Buying a foreclosed property has many benefits, especially the lower price tag it usually carries. However, before you jump in headfirst into the transaction, you should know some things. Buying a foreclosure works differently than a standard home purchase. There are likely more restrictions you must face from the bank and deadlines you must meet. The home might not be in the best condition either, depending on how long ago the owners had to vacate the premises, if they have at all. Before you decide to purchase a foreclosed home, you should know these things.
The Condition Could be Disastrous
First, you should know that the inside of the home might not be what you anticipated. You might not even get to look at the inside before bidding on the home. Either way, the previous owners could do a number on the home in a fit of rage. They might resent the bank or there could be blame between responsible parties in the home. In any case, it is not unforeseen to expect excessive damage throughout the home. Make sure you have money set aside to make any necessary repairs right away. You never know when the damages could put the integrity of the house at risk.
If you plan to finance the home, you might have trouble finding a lender. The condition of the property plays a role in its value. If the appraiser cannot honestly appraise the house for at least the amount you bid on it, you might not have financing. The only way around it is if you could pay the difference between the appraised value and the price you bid in cash.
You Need a Preapproval from a Bank
Banks are desperate to get rid of a foreclosed property, but that does not mean they do not have requirements. They do not accept just any bid that crosses their path. They usually want to see a preapproval from a lender before they accept a bid. If they were to accept any old offer without a preapproval, they could end up spinning in circles as financing falls through and they have to go through the bidding process again. By requiring a written preapproval from a lender, banks save themselves the time and money of constantly putting the house up for auction.
Aside from being able to prove you can secure financing, you need the preapproval to get a head start on the process. Buying a foreclosed property usually means you are on a strict timeline. The selling bank has a deadline you must meet. When you do the preliminary work and secure your preapproval, a part of the process is complete. The underwriter still needs to go through your loan as it pertains to the property you purchase, but at least your initial work is done. As long as you comply with the underwriter’s needs, you should be able to get the loan underwritten in time for the deadline.
Pay for the Inspection
Closing costs can add up and it can be frustrating, but do not ever skip out on the home inspection. It will be the best $300 or $400 you spend. The inspector will go through the home and tell you what damages there are and what to expect. There might even be issues with the home that had nothing to do with the actions of the previous owners. There is a good chance that they just could not afford to care for the home. This could mean that there are many issues that you need to know about before you purchase it. If the home inspection comes back with too many issues, you do have the ability to walk away.
Check out the Comparable Sales in the Area
Before you bid on a foreclosed property, check out the area it is in. Are there are many other foreclosures? Check out the comparable sales within the last six months to determine if they were actual sales or foreclosure sales. If there were many foreclosures, it could affect the long-term value of the home. If the area struggles, you might not see a return on your investment for a very long time. Take that into consideration before you make your purchase.
Find a Knowledgeable Realtor
When you purchase a foreclosed property, you cannot use any realtor – you have to use one who knows the foreclosure process. Only the agent can do your bidding for you, so you want someone who really knows what they are doing on your side. In addition, having a realtor who has been through the process before could mean he has relationships with certain banks and professionals involved in the process. This could help your purchase go much smoother than if you dealt with a bunch of strangers.
Expect a Bidding War
Today more people are able to afford foreclosure homes, which means more bidding wars. The selling bank is not going to accept the first offer that comes through. If the home is located in a hot area, there could be a bidding war. This does not mean the top bid will always win, though. You have to meet the requirements. For example, a cash offer might win over any financing offers because of the time it takes to process financing on a foreclosed property. A cash offer does not have to rely on the appraiser or any other third parties. They can close the fastest. However, if you did your homework and you have your preapproval letter, you might have a leg to stand on against a cash offer if your bid is higher.
The process to purchase a foreclosed property is long and slow. The more work you do ahead of time, the better off you will be. Make sure to keep in mind the condition of the property. Even if it passes the appraisal, it does not mean the inspection will not come back with bad news. Be prepared for the worst either by being financially prepared to pay for it or to walk away.