How to Buy a House in Foreclosure

Buying a house in foreclosure to lower your investment risk
A foreclosed home for sale

Real estate investments can cost a lot of money and be very high risk. Unless you buy your investment property wisely. One of the best ways to lower your risk and save money is by buying a house in foreclosure.


Table of Contents


What is a Foreclosure?

What does a house in foreclosure mean

When a homeowner can no longer pay the mortgage installments or loan, the home will fall into foreclosure. In other words, the mortgage lender or bank will take full ownership of the house.

When the lender or mortgage company gets full ownership, they will sell the house to recover their cash. In most cases, the price of the house in foreclosure will cost less than market value. Hence, you can easily get the house at a low price and later sell it for a profit.

The Foreclosure Process

Before buying a house in foreclosure, it would be good to understand the foreclosure process.

Pre-foreclosure

Before a foreclosure can begin the homeowner must be delinquent in their mortgage payments for a period of time. Usually about 3 or more months. This stage is considered the pre-foreclosure. It is not a foreclosure but a potential foreclosure. To save themselves from this debt and ruining their credit a homeowner would have to make their loan current.

If they are unable to make their loan current they may choose to sell the house quickly for a low price. In some cases before anyone can buy the home, the bank or lender may have to approve the sale. If the bank or lender agrees to sell the property, you can proceed with further paperwork.

Pre-foreclosure is the time when you have a small window of opportunity to buy the home directly from the homeowner.

Foreclosure

If the homeowner is unable to make back payments and bring their mortgage loan current, the home will enter the foreclosure process. This is where the bank starts processing the legal documents to take full possession of the home.

Once the process is complete the homeowner will then receive notification of foreclosure and the date by which they must vacate the premises. In some cases this will also include an auction date for the sale of the home.

Where to Find and Purchase Foreclosed Homes

Search foreclosure homes near you

The following are the three basic strategies to find and purchase foreclosed homes.

Auction

Buying a foreclosed home at a real estate auction

After a bank has foreclosed on a home they will most likely sell the home through an auction. This is where buyers are able to bid on the home in question. Depending on your knowledge of the housing market, you can proceed to bid on the house at the auction based on your ability to make a profit.

Keep in mind this strategy is very risky because you are not allowed to enter the property in order to assess damages or repair costs. The home is sold as is. There may be a lot of surprises that pop up.

Another issue you may come across is that you may not be the only one bidding on the home. This might make it difficult for you to get a great deal.

Real Estate Owned (REO) and Government-owned Listings

The next option available for buying a house in foreclosure is REO. You can directly go to the home listings of the mortgage lender. You will find all the information directly on the listing. From there you can proceed to buy the home if you like it.

Real estate owned properties

In the same way, if the loan is insured by the federal government, it will be considered as government-owned. Hence, if someone fails to pay the mortgage loan insured by the government, the house will go to the government-owned listings. You can also purchase a house from there.

Depending on the mortgage lender, an internet search can help you find all these types of listings.

Steps for Buying a House in Foreclosure

Time needed: 30 days.

The four basic steps to buying a house in foreclosure.

  1. Know your requirements

    The first thing you need to do is to know your requirements. What is your budget? Will you be able to make a profit? You will plan this by taking into consideration the location, condition, age of the home, and your MAO (maximum allowable offer).

    Have a plan before you buy a foreclosed home

  2. Find the foreclosure houses

    The following are 3 basic ways to look for foreclosed homes:

    • Have a real estate agent look for foreclosed homes on the MLS and send you a list. 
    • Look for the foreclosure listings online yourself.
    • Drive around neighborhoods you are interested in and look for homes that have signs that say foreclosed home for sale.

    There are many other creative ways you can find foreclosed homes. These are just some of the basic ways.

    How to find foreclosure houses

  3. Run the analysis

    Do your due diligence and run a Comparative Market Analysis (CMA). This will give you information that you need about the home in order to figure out its current market value.

    If you are going to an auction you need to ensure that you have enough cash for the purchase. Foreclosed houses are sold in “as-is” condition. In other words, no one guarantees the condition of the house. Keep this in mind before making your purchase.

    Plan for the worst and hope for the best. In order to mitigate your risk, treat each home as if it would need substantial repairs. This way when you run your numbers you will have a good margin of error. Foreclosure homes might need a lot of repairs. So, you need to be ready for it.

    Conduct a market research analysis

  4. Make the purchase

    The last thing you need to do is make the purchase. Later on, you can rent, sell or flip the foreclosed house and make a good return on your real estate investment.

    Buy the foreclosed home

Conclusion

Buying a house in foreclosure is a great way to make a profit but also involves some risk. To mitigate this risk, do your due diligence, be conservative in your calculations, and stay within your budget. You should now be on your way to making profits investing in foreclosed homes.

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