What is a foreclosed property?
When the borrower fails to pay the loan back to the lender, the latter starts a legal process to get their property in repayment of the loan. This process is called a foreclosure and the property is called foreclosed property. On the real estate market, it is also referred to as distressed property.
When the foreclosure process starts, the lender tries to sell the property at an auction and collects the proceeds in repayment of the debt. If the property is not sold during the auction then it becomes property of the lender/the bank. Such type of property is referred to as real estate owned (REO).
You should know, that when the borrower is served with a foreclosure, they have the right to file for Chapter 13 bankruptcy or Chapter 7 bankruptcy. The first one is used if the owner wants to keep their house and work out a repayment plan, while under Chapter 7 the owner surrenders the house and all their debts are written off.
How to find and buy a foreclosed property?
One of the first things to note about a foreclosed property is that it is sold “as is“. This means that you buy the property with all the liens and burdens it comes with, which may include unpaid taxes, property bills, etc. You should not expend any discount of the price if the property needs repair, and in most of the cases it does. Sometimes, the previous owner who has lost their home due to foreclosure damage it intentionally by ripping off furniture, flooring or even doors and window frames. This is an important thing that you need to have in mind before you start researching the options.
How to buy foreclosed properties?
There are two main ways:
- Through a real estate agent. The process is more or less similar to buying a traditional home with the specifications related to foreclosures.
- Through a public auction. There are two types of auctions where foreclosed property is sold. The first type is a public foreclosure auction. This happens when the ownership of the property is officially transferred to the bank. The bank organizes the auction and if the property is not sold then it is listed with a real estate agent. The second type of auction is a public auction through an auction company. This happens when the foreclosed property has been listed with a real estate agent for a certain period of time but not sold. Then the bank transitions the property to an auction house, which can hold an auction to sell it in person or online. You can check the internet for public auction in your area.
Where to find foreclosed properties?
The easiest way is to type “foreclosures”, “foreclosed property” or “REO properties” online and you will immediately get tons of results. Most of the foreclosures are listed the same way as the other properties. You can use traditional resources as newspapers and online real estate listings but you have other options as well. Check bank and governmental websites for REO properties. When you go through the listings it is a good idea to choose a real estate agent that you would like to work with. Many banks work with certain brokers, who are aware of all the upcoming deals and even know which properties will appear on the listings before they are updated. So, a good tactics is to find a reliable realtor who is on your site in the hunt of the most appropriate foreclosed home.
5 Tips for success
- Work with an experienced and trustworthy real estate agent who has knowledge in the field of buying foreclosed property.
- Consult a foreclosure attorney who can give you advice about the specific requirements for the state, where the foreclosed property is located. Remember that each state has its specific requirements and procedures. Do not rely on your previous experience with buying a foreclosed property in a different state.
- Compare all the pros and cons before the deal. It is wise to walk away from a seemingly attractive property if the title comes with too many liens, burdens, encumbrances or if it needs too major repairs.
- Get to know all the terms associate with foreclosure in advance. Thus, you will not look puzzled at the documentation and require explanation all the time. Of course, it is smart to ask for clarifications now and then in order to avoid making a mistake simply because you are not familiar with the jargon.
- Be prepared for delays. The foreclosure process takes time and you should be aware that moving to your new property will not happen in a month or two. Perceive this as a long-term investment and be patient and consistent in following all the necessary procedures.
At the end of the day any investment can be a failure or success. It depends on several factors that include luck and knowledge. Therefore, if you have decided to invest in a foreclosed property make sure to do your homework and follow the tips above. The best thing is to work with an experienced real estate agent and a lawyer whom you trust, so that you can avoid all the pitfalls in the process.