Foreclosures can be weird, but navigating buying a foreclosed home is also tricky. In this blog post, we will go over buying a foreclosed home.
A foreclosed property emerges when a homeowner fails to make mortgage payments, leading to a defaulted loan. The lender, to recover the mortgage loan amount, initiates a legal process to seize the property, turning it into one of the foreclosure properties.
Typically these foreclosure homes are sold as is
Foreclosed homes are then typically sold by the bank to recover as much of the defaulted loan amount as possible. The process of moving from missed mortgage payments to the sale of foreclosure properties is governed by state laws, which can offer protections to homeowners and opportunities for them to rectify the defaulted loan situation.
If this problem does not get solved, then the home will go to foreclosure auction, and the highest bidder will take possession of the property.
Table of Contents
Identify Foreclosure Opportunities
Many investors turn to foreclosed properties because it is almost a guaranteed way to find a deal. It’s important to understand the foreclosure process when buying these homes. The downside to buying foreclosed homes is that there are other real estate investors licking their lips at the same property you are! ☹
So, how do you go about finding foreclosed properties?
Lets take a look at a few different strategies to buy a foreclosed home:
Online Listings
Foreclosure.com is a platform where users can find and view listings of foreclosed properties, enabling them to get potentially good real estate deals before they become widely available on the market.
Real estate websites offer listings on various types of distressed properties, including pre-foreclosures, short sales, sheriff sales, foreclosure sale, bankruptcies, and city-owned properties
hubzu.com provides a platform for discovering distinctive properties at reasonable prices with just a click.
Hosting one of the most extensive online home auction marketing platforms, it enables institutions to promote their inventory directly to an earnest home buyer or investor. Through intelligent technology and a simplified process, Hubzu facilitates quicker and more straightforward transactions for both buyers and sellers.
servicelinkauction.com is a US-based platform specializing in real estate auctions, particularly short sales, foreclosures, and REO properties.
It provides scalable solutions backed by Fidelity National Financial to expedite sales and closing processes. The platform supports various auction types and phases, catering to different foreclosure statuses. It offers both online and in-person auctions, alongside tools to assist buyers throughout the foreclosure process
www.xome.com is an online real estate platform providing auction, listing, and home value services to users.
It offers a user-friendly auction platform for buying and selling properties, alongside traditional MLS listings. Users can also access learning resources to understand real estate processes better. While it boasts over a decade of experience and a knowledgeable team, Xome has received mixed reviews across various platforms, with some dissatisfaction noted regarding referral fees that may result in higher costs to consumers
auction.com is a prominent online platform specializing in real estate auctions across the United States, primarily focusing on foreclosures and bank-owned properties.
They offer a user-friendly interface for buyers and sellers, complemented by educational resources to guide users through the auction process. With over a decade of experience, Auction.com conducts more than 15,000 auctions yearly across all 50 states, showcasing a vast array of properties. Despite its extensive reach and technological integration, the platform has received mixed reviews, with some users praising the cost savings and customer service, while others express dissatisfaction with certain transaction experiences and customer care ethics
To find foreclosures on Zillow.com, start by specifying your search area on the platform.
Once done, click on ‘Listing Type’ and select ‘Pre-Foreclosure’ under the ‘Potential Listings’ category to view foreclosure auctions.
Additionally, you can hover over the ‘Buy’ tab in the top navigation menu and select ‘Foreclosures’ in the first column that appears, or choose ‘Pre-Foreclosures’, ‘Foreclosed’, or ‘Foreclosures’ under the ‘For Sale’ section when searching for homes.
You can also utilize search filters on Zillow’s search and maps page to find foreclosure properties. Zillow provides this foreclosure listing information for free, unlike some other online platforms, which may charge a fee
Bank Listings
In some rare cases, a single bank will post foreclosed property on its website, but in my professional experience, this is not the case most of the time. Banks usually rely on all of the online sources we mentioned earlier for advertising foreclosed homes. My professional recommendation is to rely on the online source listed above.
Government Listings
The next source would be government listings. Luckily for us investors, the government has one singular website they post on.
