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How to Buy a Foreclosure: The Foreclosure Process

Learning how to buy a foreclosure is not all that different from buying any other home – but the small differences can make the difference between getting the property you really want and be left with nothing. This post will walk you through the process of buying a foreclosure for either your personal use or as a real estate investment.

Before diving too deeply into the details, let’s first make sure we’re all on the same page with terms. A foreclosure is the process where the lien holder takes ownership in a property due to a variety of possible reasons, but most commonly the lack of payment on a loan. The foreclosure process differs in each state, but it generally begins with numerous notices given to the property owner and a legal set of steps leading up to the actual foreclosure. There are generally three places in the foreclosure process where it is possible to buy a property: pre-foreclosure, at the courthouse steps, and after the foreclosure. When learning how to buy a foreclosure, it’s important to know all three steps.

Buying a Pre Foreclosed Home

It is possible to buy a home before the foreclosure is finalized and the homeowner is kicked out. Buying a property during this period known as “pre-foreclosure” is a common technique used by many real estate investors and can be a good way to find motivated homeowners. After all – few things in life are more motivating for a homeowner than knowing they will soon be physically removed from their home.

How to Buy a Foreclosure At the Courthouse Steps

In most states, once the legal process has been carried out the property is sent to the county for a public auction on the “courthouse steps” (sometimes figuratively but often literally) and sold to the highest bidder. This process is known as the “Trustee Sale.” The bidding generally opens with an automatic starting bid of whatever amount is owed on the property, so no – it’s generally not possible to simply go and bid $1 on a property at the courthouse. If a homeowner owed $80,000 on a loan secured by the property, the bidding would start at $80,000. If no one bids higher, the lien holder will be awarded the property and be given title.

To buy a foreclosure at the courthouse steps, there are several tips to keep in mind:

1. Buyer Beware– When you buy a foreclosure at the courthouse, you do not receive any guarantee that the property is free of any liens or encumbrances. This means you could be buying a property that has hidden liens (such as a lien placed by a contractor, a disgruntled ex-spouse, or any other reason.)
2. Condition – Because up to this point the property is still owned by the homeowner, you probably will not get a chance to get inside the property and check it out (unless you go to the property and knock on the door and ask.) There may be hidden defects with the home, and you generally will not have the time do a formal inspection.
3. Cash Only – Finally, when buying a foreclosure at the courthouse steps, you will need to have all the money the same day to purchase this property. This means you cannot use a conventional loan to buy the property. There are some hard money lenders who fund these kind of deals, but be sure to make sure the other two steps are okay before buying a property on the courthouse steps.

Post Foreclosure

After the sale on the courthouse steps, the new owner of the property will next need to evict the “tenants” (former homeowners) who may still reside at the property. If it is a bank that forecloses, the bank will generally go through the process of evicting the tenant and getting the home listed with a real estate agent to sell. The remainder of this article will focus on how to buy a foreclosure after it has been filtered through the foreclosure process and is now available for sale publicly.

When a bank takes back the property and begins to sell it, the property is now known as an REO or Real Estate Owned.

Shopping for a Foreclosed Home

There are several ways to shop for a foreclosure to buy. This section is going to look at several of the more common ways to shop around.

1.) The MLS –

By far, the most common source of finding foreclosures is through the Multiple Listing Service (MLS.) The MLS is a collection of lists put together by local real estate agents of all the properties currently for sale in their offices. In the old days, these lists were kept in file cabinets and each office kept their own lists private. Today, real estate brokers work together to share all the information freely amongst each other using the MLS.

The MLS is fully accessible for any real estate agent, so it is highly recommended that you either get your own real estate license or work closely with an agent you like and trust (after all, a real estate agent is generally paid by the seller, so it’s free for you to use an agent!)

2.) Bank REO Departments

Banks typically have an “REO Department” and someone in charge of working with those properties. While most REO Properties end up on the MLS (see above) it is possible to make connections with an REO Department and have access to properties before being placed on the MLS. This is especially true with smaller, community banks.

3.) HUD Home Store

HUD properties were FHA loans that defaulted and foreclosed by the bank.  Because FHA loans are backed by the US Gov’t, these properties are sold back to the US Department of Housing and Urban Development (HUD) and eventually put on the market and listed on www.HUDhomestore.com

 

Putting in Your Offer

Once you find a property you want to buy, it’s time to submit your offer. Again, this is when a good real estate agent comes in handy. Typically, you will meet with your agent and let them know the terms you want to offer. Your agent will submit an offer to the seller and the bank will look it over and either:

1. Accept It (yay!)
2. Deny It (boo!)
3. Ignore It (In other words, “Deny!”)
4. Counter It (most common)

Highest and Best

Many times, if there are multiple offers on a property, the seller will ask you to submit your “highest and best” offer. In other words, the bank is asking you to bid on the property against others. At this time, it can be easy to fall into “auction mode” and overpay because of the hype, but know your max price and don’t let emotions take over.

Doing Your Due Diligence and Actually Buying the Foreclosure

Once your offer is accepted, it’s now time to do your “due diligence” and make sure all your ducks are in a row. This is the time where you hire an inspector to check out the property and get your financing fully in place. In most states, the closing process is handled by a “Title Company” or a Closing Attorney, who will prepare all the documents and arrange for the signing of both parties. It may sound simple, but there are some critical steps in doing your due diligence.  That is why again, it is highly recommended that you work with your real estate agent during this process.

After both parties have signed the documents and the new deed has been recorded with the local county, the property is officially yours!

Congratulations – you just learned how to buy a foreclosure.

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Funny but truth side note with viewing REO properties

Sometimes you have to be prepared when viewing foreclosures. Here’s a picture of our buyers being prepared for the smell that you’ll come across –

 

About –

Tiffany Howard Richardson of Nicole James Real Estate Group, Inc is a Local Listing Broker for K.M. Minemier & Associates.  Nicole James Real Estate Group is a full service real estate firm with offices in Durham, North Carolina and Atlanta, Georgia.