Your real estate client is interested in buying a house in foreclosure. Here’s how the foreclosure process typically works and the challenges of buying a foreclosed home. Finally, we will provide tips on making the transaction process go as smoothly as possible.
What are Foreclosure Properties?
A property goes into foreclosure through a series of steps that typically start when a homeowner defaults on their mortgage payments. Your homebuyer client must be informed about your state’s foreclosure process because there are more steps to go through when buying a foreclosed property. Here’s a quick overview.
1. The property owner misses payments.
Lenders usually allow a grace period for missed payments, but consistent missed payments trigger further action.
2. The mortgage company files a Notice of Default.
After several months of missed payments, the lender will file a Notice of Default with the county recorder’s office and send a copy to the borrower.
3. The mortgage company gives the borrower the opportunity to cure.
Before further action is taken, the mortgage company typically gives the homeowner a specific period of time to pay the outstanding payments, interest, and fees to bring the mortgage current. Sometimes, during this period, a borrower may negotiate a short sale with the lender, which means they sell the property to a third party for less than the outstanding mortgage balance.
4. The lender files a Notice of Sale.
The foreclosure process continues if the homeowner cannot pay their debt or negotiate a short sale. During the next step, the lender files a Notice of Sale and schedules a public auction. This notice is recorded with the county and posted on the property. This sale must be advertised in local newspapers or online.
5. A foreclosure auction takes place.
During the foreclosure auction, the property is sold to the highest bidder, which may be an individual or the lender itself, if there are no acceptable bids. If the property does not sell at auction, it becomes an REO (real estate owned) property. This means the lender may try to sell the property through traditional real estate channels.
It’s important to note that foreclosure laws and timelines vary by state. Some states have a redemption period allowing homeowners to reclaim their property even after the foreclosure sale by paying the total amount due.
Challenges of Buying a House in Foreclosure
Buying a house in foreclosure can come with unique challenges. Here’s what your client needs to know about the process.
1. Your client isn’t guaranteed a good deal when buying a foreclosed property.
Your client may think they’ll get a great deal on a foreclosed home – especially if the property is sold at auction. This isn’t always the case. Not all foreclosed homes are sold at auction. And, even if the property is auctioned off, the lender will often have a minimum bid.
There may be increased competition for foreclosure properties, especially since some investors target such properties for a fix and flip. Increased competition means prices may increase.
2. Some foreclosed homes are in bad condition.
Foreclosed homes are often neglected and may suffer from a lack of maintenance or intentional damage by former owners or vandals. If the owners are still in the house, it may be challenging to arrange an inspection. In addition, many foreclosed homes are sold “as is,” which means the seller will not make any repairs or offer a warranty.
3. Buying a foreclosed home can be a complex process.
Buying a bank-owned, foreclosed home can be a long and bureaucratic process. Negotiating with banks can be difficult as they often have strict policies and procedures, more red tape, and slower response times. In addition, some foreclosed properties also have liens or unpaid taxes that need to be cleared before purchase.
4. The value of foreclosed homes may be more volatile.
Multiple foreclosures in a neighborhood can lead to a decline in property values. Even if you can buy a foreclosed home at a reasonable price, similar sales in the neighborhood can reduce the overall property values in the area.
5. Not all lenders offer loans for foreclosed properties.
Since the condition of foreclosed homes is often bad or uncertain, some mortgage companies do not provide loans for foreclosed properties.
6. Buying a foreclosed home can be emotionally challenging.
Prepare your client for the complicated emotions that sometimes come with buying a foreclosed property – especially if the previous owners were evicted due to financial hardships.
Tips for Real Estate Agents to Negotiate on Foreclosure Properties
Are you representing a client who wants to purchase a foreclosed property? Here are some tips for the negotiation process.
1. Ensure your client understands the foreclosure process.
Prepare your client by explaining the potential challenges, including the extended timeline, that often come when buying a property from a bank.
2. Research the property thoroughly.
Besides completing a comparative market analysis (CMA) to determine the property’s fair market value, investigate the property’s history, including previous sales, tax liens, and any other financial encumbrances.
3. Prepare your client for competing against multiple offers.
Ensure your client understands that increased competition for the property means that they may be less likely to have an offer accepted if it includes too many contingencies.
4. Be professional and patient.
Some real estate agents specialize in foreclosure properties. If you are interested in this niche, make sure you are professional and patient with the selling agent, which may be a bank representative. Communicate clearly and be patient. You may find yourself working with these people on behalf of your clients for many years.
Related article: Top Real Estate Niches in 2024: What Real Estate Niche Should I Specialize In?
Learn more about real estate negotiations by reading Real Estate Negotiation Strategies for Buyers Agents. Of course, you can also become a better agent by taking your real estate coursework with Colibri Real Estate School. Colibri offers at-your-own-pace pre-licensing and continuing education courses. Also, we are proud to provide audio real estate courses for those who prefer to learn by listening to course content. Check out our student reviews! We are proud of them!
Key Takeaways: Buying a House in Foreclosure
- Real estate agents must educate their clients about the foreclosure process, which varies by state. Knowledge of state-specific laws is crucial.
- Agents should inform clients about the potential challenges of purchasing foreclosed homes. Managing client expectations is essential.
- Agents should prepare clients for negotiation by explaining the foreclosure process, conducting thorough property research, and being aware of competition. Professionalism and patience are essential when dealing with banks or representatives handling foreclosed properties.
