A foreclosure happens when a bank or lending institution seizes a real estate property from a homeowner who has defaulted on their mortgage payments. The lender will then require the previous owner to vacate the property before offering it for sale at a foreclosure auction in order to recover a portion of the outstanding mortgage balance. Today, foreclosures aren’t as common as they were during the height of the real estate crisis in 2008. According to ATTOM Data Solutions, foreclosure activity in the US housing market actually decreased by 15% in the first quarter of 2019.
Nonetheless, they still happen and buying a foreclosed home is still considered a lucrative way of acquiring an investment property! Today’s real estate investors continue to recognize the benefits that come with buying foreclosures. Of course, the main advantage that attracts investors to these properties is, in short, their price. In order to sell foreclosed homes as quickly as possible, lenders will offer them to buyers at a significant discount. And who doesn’t love a good bargain?
Related: Is Buying Foreclosed Homes a Smart Real Estate Investment?
However, while buying a foreclosure for real estate investment can save you a lot of cash, the process is different from a typical home buying process. There might be more ups and downs and it does come with its own set of risks and challenges. To make sure that you successfully close the deal and mitigate the risks associated with foreclosures, it helps to have a guide that walks you through each step of the process. With that in mind, let’s go over the five steps of how to buy a foreclosure.
Step 1: Get a Pre-Approval Letter for a Mortgage
Paying cash for a foreclosure investment property is preferred for real estate investors as it ensures a quick sale. If you’re paying cash, you won’t be subjected to lender requirements – which are typically strict when it comes to the purchase of foreclosed homes. However, if you can’t afford to pay for the entire cost of the property in cash and you’re planning on using a loan, you’ll need a pre-approval letter from a lender before you even start searching for foreclosures for sale in your real estate market.
Getting pre-approved for a loan will show the seller that you’re a serious buyer. Not only that, but it’ll also allow you to buy real estate properties faster and gives you a competitive advantage if there are multiple biddings on the same property. Furthermore, a pre-approval letter will detail how much money you can borrow which comes in handy when making an offer on the foreclosure. It ensures you keep your expectations tailored to what you can actually afford. So, as soon as you decide you’re going to buy a foreclosure investment, start looking for lenders willing to finance this type of real estate property and gather the necessary paperwork to obtain a pre-approval letter.
While you can go the common route of using a private lender, getting a mortgage from the bank selling the property is also an available option for financing a foreclosure. If you’re a buy and hold real estate investor, you can get a permanent mortgage for the investment property (this type of loan usually has lower interest rates). You can also get an FHLMC HomeSteps loan, which is great if you don’t want to worry about an appraisal or private mortgage insurance. On the other hand, if you’re looking to buy a foreclosure to fix and flip, a hard money loan is your best option to compete with cash buyers.
Step 2: Find a Foreclosed Home for Sale
After you secure the funding needed for buying a foreclosure from a bank, now you can start your search for foreclosure homes for sale. There are numerous ways for real estate investors to find foreclosures that offer great investment opportunities in any housing market. Here are 5 ways that we recommend to help you kick start your foreclosure investment property search:
- Real Estate Auctions: This is the oldest and most obvious way for finding foreclosed homes since these properties are commonly sold through auctions. Auctions can take place at the actual property, in a convention hall, or at the courthouse steps (live auctions). There are also online auctions which allow you to browse through foreclosures for sale and bid on the property online.
- Real Estate Agents: Some agents work directly with banks and handle the sale of their foreclosed homes. Also, a local real estate agent will be an expert on the housing market and will likely be familiar with properties nearing or undergoing foreclosure. They’ll also have a network of other professionals in the real estate business who may be able to help you in your property search.
- Bank Websites: Most banks have a special section on their websites that includes their foreclosure listings. They usually list foreclosures which have failed to sell at an auction, making them a great way for finding foreclosures at discounted rates. Lenders are willing to get rid of these properties as long as they get enough money to cover the remainder of the loan.
- Government Agency Websites: Another way of finding foreclosures for sale online is by checking websites of government agencies such as Fannie Mae, Freddie Mac, and HUD’s interagency listings (including FHA, VA, IRS, etc.). The benefit of these agencies is that they usually have a large number of government-owned listings that aren’t always listed on other sources.
- Mashvisor: This is one of the fastest ways to find foreclosures that, indeed, offer great investment opportunities! First, you can visit the Mashvisor Property Marketplace which lets you focus your property search on foreclosures and other off market properties for sale. Using our Investment Property Calculator, you can then analyze the investment potential of these properties and get pre-calculated data on what return on investment can you expect to earn.
Visit the Mashvisor Property Marketplace today and find the best foreclosure investment property in the city of your choice.
