A frequent question I receive at ChristianMoney.com is how to buy a foreclosed home. Let me first start by making clear that stories of homes for one dollar are mostly urban legends. There are some exceptions, such as the abandoned inner city homes offered for $1 in Detroit. Although it is highly unlikely that you will buy a home for $1, you can see discounts of 50 to 60 percent of what a home sold for just five years ago.
The four windows of opportunity to purchase a distressed home:
A homeowner has fallen behind on their payments, foreclosure is imminent but the process has not yet started. During pre-foreclosure there can be some great deals, but you will have to contend with the seller’s underlying mortgage balance. If the seller owes more on the home than it is worth, the lender will have to go along with a short sale (agreeing to forgive a portion of the mortgage balance). It may take six months or longer to get a final answer from the bank on a discount they will go along with. As a result, this scenario is less than ideal.
If, on the other hand, the outstanding mortgage balance is at or below the price you are willing to pay, this can be a win-win for all parties. This would be a home purchased most likely more than five years ago and with a decent down payment. Buying before a home is actually in foreclosure is a very good option if the numbers can be worked out.
2. During The Foreclosure Process
After the foreclosure process has started, but before the home is sold at auction, there is an opportunity to purchase a distressed home. This can become very complicated since the legal process of foreclosure must be stopped. This may involve some paying thousands in court costs and fees to get a final release of the deed. As a result, I don’t suggest this as a good time in the process to buy.
3. Foreclosure Auction
Probably the worst time to buy a distressed home is at a foreclosure auction. Homes sold at a foreclosure auction are not usually available for inspection. As a result, you will be taking on the risk of an unknown amount in repairs. As a registered bidder you will be typically required to post a refundable deposit of 5 to 10 percent of the amount you will be bidding. After a winning bid, most counties require that you pay the remaining balance within 24 to 48 hours. This leaves no time to run out and get a mortgage. What if the foreclosure was not completed with all of the proper legal filings and legal processes? You may end up with an additional legal battle for clear title. For all of these reasons, buying at a foreclosure auction is not recommended.
4. After The Foreclosure Auction
Purchasing a home directly from a bank REO (real estate owned) department is probably the best overall option. Most homes end up going back to the bank after the foreclosure auction. This is because there are many times no bids that are higher than the outstanding mortgage balance. As a result, banks literally have countless thousands of homes that they have in inventory. After the auction the bank will clean up the property and make any needed repairs. In most cases, the home will end up being listed with a Realtor. It is possible to be buy prior to a Realtor becoming involved. By purchasing prior to the property being listed in the MLS you will likely have a chance at a better price. This is because Realtors will charge a 6% selling commission to the bank which will require a higher selling price. Consider contacting several local banks and asking about properties yet to be listed with a Realtor. You may want to follow up with a letter of interest and a copy of your mortgage pre-approval. This should get your phone ringing with offers.
Whether you buy a home directly from a bank or through a Realtor, purchasing after the auction is most likely the best option. This will give you the time to inspect the property, make final arrangements for your mortgage, and have confidence that you are going to be receiving clear title (although you should always purchase title insurance of your own as well). In addition to making direct contact with local bank REO departments, find a Realtor you can work with to assist you in locating foreclosed homes that are listed in your local MLS. You can still get an unbelievable bargain by purchasing after the foreclosure sale. I advised a friend on how to do this about six months ago and she was able to purchase a 2,500 square foot home for only $125,000 in the Daytona Beach area. The home had sold to the original owner four years ago for $240,000! These kinds of deals are still out there if you look for them.
Helping you make the most of God’s money!