Many buyers are looking for a “great deal” when purchasing a home. The Utah market in 2018 was fast and furious, causing prices to rise and inventory to dip. The good deals are few and far between now. However, you have options if you are patient and your financing is in order. Homes that are in foreclosure, although challenging, might be something to consider. Read on to learn more about the process and what you need to do to be ready.
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What is a Foreclosure?
Foreclosure is the process of a lender taking back possession of a home they hold a mortgage on. This normally happens after the mortgage company is no longer receiving the monthly payments. Every mortgage company handles this process a little differently. However, many homes eventually end up at auction. In a nutshell, a home in foreclosure is a house that the lender “takes back,” and is going to sell to try to re-coup costs. These costs will also include any late payment fees, unpaid property taxes, title fees, attorney costs. In some instances, the home sells at auction for greater than the loan balance at the time of auction. This includes the costs above and the home owner may be entitled to for any surplus.
Buying a home in foreclosure is not as simple as many assume, especially when the market is good. Competition is fierce and the inventory is low. However, it is normally a faster process than when you purchase a home the standard way. A 30 to 45-day process of negotiations, inspections, financing, appraisal, etc. is common when purchasing a home. With a foreclosure auction, you bid on the home you want. If you outbid everyone else, the home is yours within hours.
Hiring a Realtor
What should your first step be? Interview and hire a full-time real estate agent with experience, such as the agents on the C4 Elite Real Estate Team. Many people will tell you to find the listing brokerage on the home you are wanting to purchase so you can try to get a better deal. This often works against the buyer since the listing agent wants to pass any savings along to the seller first. Additionally, the listing agent cannot give you the full fiduciary duties you need and deserve. You may also be making offers or bids on multiple homes with different brokerages. If you use this strategy you would need to change the agent every time one offer or bid does not work out. It is best to find one agent who will get to know you and exactly what you are looking for, for the entire process.
Talk to your Lender
Next ask for lender recommendations. It is important to talk to a lender and get your finances in order before looking at foreclosure homes. Your competition will be there with pre-approval letters, cashier’s checks, and/or cash, you need to be just as prepared. There is no time afterwards to figure out your finances and what you can afford.
Do your Research
Before jumping into a foreclosure auction, ask your agent if there are any current “good deals” on the market. As agents we can look up bank-owned properties listed on the MLS. These are homes that went to auction, but never sold. We can also find government owned properties. These are typically referred to as HUD homes because so many are through the government agency called Housing and Urban Development. However, it can be through any number of government agencies such as Fannie Mae, Freddie Mac, FDIC, Department of Agriculture, etc.
Your agent can help you spot any pre-foreclosures. Pre-foreclosures are homes that are facing the foreclosure process but have not yet been repossessed by the bank. The home owners are trying to sell the home quickly so they can keep any equity, and/or avoid having a foreclosure on their credit report. Home owners are notified of the proceedings and often given an auction date that they must sell before. If you are in that situation do not wait to contact us to help you sell your home. It is a complicated process and you must act quickly.
Pre-foreclosures are harder to find because agents do not have to disclose them. Sometimes agents will mention it in the agent remarks (a section that only agents can see, not viewable by the public). If a home is discounted and you are curious if it is a pre-foreclosure your real estate agent can look up to see if the home had any notices of default. This still allows you to get a great deal on the home, in a faster time frame, while also being able to see and possibly even inspect the home before closing on it.
What to Expect at Auction
With the help of your real estate agent, collect information and comparable home sales (called “comps”), in order to evaluate your options. Try to find homes like the one you are looking for in the area you are hoping to buy. This will allow you and your agent to quickly spot a great deal. This is especially important if you are wanting to flip a home. You need to know what kind of ROI (return on investment) you can expect before bidding.
Foreclosure auctions are typically held at the local district courthouse. The attorney or title company that is acting as the “Trustee” for the bank is responsible for running the auction. The Trustee posts the notice of sale, which includes the specific location of the auction. Your agent will check with the appointed Trustee to make sure any auctions were not canceled or postponed. The Trustee keeps a list of all the foreclosed properties to be sold. Your agent can also ask if there are any similar homes coming up.
The Trustee will have an opening bid, or the minimum amount to start the auction. Then they will open it up to bids. Sometimes there is only one person there and they will accept the first bid, which is only $1 over the initial bid price. Bid increments are likely to increase from $1 to $100 if there are multiple people bidding on the same home or property. Be prepared to offer your highest and best offer so you do not miss out on the home you really want.
There will be a certain amount of money that you must deposit after you make a winning bid, which the Trustee determines. Your deposit is due at the time of sale, commonly $5,000.00 here in Utah. This deposit must generally be made in certified funds, such as a cashier’s check. The entire balance of your winning bid is due within 24 hours afterward. Therefore it is important to have your financing ready to go ahead of time, especially if you are obtaining a loan and not paying cash. Be sure your lender understands you are bidding on a foreclosed property.
Risks of a Buying a Foreclosure
In general, foreclosed homes are sold just as they are, and you often purchase the home blind to its condition. Even though you might get a great deal, the cost of fixing it up can quickly escalate, especially if major concerns pop up. If possible, drive by the home before the auction. From there you can see if it needs paint, trim, siding, new windows, what the air conditioning unit looks like etc. There will be no pre-purchase inspection or repair negotiations. Plan for renovation and repair expenses since foreclosed homes often need it.
The Do’s of Buying a Foreclosure
- Hire a real estate agent. It is important to have an experienced guide on your side.
- Talk to a lender and get a pre-approval letter before going too far into the process. Fully inform your lender your plan to purchase a foreclosed home.
- Look at all your options. Do not think that a foreclosed home is the only way to get a good deal.
- Do your homework. Gather “comps”, area information, and general repair quotes.
Foreclosed homes can be a great find if you are careful and thoughtful about it. The Team at C4 Elite Real Estate is ready to help. Whether you choose to purchase a home the traditional way or want to look at foreclosures, we can answer your questions. Call today to see what is on the market today!