Many people who were approved for a mortgage during the subprime-lending period, which occurred mostly between 1997 and 2006, began to default on their loans in record numbers beginning in 2006 and 2007. The glut of foreclosures on the market can be a good opportunity for home buyers. To buy a foreclosed property before it goes to the sheriff auction, you would buy during the pre-foreclosure stage.
Pre-Foreclosure or Short Sale
Pre-foreclosure occurs after the homeowner has missed several mortgage payments, and the lender files a public notice. Buying during this stage is a little tricky because the homeowner can still pay the lender what he owes to reinstate the mortgage. You would contact the homeowner directly or through a real estate agent during pre-foreclosure with an offer to buy the house. A short sale is another type of transaction that occurs when the bank allows the homeowner to sell the house for less than what he owes to avoid foreclosure.
Find a Real Estate Agent
Banks typically hire a real estate agent to handle their foreclosed properties, Memphis, Tennessee-based real estate investor Elaine Zimmerman told Bankrate.com. Find one by looking through foreclosures at real estate websites. Your goal should be to find a real estate broker, not a property. Once you develop a relationship with an agent who specializes in foreclosed properties, you might learn about the newest properties that have not yet been listed, which could reduce your competition in buying the property. Call the agent and tell her you are interested in buying a foreclosed property.
Know the Comps
Identify the prices that other homes have sold for within the past 90 days in the area in which you wish to buy a pre-foreclosure. This is especially important in high foreclosure areas where prices are likely to decline until the market hits bottom. Short sales traditionally were priced low, but this caused lengthy delays for the banks to approve the sale. As of 2012, short sale homes are priced higher to shorten the wait time. Therefore, you need to know the home’s value so you won’t overpay. Foreclosed homes are the same way. Banks sometimes price them low, but sometimes they price them too high, according to Zimmerman. Also, check to determine whether there are any liens on the property by contacting a title insurance company.
Show that you are serious and can act immediately to buy a home by obtaining pre-approval from a lender. Lenders pre-approve a certain loan amount by looking at your credit score, your income and your expenses. If you wait to find the house and then arrange financing, you might miss the deal. Foreclosures tend to sell quickly. Buying a foreclosure is unlike buying a car, where dealer financing is common. Providing financing for the sale of a house and selling a foreclosed property are two separate transactions. You are better off shopping for the best mortgage deal available and then approaching the lender that is selling the property.
- RealtyTrac: How to Buy Foreclosures
- Bankrate.com: 5 Tips for Buying a Foreclosed Home
- Newsday: The New Rules of Pricing Your Home for Sale
- MarketWatch: Harder for Non-Investors to Buy Foreclosures
- Realtor.com: How Do I Buy A House Before It Heads to a Foreclosure Auction?
- CCH Mortgage Compliance Guide and Bank Digest: The Subprime Lending Crisis: Causes and Effects of the Mortgage Meltdown
- George Doyle/Stockbyte/Getty Images