Related: How to Find Foreclosures: The 9 Best Ways
Step 3: Do Your Physical Due Diligence
The next step of how to buy a foreclosure for real estate investing is a bit tricky, but should not be skipped nonetheless! There are several pitfalls that you must be aware of before buying a foreclosed home. Falling into these pitfalls becomes easy if you don’t do your due diligence. The biggest risk of buying foreclosed homes is that these properties are typically sold as is, meaning the bank isn’t going to fix any problems. In a traditional home sale, owner or sellers must reveal every flaw in the home to the buyer. There’s no such legal requirement in a foreclosure sale.
The first thing to do in this step of the buying process is to check the investment property’s condition. Foreclosed homes for sale are often poorly maintained. After all, if owners can’t make the payments, they’re probably falling behind on regular upkeep too. Plus, some people who are forced into a foreclosure take out their frustration on the house before the bank seizes it. This often involves removing appliances and fixtures, and sometimes even vandalism.
Your ability to get a home inspection will depend on how you’re buying the foreclosure. While you typically can’t get into the property before bidding at an auction, you should drive by and take a look at the exterior. If you’re buying a foreclosure directly from a bank, be sure to hire a home inspector to thoroughly check the home for major problems. This helps you estimate how much money it’ll take to repair the investment property.
Another important step is to make sure the foreclosure for sale is free of liens. Many foreclosed properties have more than one mortgage and there are horror stories of people buying the second mortgage thinking they were buying the first. Make sure this doesn’t happen to you as, if it did, you’ll have to pay the first mortgage. To avoid this, hire a title company to run a title search for you. This will cost you, but it’s better to be safe than sorry.
Step 4: Look at Comps to Analyze the Property
So, you’ve found a foreclosure home for sale in your real estate market and you’re planning on buying it as an investment property. But, how do you know what the right price to offer is? What kind of discount are you getting? As a real estate investor, you can find out all of that by running a comparative market analysis (CMA). This means you need to research the neighborhood and find comparable homes (comps). Basically, these are recently sold properties which are similar and nearby the property you’re targeting.
Related: How to Easily Find Real Estate Comps
This step is important in any home sale, whether a traditional or a foreclosure one. Here, you’ll take a look at and compare similar properties to figure out their recent sale prices and market value. After doing that, simply compare what you’ve found to the foreclosure you’re considering to determine its current market value. This will help you decide on the price that you should submit in your offer.
In addition, if the home is in poor condition and requires repairs and renovations, reviewing real estate comps can give you a realistic after repair value (ARV) that your renovated property can sell for. Therefore, running a comparative market analysis is an important step in the process of buying a foreclosure because it assures real estate investors that they’ll actually make profits from this investment after all the additional expenses spent on repairs.
Mashvisor makes this crucial step an easy one! We provide investors with data and predictive real estate analytics which helps them make faster and smarter investment decisions. This data includes comparable properties to the foreclosure you’re interested in buying. Rather than wasting time and money to put together a list of comps, you can automatically get them in a matter of minutes on Mashvisor!
Start out your 14-day free trial with Mashvisor to start looking for and analyzing the best investment properties in your city and neighborhood of choice using analytics.
Step 5: Prepare and Submit Your Offer
Once you’re certain that investing in a foreclosed home is a smart and profitable investment, it’s time for the final step of how to buy a foreclosure – making an offer. Most banks and lending institutions provide detailed instructions on what you should include in your offer and how/when to submit it. In addition, banks are not homeowners – they’re businesses and will want to work with serious buyers who are ready to go through with the purchase. Make sure your offer conveys that you are this buyer. A good real estate agent should be able to help you with writing a competitive offer. Typically, your offer should include:
- Pre-approval letter
- Price
- Terms
- Contingencies
- Deposit check
- Closing date
Be smart with the offer you initially submit. While banks will already offer the foreclosed home for a certain price, it’s always best to go beneath that amount especially if there are issues with the home. Once you prepare your offer, your agent will submit it along with any bank documents to the listing agent responsible for selling the foreclosure on behalf of the bank. The listing agent will, in turn, forward them to the bank for review.
It’s typical for lending institutions to make decisions slower than an average home seller. Generally, you can expect some kind of response from the bank between a few days to three weeks. So, if you’re serious about buying the foreclosure, be patient after making the offer. Moreover, be prepared for negotiations – banks want to get the highest price, so expect several rounds of back-and-forth communication between you and the bank. If the bank accepts your offer, you’ll sign the final contract or purchase agreement and then move forward with closing the sale which typically takes 6 – 8 weeks.
Final Words on Buying a Foreclosure
Investing in foreclosed homes can be a lucrative way of making money in real estate, but the process is not easier than a traditional home sale. It’s important to note that foreclosure laws in the US vary by state, so it’s important to seek the advice of a local real estate agent before going through these steps of buying a foreclosed property. In addition, don’t forget the fundamentals of a profitable investment property just because the price is a bargain! Even though you can make money from a foreclosure investment, you must still do your research, weigh the pros and cons, and run the numbers to make sure you’ve got a good deal.
Use Mashvisor’s tools to start looking for and analyzing foreclosures in your city and neighborhood of choice to find the best one for real estate investing. Sign up to get started!