Why Foreclosure Houses are Cheap? (2024)

Is buying a foreclosed property something you have considered?

To put this into perspective, let’s say you take a bank loan to buy a car.

The bank will use the car as collateral until you pay the loan in full. Banks secure mortgages in the same way so that in case you stop making your payments, they have the legal right to seize your house.

The foreclosure process differs from state to state, with some taking years, while others taking only a few months after bypassing intricate court procedures. But, in a nutshell, below are the 3 key definitions of foreclosure that you should know:

• Foreclosure – Legal process that a mortgage lender seizes a property in arrears.
• Home in foreclosure – A home undergoing the foreclosure process.
• Real estate owned (REO) property – A home repossessed by a lender through foreclosure.

“Foreclosure real estate is fantastic if you are looking for opportunities but is not the usual real estate to buy if you are a newbie. It is possible to buy it cheap at first, but if you are not aware of the opposing sides or don’t predict them in advance, you might find yourself in trouble.”

George Nicola (Expert Stager)

Now that you know what a foreclosed house is let us dive into why they can be very cheap.

Lenders Sell to Get their Money Back

Rather than making a profit, lenders sell foreclosed homes to recoup outstanding loan balances, unpaid property taxes, the costs of sale, and associated liens. This is why most banks or mortgage investors price foreclosed houses lower than other houses.

Less Title Issues

Generally, when buying a house, the original homeowner is legally mandated to provide you with its title. While the same applies when buying a foreclosed home, the bank must clear any overdue property taxes and liens attached to the property’s title.

Standard Loan Structures

When buying a foreclosed home, the bidding and purchase process is slightly different, which gives you various loan options. If the foreclosed house is in a liveable state, you can buy it affordably using a well-structured government-backed loan, FHA loan, or a USDA loan.

Need Several Repairs

Most foreclosed homes usually need substantial repairs. Therefore, banks sell them cheaply to avoid being landlords of distressed houses. This attracts house flippers known to buy cheap foreclosed homes at low prices that can fetch a decent profit after making repairs.

While buying a foreclosed home can be a faster and cheaper way to invest in real estate, these properties may not be cheap in the long run due to the following reasons:

Competitive Market

Due to the hard times caused by the pandemic, many homes are in foreclosure. As lenders and mortgage investors conduct multiple auctions of foreclosure listings online, potential occupants and professional house flippers competitively vie for the foreclosed homes, which steeply increases their interests.

They are Sold in Disrepair State

Due to the failure of most original homeowners to maintain the home, foreclosed houses are always in a state of disrepair. Since the bank usually sells the home “as is,” the buyer is bound to cater to huge repairs costs.

Squatter Rights

After the bank evicts the defaulting homeowners, the foreclosed home may remain unoccupied for months or years, attracting squatters. This means that you can end up spending thousands of dollars to legally evict the squatters after buying the home from the bank.

You May Need Large Amounts of Cash

Most auctions for foreclosed houses prioritize cash bids, which may require you to set aside large amounts of upfront cash. However, having good credit may still allow you to buy the foreclosed home if you avoid an auction.

While the foreclosure process differs from one state to another, it is important to understand the three common types of foreclosures.

Pre-foreclosure Property

Short Sales

Real Estate-owned Properties

Government-owned Properties

Sheriff’s Sale Auctions

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With the COVID-19 pandemic, home prices have risen steeply as mortgage defaulters opt to sell their homes for profit instead of going into foreclosure.

For those that unsuccessfully go through foreclosure auctions, lenders usually list them based on market values and their repair states. For example, a $500,000 pre-foreclosure home might drop to $400,000 post-foreclosure.

The bank or the mortgage lender owns a foreclosed home before it is sold. Immediately the lender repossesses it from the previous owner who defaulted on his mortgage payments, and it becomes an REO property.

It can be sold to the highest bidder at an auction, but if the auction is unsuccessful, they are usually bought through real estate agents or listings at a lower price.

There are several ways to buy a foreclosed home with no money, but it will likely require creative thinking and willingness to take on additional risk. This strategy is also known as “no money down.” Here are a few caveats to consider:

1. Look for owner financing: Some sellers of foreclosed homes may be willing to finance the purchase for you, either through a mortgage or a contract for a deed. This can allow you to buy the house without a down payment, but you will still be responsible for making monthly payments to the seller.

2. Try to negotiate a lower price: If the seller is motivated to sell the home quickly, they may be willing to accept a lower offer, especially if you have a strong case for why the home is worth less than its listed price. This will require a combination with point (3) below.