The HUD Home Store website is a platform where you can find government-owned property for sale. These government-owned properties are owned by the U.S. Department of Housing and Urban Development (HUD), which acquires them due to foreclosures on government-backed loans like an FHA loan. On the HUD Home Store website, you can search for properties, bid on them if you’re an authorized agent, and learn about the procedures and requirements for buying a HUD home.
Typically, these homes will also be listed on the local multiple listing service that real estate agents use so HUD Homes are well advertised.
Local Newspapers
If you’re an old-timer and still read the newspaper, then you may get lucky and find some foreclosed homes advertised.
I only see one problem with finding foreclosed homes this way.
Your local newspapers are typically published daily, weekly or at regular times. This leaves a lot of elapsed time when your competitors (other investors) are simply using faster methods of locating foreclosure listings.
I’d highly not recommend the newspaper as the way you located foreclosed homes, but it still is a lead source.
Real Estate Agent
So, what’s better at finding foreclosures than all of these other methods?
The answer is using your investor-friendly real estate agent.
In my pillar blog post 23 Tactics: How to Find Distressed Properties Fast I explained how to find a real estate agent.
More importantly, would be to find one that would be best suited for your real estate investing needs.
They have to be investor-friendly.
In other words, the agent you select must not need a money-grabbing fool!
You need to trust this person to offer you investing advice and advise you on after-repair values. They also need to be educated on finding foreclosed homes for you and advise you on the real estate market ect.
Want to learn more about how I wanted to get into real estate? Check out my About Me page.
Financial Preparation
After you find a property, you need to obtain some sort of financing or get your cash ready to move. The reason for this is that foreclosed homes move fast. You need to have a mortgage preapproval letter or cash handy (with proof of funds) If you want to find a foreclosure home for cheap.
Set Your Budget For Buying Foreclosed Properties
Before you buy a foreclosed home, you need to figure out what your monthly mortgage payment will be or, if you’re paying cash, what your taxes and insurance will be.
This is also known as PITI, which is an acronym for:
Principal
Interest
Taxes
Insurance (Home & Private Mortgage Insurance)
Even if you are paying in cash for foreclosed homes, you will still have a monthly carrying cost of the property you are ready to dump your money into.
For a lot of people, this will boil down to how much monthly mortgage payments they can afford or how much cash they have on hand to buy a foreclosed home.
For calculating any investment properties, I love to use calculators on dealcheck.io
DealCheck.io is a real estate analysis platform that enables swift analysis of various types of investment properties, including rental properties, flips, and multi-family buildings. It provides tools to import property data, customize deal parameters, view detailed financial analyses, and create/share professional property reports. The platform is designed for ease of use, speed, and accurate analysis, catering to real estate investors, agents, and homeowners. Users can try DealCheck for free or use it through a browser, with no credit card required for access
Securing Financing or Cash
After analyzing your budget to buy a foreclosed property, you will need to secure your method of payment.
Typically, foreclosed properties are distressed; therefore, they will not qualify for traditional financing. You will either need to use cash to buy these homes or use a hard money mortgage lender. In some rare cases, you may get a decent foreclosed property that is good enough to qualify for traditional financing. If the property does not meet the minimum qualifications for the condition, the lenders reject the property.
In most cases, the bank will not even accept the offer if they see the payment method is a VA Loan or even a VHDA loan.
So, how do I determine if a property will get approved using traditional financing?
Traditional banks will look at a few items when deciding if they will cut you a loan amount for a property:
Condition:
The property’s condition should meet certain standards set by the lender.
Title Search:
A clear title is essential to secure financing.
Zoning Compliance:
The property should comply with local zoning laws.
Occupancy Type:
Whether the property is owner-occupied, a second home or an investment property can affect financing approval.
You will need to talk with a mortgage lender to determine what their specific requirements are. The main benefit of using a traditional lender is it is the cheapest way for you to buy a foreclosed home. If you plan on living in the property, then you will get the best bang for your buck.
For homes that require many repairs, you may want to opt for a different way to obtain financing than using traditional financing.
Let’s take a look at hard money lenders. A hard money lender is a type of private lender that provides loans based on the value of the underlying asset rather than the borrower’s credit report. They often offer short-term, high-interest loans, and are typically used by investors for projects that traditional banks may find too risky. The buying process is usually faster with hard money lenders, making it a preferred choice for investors looking for quick financing for investment opportunities.
