Foreclosure Buying Tips Part 1

Foreclosure was once that dirty word that nobody talked about, but with the recent market changes everybody who’s looking to buy a home is at least curious about how the process of buying a foreclosure works.

There’s really no great mystery to it, but there is a process to it and I’m here to do my best explaining how each step works and how you can capitalize on it as a consumer to keep a little more cash in your pocket.

The 3 steps are this:

1. Pre-Foreclosure
2. Foreclosure
3. Post Foreclosure REO(Real Estate Owned)

I will be posting this as a 3-part series, so I will break down Foreclosed Property Sales and REO Sales in my next posts.

Pre-Foreclosure

What This Means

The homeowner is delinquent in paying their mortgage and the bank has notified them that they are preparing to foreclose on the property if payments are not brought up to date by the specified date.  At this point the homeowner still legally owns the property and has the right to sell it before the date of foreclosure.

A pre-foreclosure property is often placed on the market by the homeowner and legally any pre-foreclosure MUST BE DISCLOSED (but not always is).  A Short Sale is an example of a pre-foreclosure sale where the bank must approve the sale because they are selling for less that the total amount due on the loan.

The Positives

1. The home is not yet bank-owned-  Dealing with a homeowner is typically a much easier process than negotiating with a bank.  There’s simply less hurdles and stipulations attached to the process of submitting an offer and getting it to settlement.
2. There may be negotiable equity-   If there is any established equity in the house, the owner may be willing to sacrifice it to sell at a discount in order to avoid foreclosure.  Any Foreclosure on your credit score will damage it by 200-250 points.  If the owner were to sell it prior to foreclosure he/she’s looking at a drop of only 100-150 points and might be able to buy something smaller that he/she can afford.
3. Known issues with the home may be disclosed-  If there are serious material defects with the property the homeowner will have to disclose if it was a primary residence.  A bank will sign a complete disclaimer, so you may not know about that leaking oil tank that’s buried underground

The Negatives

1. The bank may need to approve the sale-  If it is a negative equity situation or a short-sale that the bank needs to approve, you’re at the mercy of that approval.  If they don’t like the offer it may not fly, regardless of the homeowners desire to sell it to you.  Typically you’re looking at a minimum of 3-4 weeks to close on a short sale because of the extra people involved, and there may be extra paperwork necessary to satisfy the banks demands

How to Capitalize

1. Find a pre-foreclosure with negotiable equity-  Remember that the homeowner needs to get out and should be flexible enough to try and make the deal work.  If they can’t do it, it’s possible they may lose the house completely and take a much bigger hit on their credit score.
2. Make sure there is value in the transaction-  Buying a short-sale can be a test of patience because of the bank’s involvement.  If it’s not a good discount, why put yourself through all the extra hoops?

See what comparable foreclosures have sold for-  I find that the best
deal is often right here before the foreclosure has gone through, and it’s
less difficult to negotiate and faster to close on.  I will explain why a foreclosed property can actually be the raw deal when compared to pre-foreclosures in my next post!