How to Buy a Foreclosed Home: The Ultimate Step-by-Step Guide

Key takeaways

• Homes that are foreclosed are repossessed by lenders and sold through a real estate owned (REO) sale.
• Someone may want to buy a foreclosed home for reasons such as lower prices, investment potential, or less competition.
• Foreclosed homes are not always for everyone as they are often sold in “as-is” condition.

Buying a foreclosed home can be a unique opportunity which can potentially offer a property at a lower price than traditional listings. If you’re wondering how to buy a foreclosed home, this Redfin Real Estate article will walk you through the process and help you understand the steps involved and what to expect. 

However, buying a foreclosed home isn’t going to be the right fit for everyone. Be sure to carefully weigh the pros and cons before deciding between buying a foreclosed home vs a traditionally listed property. Now, let’s get started.

What is foreclosure?

Following preforeclosure is foreclosure, which occurs when a lender repossesses property after the homeowner failed to make mortgage payments as agreed. This repossession process, known as foreclosure, allows the lender to sell the property to recover the outstanding loan amount. These homes can be sold at auction, through a real estate owned (REO) sale, or even as short sales.

Buying in a typical real estate transaction vs foreclosure

The process of buying a foreclosed home differs in several key ways from a typical real estate transaction. In a traditional sale, you negotiate with the homeowner, and inspections and appraisals are standard. 

With a foreclosure, you’re dealing with the lender, and the property is often sold “as-is,” meaning the seller will not make repairs. This “as-is” condition means less room for negotiation on repairs, and buyers often have limited opportunities for thorough inspections before purchase, particularly in auction scenarios.

Why buy a foreclosed home?

There are several compelling reasons why a foreclosed home might appeal to a buyer.

1. Potential for a lower price: Foreclosed homes are often sold below market value, presenting a significant savings opportunity. Lenders are typically motivated to sell quickly to recoup their losses.
2. Investment potential: For investors, a foreclosed property can be an excellent opportunity for a flip or a rental property, especially if purchased at a good price and renovated wisely.
3. Less competition (sometimes): While popular, foreclosed homes can sometimes have less competition than traditional listings, especially those requiring significant repairs.
4. Unique inventory: Foreclosures can offer access to properties that might not otherwise be on the market, or in areas where inventory is low.
5. Opportunity to build equity: By purchasing at a lower price and investing in necessary renovations, buyers can quickly build equity in the property.

How to buy a foreclosed home

The process of buying a foreclosed home involves several distinct steps. Understanding these will help you navigate the complexities effectively.

1. Consult your Redfin real estate agent: A real estate agent experienced in foreclosures is invaluable. They can help you identify suitable properties, understand the specific procedures for different types of foreclosures (e.g., auctions vs. REO), and assist with bidding or negotiating.
2. Prepare your finances (preapproval or cash offer): Lenders want to see that you are a serious and capable buyer. Having a pre-approval for a mortgage or, even better, the ability to make a cash offer, will strengthen your position. Foreclosures often require quick closings, making strong financial backing essential.
3. Assess comps to determine your offer price: Before making an offer, research comparable sales (comps) in the area. This will help you determine a fair market value for the property and avoid overpaying, especially considering any necessary repairs.
4. Understand that a foreclosure is going to be purchased in “as-is” condition: This is a critical point. “As-is” means the seller will not make any repairs, even if major issues are discovered. You are buying the home exactly as it is, so budgeting for potential renovations and unforeseen problems is vital. A thorough inspection, if permitted, is highly recommended.

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Pros and cons of buying a foreclosed home

If you’re considering buying bank-foreclosed properties, be sure you understand the benefits and drawbacks. Let’s take a look at them.

Pros of buying a foreclosure

1. Lower prices: Foreclosed homes are almost always less expensive than other homes for sale. These savings can be substantial if the home is listed below market value.
2. Loan options: Contrary to popular belief, you can get a conventional loan when buying a foreclosure. Alongside options like 203(k) loans, HomePath ReadyBuyer, and Home Steps, there are plenty of financing options available for potential buyers. 
3. Long-term value: If the foreclosure is priced below market value and you’re able to make good repairs on the home, your home’s value may increase. By the time you’re ready to sell, your home’s worth may be more than when you bought it. 

Cons of buying a foreclosure

1. As-is condition: Most foreclosed homes are sold as-is, so there were no repairs or updates made to the home. Therefore, you’ll need to budget for more repairs than you would buying a non-foreclosed home.
2. Increased repairs and maintenance: Some foreclosures have been left in disrepair meaning you may face additional repairs and maintenance. In some cases, there may be structural or electrical problems that require expensive repairs. 
3. Complex process and competition: Buying a foreclosed home can be a complicated process from finding a home, getting preapproved, and waiting for the bank to approve the offer. Additionally, real estate investors often buy up foreclosed homes with cash, making the process competitive. However, a trusted real estate agent can help you navigate the process. 

Get ready to take on your foreclosed purchase

Buying a foreclosed home requires careful consideration and preparation, but it can be a rewarding experience. By understanding the unique aspects of these transactions, preparing your finances, and working with an experienced real estate agent, you can confidently navigate the process. Remember to account for potential repairs and be prepared for the “as-is” nature of these sales.

FAQs about foreclosed properties

Q: Why are houses foreclosed?

A: Houses are foreclosed when homeowners fail to make several mortgage payments. Usually, this occurs due to job loss, serious conditions that prevent employment, serious home maintenance issues that homeowners can’t afford to divorce, or other types of debt. Foreclosure can negatively impact a homeowners credit score, so it’s often a last resort. 

Q: How does foreclosure work?

A: Foreclosure is a slow process – homes aren’t foreclosed after one or two missed mortgage payments. In general, banks are willing to work with their clients on a short-term basis. However, if sellers fail to make a payment for 90 to 120 days, depending on the lender and state law, a lender can move forward with foreclosure. Lenders will generally take less serious steps, like demand letters, before going to these lengths. However, if any of these attempts to solicit payment go unnoticed, foreclosure is virtually unavoidable. When a foreclosure notice is filed, the court process begins. This process can vary from state to state, so understanding procedures based on residence is important for homeowners struggling to make payments. Foreclosure can take a year or more in simple cases, or as many as three or four years in more complex cases. 

Q: What’s the process for buying a home at auction?

On the day of the auction, come prepared with the money you plan to spend on a home. Most auctions require payment in full via cash, cashier’s check, or money order. If you win, you’ll be required to pay this amount in full. Some states allow cash to change hands the next day, in order to receive a certificate of sale. The certificate of title may take up to 10 days. Be aware that if the home’s owner files an objection and is not able to pay the amount owed in full, the property transfer will not go through. Don’t begin renovations or the moving process until you have a title in hand.

A: Can you buy a foreclosure with an FHA loan?

FHA loans, backed by the Federal Housing Administration, are government loans that are intended for lower-income borrowers and come with a lower down payment amount and reduced interest rate. While not necessarily common, it’s possible to use an FHA loan to purchase a foreclosure property.

As long as a foreclosed property meets the FHA guidelines as they pertain to value, habitability, and safety standards, your loan may be approved. A foreclosed property that meets FHA standards will likely be in better condition than other foreclosures. This will be determined by a fee appraisal prior to loan approval.