The lender that I recommend using is David Cruise at Straightline Funding.
Straightline Funding is a lending platform dedicated to investors in the United States, offering various loan products for different investment strategies, including renovation, wholesaling, rental, new construction, and others. They emphasize a simple application process, quick decision-making, and competitive rates with experience dating back to 2006. Their loan offerings include transactional funding, rehab loans, bridge loans, and ground-up construction loans. They strive for a straightforward process, eliminating unnecessary paperwork and financial documentation, and value relationships with repeat business and referrals from various real estate and financial professionals.
Okay, let’s say you have access to a large sum of cash somewhere. This can be many places other than just your bank account. Let’s look at some possible places you may have untapped cash:
Home Equity Line of Credit (HELOC)
401k
Stocks
Private lenders
Personal Loans
Cash is king when buying foreclosed properties. If you have the luxury of being able to buy a foreclosed home using this method, then you will be able to buy it for cheaper.
The reason for this is that you can buy a foreclosed home in as little as two weeks with no appraisal required.
Investigate the Foreclosed Property
If I can offer any advice, I would advise against buying a foreclosed home sight unseen.
It’s crazy to me that so many investors do this. There a few reasons why you want to investigate a foreclosed home before you make any bids on it:
Undisclosed Issues:
There might be undisclosed or unseen issues with the property that could be expensive to fix and out of your budget or skill level of renovation.
Misrepresentation:
Photos or descriptions might misrepresent the true condition of the foreclosed home.
Tenant Occupied:
This property may have a tenant residing in the property that is late on rent. This can add to your expenses of having to evict the tenant.
Physical Inspect The Foreclosed Home
I know it sucks having to waste your time and your gas to go visit the foreclosed home, but this is well worth your efforts. This will give you a bit of a competitive edge over other investors who may be going off of online listings to do their due diligence.
Take a look at my Property Repair & Planning Worksheet, which is a free resource of all of the items you should be inspecting on the foreclosed home when you are performing a home inspection.
Having a systematized checklist of each of the foreclosed homes you visit will make you more organized and not miss any important expenses when you are walking through a foreclosed property.
Legal Status Check
Conducting a Legal Status Check on a foreclosed property is imperative to uncover any legal issues before proceeding with foreclosure purchases. This check reveals the title holder, any existing liens or encumbrances, zoning compliance, and outstanding taxes, providing a clear picture of the property’s legal standing.
It’s advisable to proceed with purchasing only after a thorough legal check to avoid future complications. Additionally, obtaining title insurance is recommended to safeguard against any unforeseen title issues, further emphasizing the importance of a meticulous legal review to mitigate investment risks when buying a foreclosed home.
When buying a foreclosed home, whether it is with cash of financing, you will want your closing office to perform this check. The can take about a week to two weeks to do so it’s important to add this to your closing process as soon as possible.
Purchase Process
Now it’s time to put your money where your mouth is when buying a foreclosed home 🤑
Now comes the fun part. Finding these awesome deals. The purchase process of a can be grueling but it takes time to find a good foreclosed home that is a good deal.
Remember the goal here is to buy a foreclosed home in the cheapest way possible. As a real estate investor, it is important to perform your due diligence properly before you perform this next step.
Participate in Auctions
So, by now, you know how to find foreclosed homes, prepare financially, and investigate the property. Now, you must participate in the auctions.
The auctions for the foreclosed house will be held either in person or online. Be sure you are aware of how and when the foreclosure sale is being held. In my pillar post 23 Tactics: How to Find Distressed Properties Fast we discussed more in depth about how to find out where and when public auctions will be.
If you are bidding on a property at a foreclosure auction, be sure to already have already done your due diligence. The home will get sold to the highest bidder, so be sure to have all of your numbers and other due diligence figured out at this point.
This includes:
Inspection: Conduct thorough inspections for structural, electrical, plumbing, and pest issues in foreclosed homes.
Title Search: Ensure the title of foreclosed homes is clear of liens and encumbrances.
Cost Estimate: Get an accurate estimate of repair, renovation, and holding costs for your foreclosed homes.
Market Analysis: Analyze the local market for the market value and demand of foreclosed homes.
