a lender from initiating foreclosure for 120 days, the reality is that once a borrower is behind, it is extremely unlikely that he/she will be able to catch up to avoid foreclosure.
These homes can be bargains because homeowners unable to keep up with mortgage payments and/or their lenders often are motivated to sell fast rather than wait for top-dollar bids.
To nab bargains that don’t backfire, you need to call on new and old strategies. What you need to know now…
The best selection of homes—and the best deals—are in the preforeclosure market. The traditional way to buy properties facing foreclosure is to bid at auctions where lenders who already have seized the homes are selling them. But currently you’ll find a much better selection of properties—and better deals—by making offers on pre-foreclosure homes. These homeowners have gotten behind on their payments and have entered the foreclosure process only in the past few days and still are a long way from auction.
Now, the supply of foreclosed homes going to auction is very low, so almost every desirable property that goes up for auction receives attention from seasoned real estate pros who know exactly how much the homes are worth…and/or from amateurs who might overestimate the value of a property and overbid. So the odds of landing a great deal among homes in foreclosure are low.
Because the supply of homes in pre-foreclosure is larger and buyers are fewer, nabbing a bargain is more likely, particularly if you can act before other would-be buyers discover the property.
To find homes facing foreclosure: Call your city, county or district court and ask, “Is this the court where foreclosure actions are handled for this area?” If it isn’t, ask which court does so and call that court. When you locate the correct courthouse, drop by and request all the foreclosure actions filed during the preceding week. You also can try to search online legal-notice publications. Do this every week. It’s also worth asking, “Are foreclosure actions taken on specific days or on any day of the week?” If it’s on specific days, time your research for immediately after a new batch becomes available.
Warning: Try to not wait for a notice of the preforeclosure to appear in a local newspaper and/or on real estate websites. That’s where many buyers look for preforeclosures, so once properties appear there, the word is out and the competition tends to increase sharply.
Buying preforeclosures takes tact. Preforeclosures still are owned by homeowners, not lenders. Those homeowners often are going through tough times, such as unemployment or divorce—they’re behind on their mortgages for a reason. Many are trying to save their homes, not sell them.
When you identify a preforeclosure of interest, contact the homeowner and very politely say that you saw the foreclosure filing, and if that owner is interested in selling, you might be interested in buying. The most effective way to contact these homeowners is to send a simple personal letter of introduction offering to help the homeowner. Remember—they are in a tough spot and may welcome help if you approach it the right way. If you work with a real estate agent (see below), that agent also could approach the homeowner on your behalf. The homeowner may or may not be willing to show you around the house.
Try to cast yourself as a potential teammate offering a solution to a financial challenge, not an opponent trying to take their home. Example: You might say, “We can work together to make the best of the situation, if that’s something you’re willing to consider.”
Consider working with a real estate agent. You might imagine that there’s no need to hire a real estate agent because you’re tracking down preforeclosed properties yourself. But if you can find an agent who is very familiar with the neighborhood that you’re targeting, that agent could provide crucial insight into how much the property is worth, what the outstanding debt is on the house and how much you should offer. The agent also is likely to know your state’s relevant real estate laws—in some states, homeowners in financial distress have legal protections such as the right to undo a sales agreement for a period of time after the agreement is made.
To find an agent, enter the address of the property into a real estate website, such as Redfin.com or Zillow.com, or a search engine. These sites likely will display nearby properties for sale as well. The best agent to work with is the listing agent for the largest number of nearby properties—that person is likely one of the foremost experts on the neighborhood’s real estate, an ally worth having.
If you want to buy a property to resell at a profit, the agent might be willing to assist you in exchange for being the listing agent when you sell. If you’re buying the property to live in, negotiate a fee. A buyer’s agent typically gets 2% to 3% of the transaction price. With most home purchases, the buyer’s agent receives a share of the commission collected by the seller’s agent, but at this initial stage of the preforeclosure process, the homeowner is unlikely to have an agent.
It pays to be a cash buyer. It can be difficult or impossible to arrange financing for preforeclosures and foreclosures. Lenders have tightened their lending rules following the real estate crash, and mortgage lenders typically require inspections and titles that buyers of these properties often cannot promptly obtain (more about inspections below). Even when financing is feasible, it slows the buying process, increasing the odds that other cash buyers would be able to make offers before you can close the deal. Besides, a fast, no-fuss cash offer can be especially enticing to homeowners who are experiencing financial problems.
Details to Check On
It pays to know what the home is truly worth and whether there are potential problems before you make an offer. Check on the following…
Are there any liens on this property? If you purchase a property during the foreclosure process, you could become responsible for paying off these liens as well, which can significantly increase the price of the property, turning a good deal into a bad one. This information often is available on the website of the county, city or town treasurer and assessor.
Are there encroachments and easement issues with the property? An encroachment is where one neighbor builds a structure on another’s property, typically by accident…while an easement means that someone else has a legal right to use a portion of this property, for example a neighbor who has the right to use your driveway to access his/her property. Either could detract from a property’s value. Online mapping tools available through the county, city or town might provide access to property deeds or land surveys available at local assessors’ offices.
What’s the home’s condition? Use binoculars to examine the roof, one of the most expensive parts of the home to replace. You also may be able to use a drone to do this, if you have the property owner’s permission. Also look for weeds growing out of gutters, peeling paint, rotting wood and other signs of overall neglect. Ideally, you’ll be able to arrange a home inspection before buying, but it’s still best to make an offer that you won’t have to later lower to account for repair costs—this isn’t like a traditional home purchase in which you can use the home inspection as a negotiating tool. In fact, if the homeowner is selling only grudgingly, he/she might not allow a home inspection at all.
The town or county building department might provide clues about the home’s condition—perhaps telling you that the home has been “red tagged” for a code violation, permit problem or condition issue, meaning that it can’t be occupied until repairs are made.
Check the age of the home’s most recent mortgage. It’s a good sign if a mortgage was taken out on the property within the past few years—the lender almost certainly insisted on a home inspection before making the loan and would not have done so if it weren’t in reasonable condition.