If you’re a real estate investor, your goal is to find cheaper homes so you can get some good profit when you make the sale. While homes are one of the most expensive investments, there are various ways to save on property purchases. Foreclosed homes tend to sell cheaper than other homes in the market.

But before you get attracted to the low prices of foreclosure properties, you must understand that there’s more to buying them than just the prices. Even though the buying process seems the same as that of other properties, there is a lot you need to understand about foreclosed homes.

What Is a Foreclosure Property?

A foreclosed home is a property that the bank has seized after the owner failed to pay their mortgage. A house listed as foreclosure property means that it belongs to the bank. The lender takes ownership of the property when the owner stops paying their loan.

Foreclosures happen when the homeowner is facing some financial crisis that prevents them from paying their mortgage. But before the lender repossesses a home, they have to issue several notices.

The foreclosure process takes several stages that you need to understand before making a purchase. Here are the stages:

Payment Default Notice

When a homeowner misses mortgage payments, the lender will consider this a default. The bank will send a notice of default after 90 days. They can give the homeowner some time to work on a better payment plan.

Notice of Trustee’s Sale

If the new payment plan doesn’t work, the lender will start the sales process of the house. They’ll give notice to the county and publish news on the sale in a local paper.

Take your time to find out more about the property at this stage before you prepare yourself to make a purchase.

Trustee’s Sale

The lender will start a public auction to sell the house. You can attend the auction and try your luck. Many home auctions only accept payments in cash, so you must prepare the money if you’re ready to purchase.

Other auctions allow mortgages, but you must also ensure you come with your preapproval. Make sure you have a verified approval to increase your chances of winning the auction.

Real Estate-Owned

If the property fails to sell at auction, the lender becomes the new owner of the home. At this stage, the home might also be called a REO property, meaning real estate-owned. They’ll then attempt to sell the property again.

At this stage, the bank would have evicted the previous owner and cleared the title. You must also know that some banks don’t sell homes to an individual. Talk to a real estate agent to help you with the purchase process.

Why Buy Foreclosure Properties

There are many reasons why you should buy a foreclosure property as a real estate investor.

So, what makes these homes such a good deal? Here are the benefits.

Low Prices

One obvious benefit that home buyers get when they go for foreclosed homes is the low prices. Foreclosed properties tend to cost less than other houses in the market.  The lenders only price the homes to get a small profit or get their money back.

Easy Title Clearance

Foreclosed homes have fewer title issues because the bank clears all the necessary documentation. You have higher chances of getting a clean title, making you a legal owner of the property sooner. This is a vital part of property buying for an investor.

Loan Configurations

Buying a foreclosed house still gives you some good loan options, unless it’s a cash-only auction. You can apply for a conventional loan from any lender. You can also consider various government-backed loans such as USDA, VA, and FHA loans.

Risks of Buying Foreclosure Properties

While the benefits above are mouthwatering, you should not rush into it before understanding the risks. Here are the drawbacks of buying foreclosed homes.

Property Issues

Foreclosure properties are ‘sold as they are’; hence, one reason for the low pricing. Sometimes the conditions of the house you intend to buy can be pretty bad. Some people fail to keep up with regular maintenance of the property, and the bank will not do any major repairs after repossessing it.

So, when buying a foreclosed property, don’t be too excited about the low price before considering the repairs you’re going to make. You might even get a house that the previous owner vandalized as they take out their frustrations.

A Period of Redemption

Not all homes listed for foreclosure are usually repossessed. Homeowners can negotiate with their lenders to give them a redemption period as they put their finances together. When they catch up with their bills, the bank will give them back the property.

Some states give homeowners up to 12 months redemption period. You have to cross your fingers for this period if you’re interested in the property.

Slow Buying Process

The foreclosing process takes a lot of paperwork which can take a lot of time to process. If it’s a short sale situation, the lender must approve the sale. Damages in the house can also slow the home appraisal process delaying the mortgage process for the buyer.

High Competition

Because foreclosed homes are relatively cheaper than others in the market, there are many investors eying them. As soon as the banks put these properties on sale, they receive multiple offers that can result in a bidding war. Consider placing bids in different properties to increase your chances of securing one.

Should You Buy Foreclosed Properties?

Buying foreclosure properties comes with great benefits, but there are also pitfalls that you must understand. You can acquire a perfect house at a low price, but at times you might have to deal with costly repairs. As a real estate investor, you have to do everything possible to make sure you don’t run into losses.

We understand that buying a home is a big investment, and that’s why we’re here to help. Go through the rest of this blog for tips to finding a home, working with realtors, among other things.