Permitting: Check on necessary permits for planned renovations of foreclosed homes.
Contractor Bids: Obtain multiple bids from reliable contractors for work on foreclosed homes.
Financing: Secure necessary financing for your foreclosed homes.
Insurance: Ensure proper insurance coverage for foreclosed homes.
Resale Value: Evaluate the potential resale market value post-renovation of foreclosed homes.
Legal Compliance: Ensure compliance with local zoning and housing regulations for foreclosed homes.
The auctioneer will typically have a starting bid amount, which is normally based on the original loan amount.
At public auctions, if a foreclosed home gets sold back to the noteholder (the lender), then the property will go into the next stage, known as a bank-owned property, also known as a real estate owned.
Negotiate with Banks for REOs
When a foreclosed home turns into a bank-owned property, the lender now legally owns the property. Most of the time the properties are vacant that get moved to this stage because vacant foreclosed home is easier to sell.
The bank will hire a real estate agent and then list the property on the MLS. When negotiating with a bank on reo properties, keep this in mind:
Research: Understand the property’s value and the local housing market.
Proof of Funds: Have a mortgage pre-approval or cash ready ready to show you are a serious buyer.
Professional Inspection: Conduct a professional inspection to uncover any issues, which can be used as negotiation points.
Offer: Make a realistic offer based on your research.
Patience: Banks might take longer to respond, but patience is key when buying real estate owned homes.
Closing Costs: Be prepared to cover closing costs, which banks often won’t usually pay
Professional Help: Consider hiring a real estate agent experienced with REO properties to guide you through the process.
Consider Wholesalers
Wholesalers, you can live with them, and you can’t live without them.
Just kidding… kinda 😈
A real estate wholesaler is an individual who identifies investment opportunities in properties, gets them under contract, and then sells the contract to a real estate investor for a fee.
Unlike traditional real estate agents, wholesalers don’t sell the property itself but the rights to purchase the property at a pre-negotiated price, allowing the investor to then either buy and hold or fix and flip the property. This process allows for real estate transactions without a large capital outlay, making wholesaling an attractive venture for those with an understanding of the real estate market but limited financial resources.
Wholesalers are experts at finding a good deal. They usually exclusively work with investors and will send them a good deal.
The main issue I see with them is they can generate a lot of competition if they are good at their craft. If you can find a wholesaler that will work with you mainly, then that would be the most efficient way.
A lot of the time, a wholesaler may find a motivated seller in pre-foreclosure. This means that the bank hasn’t started the foreclosure process yet, but it is well on the way if the owner does not make amends with the bank. If you can find a home in pre-foreclosure, then usually, these are the most motivated people.
Usually, owners or tenants that are residing in a property have nowhere else to go, so this is why they will stay in the home up until the point of eviction (it’s sad, really)
You can find wholesalers here:
Networking: Attend real estate investment meetings or local real estate meetups.
Online Listing: Many times, wholesalers will post their listing on Facebook Marketplace or Craigslist
Online Forums: Engage in real estate forums BiggerPockets.
Social Media: Look for real estate wholesaler profiles on platforms like LinkedIn or Facebook.
Real Estate Investing Clubs: Join and participate in local or online real estate investing clubs.
Direct Contact: Contact known real estate wholesalers directly if you have their information.
Referrals: Ask for referrals from real estate professionals or investors within your network.
Online Directories: Search for directories of wholesalers online.
Post-Purchase Strategy For Buying A Foreclosed Home
So you were the highest bidder and won the auction; now what?
You will typically have to make an immediate deposit of anywhere from 5-20% of the sales price. It is important to have your personal funds ready when buying a foreclosed home.
(be sure if you are using certified funds for your deposit, the date has not expired.)
The bank attorney will typically have a pre-filled purchase and sales agreement already made, and you will give them your deposit.
When you officially close on a foreclosed home in about a couple of weeks, you must start taking action fast because now you are carrying the property. As discussed earlier, you will have to carry costs each month you hold the property, so in reality, time really is money here.
Once you acquire the property, there are many different directions you can take as an exit strategy.
Later on in this blog, I would like to discuss the different exit strategies, such as the BRRRR method, fixing and flipping, wholesaling, and more.
