{"id":1083,"date":"2020-11-18T06:00:59","date_gmt":"2020-11-18T11:00:59","guid":{"rendered":"https:\/\/www.deeds.com\/articles\/?p=1083"},"modified":"2024-04-25T23:20:27","modified_gmt":"2024-04-26T03:20:27","slug":"what-to-know-before-you-buy-a-foreclosed-home","status":"publish","type":"post","link":"https:\/\/www.deeds.com\/articles\/what-to-know-before-you-buy-a-foreclosed-home\/","title":{"rendered":"What to Know Before You Buy a Foreclosed Home"},"content":{"rendered":"\n
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Thinking of buying a foreclosed home? The lower prices for\nforeclosures among the listings are certainly tempting! Even better, a lower\nprice translates to lower property taxes. But given the potential pitfalls, will\nthe deal be worthwhile? <\/p>\n\n\n\n

Buyers\u2019 experiences vary widely. States vary, too, in laws\nand policies related to the way foreclosures are handled. That noted, here is a\ngeneral planning guide to buying a home in foreclosure.<\/p>\n\n\n\n\n\n\n\n

First, Note the Main Types of Foreclosure.<\/h2>\n\n\n\n

Banks open the foreclose process in two different ways, usually\ndepending on whether the homeowner holds a mortgage or a deed of trust. To\nconfirm, ask an official at your county courthouse which foreclosure process is\nfollowed in your area.  <\/p>\n\n\n\n

Nonjudicial Foreclosures <\/h3>\n\n\n\n

Common in states where the deed of trust<\/a><\/em>\nis used in place of the mortgage, this type of foreclosure happens out of\ncourt. The deed of trust\u2019s power of sale clause<\/em> authorizes the trustee\nto sell if the buyer cannot repay the loan. Rather than having to go through\nthe courts, the lender can enlist a private company to hold the auction at the home\nitself or another accessible location. <\/p>\n\n\n\n

In deed of trust states, the lender opens\nthe non-judicial process by recording a Notice of Default. You have a specific\ntime, such as California\u2019s three-month period, before the lender may publish a\nforeclosure sale schedule, plus the three weeks from the sale publication to\nthe sale itself. Check the home\u2019s state law.<\/p>\n\n\n\n

Judicial Foreclosures <\/h3>\n\n\n\n

A judicial process is a longer, costlier\naffair. The mortgage lender must seek a foreclosure order from a court, which\nauthorizes an auction at the courthouse or online. With non-tax liens, the\nhomeowner in judicial proceedings has rights. The whole process can span several\nmonths to a year or more. <\/p>\n\n\n\n

If you\u2019re considering buying through a\njudicial sale, learn about owners\u2019 redemption rights. Depending on the law\nwhere the home is, or if the homeowner declares bankruptcy, the home can be\nredeemed from its owner even after your successful bid.<\/p>\n\n\n\n

And be sure you know the process for\nresolving any liens that survive the judicial sale. Otherwise you may need to\nfollow through with a quiet title\naction<\/a><\/em> in the court. The court must clear title defects in order\nto ensure a buyer\u2019s full ownership rights.<\/p>\n\n\n\n

Note:<\/em><\/strong> Depending on the redemption allowances\nset forth by state law, the deed can take months after a foreclosure to be\ntransferred into a new buyer\u2019s name. For non-judicial foreclosures and tax\nliens, the transfer occurs immediately, or within a few days.<\/p>\n\n\n\n

Buying an REO House Means the Bank Is the Seller. <\/h2>\n\n\n\n

What if no one makes the minimum bid at the auction? Then\nthe bank buys the house back. The property now has a real estate owned (REO)<\/em>\ntitle. REO properties also include those homes returned to banks that have\naccepted deeds\nin lieu of foreclosure<\/a><\/em>.<\/p>\n\n\n\n

REO homes appear not only on bank websites, but also on the major\nreal estate websites. Yet there are some differences between an REO sale and a\nregular home sale. Having a bank as your seller instead of the person who lived\nin the home can cut both ways. A bank doesn\u2019t know the home like its resident did,\nand can\u2019t answer your questions about its history or give you important tips.\nAlso, if the bank\u2019s broker is not highly motivated, or if the bank is inundated\nwith foreclosures, your bid can take several months to process. That said, a\nbank holding onto a large REO inventory may be motivated to sell at a discount.\nAnd if you\u2019re able to offer a cash bid, you could get to closing within a\nmonth. (Often, REO buyers are experienced home flippers buying with cash.)<\/p>\n\n\n\n