3. Partner with an investor: If you don’t have the money to buy a home outright, you might consider partnering with an investor who does. The investor could provide the capital for the purchase, and you could work together to fix up the property and either sell it for a profit or hold onto it as a rental property.

4. Consider government programs: Several government programs can help you buy a home with little or no money, such as the VA loan program for military veterans and the USDA rural development loan program.

Remember that buying a foreclosed home can come with additional risks and uncertainties, so it’s essential to do your due diligence and carefully consider your options before making a decision.

* This is not financial advise

Judicial Foreclosure

Most lenders in all U.S. states use the judicial foreclosure process before selling foreclosed houses. This involves going to court to establish that they have the legal right to foreclose on the house.

The lenders will notify the homeowners about the lawsuit, and if they fail to clear their arrears, the property will be sold in a public foreclosure auction.

Non-judicial Foreclosure

Non-judicial foreclosure is a quicker and cheaper way to sell foreclosed houses without going to court. The lender may send one or two notices to homeowners before selling the house at a foreclosure auction.

The non-judicial foreclosure common in California, Michigan, and Texas and can only be used if the mortgage has a power-of-sale clause.

Strict Foreclosure

Commonly used in Connecticut, Vermont, and Maine, strict foreclosure allows lenders to acquire court approval to put up property for sale and recover outstanding loans.

The approval can only be granted if the property value is less than the mortgage balance. Once granted, homeowners are obliged to clear the mortgage debt within a set deadline, or else the lender repossesses the home.

To ensure the foreclosure sale process is smooth, follow these steps:

• Obtain a Preapproval Letter – This indicates that a lender has agreed to finance you within the set price range of the foreclosed house.
• Plan a Property Inspection – This helps you know potential issues with the house that need to be addressed before you move in.
• Carry Out a Title Search – This identifies overdue taxes, liens, and legal judgments associated with the house.
• Consider Contract Contingencies – Include a contingency in your purchase to give you the option of backing out of a sale.
• Select the Right Process – Before committing to the sale, thoroughly review the process you want to use (short sale, auction or REO).

Are you looking for to find foreclosed homes or properties for sale? Besides contacting real estate professionals in your region, the following are other key resources.

1. Bank websites – Here you can find several REO properties listed for sale.
2. The U.S. Department of Housing and Urban Development (HUD) – Here you can find many foreclosed homes from government agencies listed for sale.
3. Online real estate listings – You can find many foreclosed properties on websites such as Zillow (US), OnTheMarket (UK), Zoopla (UK), and RealtyTrac (US).
4. Multiple listing services (MLS) – Licensed real estate professionals list foreclosed properties here.
5. Foreclosure Auctions – You can also buy foreclosed homes at auctions. During foreclosure auctions, the following happens:
   • Investors and bank representatives fill the room.
   • The auctioneer announces the opening bids of each property. The opening bid often reflects the unpaid loan amount, the interest accrued, and any extra costs
   • You bid by raising your number or speaking up. The highest bidder proceeds to the clearing desk to complete paperwork, payments, and collect receipts.
   • If no bids exceed the opening bid, the lender’s attorney will buy the property, which is considered Real Estate Owned

Lower Price

Lenders often sell foreclosure homes below the market value of properties. During pre-foreclosure, homeowners are motivated to sell fast and are open to negotiation. It is also illegal for banks to charge beyond the outstanding balance of the mortgage during foreclosure auctions.

Clean Title

When buying a foreclosed home, the bank must clear any overdue property taxes and liens attached to the property’s title, meaning you won’t owe any taxes or liens from the previous owner.

Potential Investment Opportunity

Purchasing a foreclosure home and repairing it allows you to improve the home’s value and increase its equity in the real estate market. The right upgrades are recipes for a solid return on your investment, especially if you are a home flipper.

Financial Flexibility

You can buy a foreclosure home using regular mortgage financing. The seller may even be inclined to set up a mortgage financing in the form of a mortgage assumption or lease-purchase agreement.

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Home Inspections are not guaranteed

Most foreclosure homes are sold “as-is” on foreclosure websites (HomePath.com, Zillow Foreclosures, Realtor Foreclosureswhich means that buyers rarely access the homes before making an offer. You may not get the chance to view the property before submitting your bid, and the seller may not reveal the condition or history of the house.

