Buying a foreclosed home can be challenging. But for the right buyer, it can also be an incredible opportunity to get into a home for an amazing value. Purchasing a home that’s in foreclosure is a very different process from buying a standard home. Foreclosed homes that are sold as-is often need costly repairs and typically leave very little (or no) room for negotiation. Here’s what you should know before you start the process.
REO is an acronym for “real estate owned.” An REO property is one that’s been foreclosed on by a bank and is now owned by the lender.
What’s a HUD house?
A HUD house is a property whose mortgage was previously insured by the federal government. HUD houses typically go to market about 6 months after a foreclosure, with local governments getting first dibs on the opportunity to purchase. If no such offer comes to pass in the first 10 or so days on the market, the listing will become available to other buyers.
Tips for buying a foreclosed home
Here are some easy things you can do to make the process less painless.
1. Find a broker who specializes in foreclosed homes
Rather than beginning your search with the house hunt, start by looking for an experienced broker who can help you navigate the oft-bumpy road of buying an REO property. Banks typically hire brokers to manage their REO load, which means you can work with the broker directly (eliminating the need for 2 brokers). These experienced professionals will have an inside track on available foreclosed properties, sometimes with access to homes not yet listed in public databases.
2. Get pre-approved by a lender
The pre-approval process is how a potential lender determines how big of a loan you qualify for, based mostly on your credit score and income. Once you have your broker locked down, you’ll want to start the process by getting a pre-approval letter from a lender. This isn’t necessary if you’re prepared to make all-cash offers on a property. But if you’re planning to finance a home, then you must get pre-approved first.
3. Do your research
Before jumping on a property, do your due diligence. Look at what similar properties in the neighborhood have recently sold for (aka “comps”), which’ll help you gauge both the property of potential properties and how much to offer once you find a home you like.
Tour houses in person, being sure to visit neighborhoods you’re looking at in the morning and at night. Ask questions of neighbors. Look into crime statistics. Check for pests, landscaping issues, indoor plumbing, and sewer lines for existing or potential issues. And find out how long the house has been vacant. Deferred maintenance because of vacancy can mean more repairs for a potential homeowner.
4. Initiate private inspections
You may be required by your lender to get a home inspection. But even if it’s not a requirement and you need to pay out of pocket for one, experts strongly encourage serious buyers to initiate a home inspection. In addition to identifying costly deficiencies to the existing property, inspectors may also be able to flag items that can be big (and expensive) problems down the road.
Want to learn more about why a home goes into foreclosure and what it all means? Check out what you should know about understanding foreclosure.