Generally, in an REO sale, the buyer will have the benefit\nof time \u2014 usually one to two weeks \u2014 to get an inspection done before signing\nthe paperwork. And, as with most houses on the MLS, getting a mortgage is\npossible. Some banks even offer closing cost discounts for buyers who finance\ntheir purchases.<\/p>\n\n\n\n

To prepare to bid on one or more of these homes, buyers\nshould research the local market and the homes themselves, hire a great local\nagent, and obtain a lender\u2019s pre-approval. The buyer should also have a title\nsearch done, to uncover encumbrances\nand liens<\/a><\/em>. It\u2019s vital to know if outstanding utility bills,\nhomeowners\u2019 association fees, or various liens will be covered by the bank at closing,\nor if the buyer will be saddled with them.  <\/p>\n\n\n\n

On that note, expect transfer taxes and other obligations shift to the buyer if the home is being foreclosed by a government agency. Government agencies are exempt from taxes, as noted by Weichert<\/a>. So, for example, the 2% transfer tax in Pennsylvania falls on the home\u2019s buyer. So do utility hookups, inspections, and other compliance costs. Details like this underscore the importance of hiring an experienced agent. A person planning to bid on real estate should avoid situations in which one broker has a dual role, assisting both buyer and seller. <\/p>\n\n\n\n

Note:<\/em><\/strong> Because of the added risks in the foreclosure transaction, we recommend engaging an attorney to review and explain the offer document before<\/em> you consider signing it. You also need to speak with your tax expert about the tax implications of buying a foreclosed home<\/a>. And, as always, hire a real estate agent who is, by contract, working for you<\/em>! A good agent can save the day by knowing what to do to get the home in shape for an appraisal. And an agent who is happy to communicate with the bank\u2019s broker may improve the deal you get.<\/p>\n\n\n\n

\u261b<\/strong> See more\ninformation from Deeds.com <\/em>about a real\nestate agent\u2019s fiduciary duties<\/a> to the buyer.<\/strong><\/p>\n\n\n\n

Successful Foreclosure Purchases Rely on Thorough Inspections.<\/h2>\n\n\n\n

Water and electricity could be shut off, so you might not be\ninspecting every element, but as far as possible, the home will need to be\nexamined. If radiator heating, water, or both were shut off in the wintertime,\ndid pipes burst? Are there a lot of old trees that could pose dangers, or tree\nroots in the sewer line? Any past floods in evidence? Signs of infestations? How\nlong has it been since the HVAC system and the roof were installed? These are\nall serious repair items. A very good home inspector is needed to thoroughly\nexamine the interior, and an architect and engineer should be enlisted to go\nover the home\u2019s structural condition.<\/p>\n\n\n\n

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Some foreclosed homes are well maintained, and the bank may\nfix them up to meet local safety codes before selling them. Condos are usually\nin fairly good shape too. If there is a maintenance team onsite, at least the\nexterior should come to you in good condition. If you receive a condo without a\nwarranty, though, be sure all major systems are up to your local code: anything\nconnected to a gas line, the electrical systems and outlets, the heating and\nair conditioning units, and the plumbing.<\/p>\n\n\n\n

Especially if it has weathered drawn-out judicial proceedings, a foreclosed home could need a lot of work. In the worst cases, homes are stripped of their fixtures and the inspection can even uncover vandalism. (Sometimes, no inspection is needed to see the vandalism, as in this unfortunate instance<\/a>.) Serious damage found in the house could lead to a low\u00a0appraisal, make the title uninsurable, and sink your loan approval. \u00a0<\/p>\n\n\n\n

If you do make an offer on the house or condo, you can\nnegotiate the price based on the condition of the home, and should. With a\nwarranty or as-is, expect that each major repair you make will lead to another \u2014\nand some might need construction\npermits<\/a>. In other words, many foreclosures are much more resource-costly\nthan they seem at first glance. Granted, if your efforts result in a high-value\nhome, you can build strong equity in a relatively short time \u2014 although your\nproperty taxes will also rise. <\/p>\n\n\n\n

\u261b<\/strong> See more\ninformation from Deeds.com <\/em>about how to find hidden\ndefects and damage in a home<\/a>.<\/strong><\/p>\n\n\n\n

Government-Backed Mortgages Are Available for Buying Foreclosed Homes. <\/h2>\n\n\n\n

You can get a conventional mortgage to buy a bank-owned\nhome. Alternatively, for slightly higher interest rates, a government-backed\nmortgage could do the job. Here are some federal perks to know about:<\/p>\n\n\n\n