Need Several Repairs

Many foreclosed homes usually need substantial repairs due to long periods of vacancy by the original homeowner or his failure to conduct regular maintenance. This leads to substantial damage to the property that demand huge repair costs.

Slow Process

While this varies from state to state, the legal procedures for foreclosures are generally lengthy and complex. You’ll need to fill multiple paperwork, and the sale may take longer than expected.

Upfront Payments During Auctions

Most foreclosure auctions are “all-cash” transactions, which may require you to set aside large amounts of upfront cash in a short period to make full payment. While you can solicit funds from your lender, securing a mortgage may take longer and prevent you from closing the sale quickly.

Generally, the length of the full foreclosure sale process can take approximately 6 months to more than 18 months.

However, this depends on your state law and other unpredictable factors, such as negotiations between the borrower and lender to prevent foreclosure. Therefore, completing the foreclosure process has no defined timeframe.

Selling a foreclosed home also takes longer than expected, especially because the banks’ approval process is generally slow.

In addition, a sale can only be deemed complete once the bank approves it, which is an extra step that you cannot speed up as desired.

Therefore, the buying process for a foreclosed house depends on your financing and your bank. Some banks accept offers in 2 weeks or less, especially if you are paying cash and successful home inspection.

On the other hand, some may take many months, especially if your loan processing is disruptive.

Yes! If the property passes all guidelines, you can buy a foreclosed home with no money down using the following strategies:

Use an FHA Loan

If you are a first-time homebuyer, using an FHA loan is the most viable option if the property passes the strict guidelines. Furthermore, you might be eligible for a house renovation loan to allow you to repair it without spending your own money.

Use a Credit Card

Using a credit card to buy foreclosed property allows you to request a cash advance to complete the purchase with no money down. First, however, ensure that you have laid down a solid plan to pay back the balance promptly to avoid high interest rates.

Aim for FHA Foreclosures

Find a list of available uninsured FHA foreclosures properties in your area. You are allowed to fund them with no money because most of them are typically in a state of disrepair and are usually sold at massive discounts.

Now that you know the ins and outs of the foreclosure process, keep the following in mind:

• Home in foreclosure is a home undergoing the foreclosure process.
• A REO property is a home reclaimed by the bank after the foreclosure process.
• Foreclosed homes are not necessarily cheap
• The foreclosure sale process varies from state to state and can take 6-18 months
• You can buy a foreclosed home with no money down using an FHA loan, your credit card, or uninsured FHA foreclosures.

• Foreclosed homes are usually sold “as-is” meaning there may be unknown problems or repairs needed that you take on when you purchase the home. Do thorough inspections.

Foreclosed homes often sell at a discount compared to comparable non-distressed home sales. However, competitive bidding can drive up prices.

You will likely need to move quickly with an offer, as foreclosures tend to get multiple offers soon after listing. Being preapproved for a mortgage will make for a stronger bid.

The previous owners are unlikely to be present during showings. Be prepared to see signs of their financial struggles like unfinished repairs or unclean conditions.

The mortgage lender, bank, or county entity selling the foreclosure just wants to recoup their losses, so there is less room for price negotiations. But lowball offers could still succeed.

Closing processes can drag out on foreclosures due to paperwork delays or title issues. Build extra time into your purchase plans and be patient.

Occupied foreclosures mean the owners could be facing eviction soon or may damage the home before leaving. Only consider occupied homes if you get an inspection first.

Here are some tips for getting the best deal on a foreclosed home purchase:

1. Buy at auction. Foreclosure auctions will have the lowest opening bids, sometimes as low as a few thousand dollars depending on the property. Just know there are risks with auction buying.
2. Leverage government programs. The Department of Housing and Urban Development (HUD) often auctions foreclosed homes they’ve insured at flexible terms and discounted prices to promote affordable housing.
3. Use an agent. An experienced real estate agent will monitor new foreclosure listings in your target locations and may be able to negotiate better terms than you could get yourself as an individual buyer. Agents can also help flag any issues.
4. Submit low opening offers. Even on non-auction foreclosures being sold directly by lenders, submit offers 20-30% under list price. Go even lower if the home needs significant repairs. Just know the competition could be fierce
5. Line up financing early. Being pre-approved with a mortgage lender makes your offer stronger, as all cash deals are uncommon in foreclosures. Shop around for the best rates and closing costs
6. Waive contingencies if possible. Limited contingencies like inspection periods show you have done due diligence and are ready to close quickly, which most foreclosure sellers prefer.