If you’re considering this type of home purchase, here’s our expert-backed explainer on what is a short sale home, what are the potential pros and cons of buying one, and how to find short sale home listings in your area.

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What is a short sale?

A short sale happens when a homeowner needs to sell their house but owes more on it than it’s currently worth. This often occurs when someone buys at the peak of the market, and then the market declines.

The Great Recession of 2007 is a prime example of this scenario, and it created plenty of short sales. “People had done 100% financing on their homes,” says Jessica Wallace, a top-selling agent based in Santa Cruz, California, so they had zero equity when “the market dropped 10%.”

More recently, the third quarter of 2024 saw home equity gains drop from 8% to 2.5%, according to CoreLogic. This was driven by real estate price changes and natural disaster events. Additionally, the number of homes with negative equity increased by 1.8% from the previous quarter, which may increase the potential for short sales in the market.

Why might a homeowner opt for a short sale? One common reason is if they’ve taken on too much debt through home equity loans or lines of credit.

For a short sale to proceed, the homeowner must persuade their lender to accept less than the home’s current market value, essentially “coming up short” on the sale. Lenders might agree to this because it’s often more cost-effective than going through the foreclosure process, especially if the homeowner can no longer afford to make payments and the property’s value has declined.

You very likely can shave some cost off the final price when you buy a home at auction, but just how much that home will cost — or what level of discount you can score — will depend on a number of factors. You definitely don’t want to overpay, especially considering you might need to pour a lot of money into repairs and other problems once the home is yours.

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To help you calculate how much a foreclosed home might sell for at auction, we talked to expert real estate agents with years of experience in the field of foreclosures.

How much do foreclosed homes sell for at auction?

Appraised value

One important factor in determining how much a house will go for at a foreclosure auction is its appraised value, the professional estimate of its worth in the current market.

The lender trying to collect on the defaulted mortgage will order an appraisal on the home to determine its worth. They’ll then use that value as a starting point when conducting the auction.

An appraisal typically takes into account a home’s size, condition, features, and property. The appraiser will compare the home to others around it, taking into account recent sales prices for other homes with similar features.

These comparable homes or comps can give you a good idea of what similar homes in the area might be worth. But, as we’ll discuss below, the home’s current condition might set it apart from other comparable homes in the area, dragging its value down until it’s been renovated or repaired.

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Lauren Rosin, a real estate agent in Arizona who works with investors looking for deals, advises buyers looking for cheap houses, “Partner yourself with someone who’s in the market, not someone stuck on the multiple listing service (MLS).

“Most of my investments are off-market, and by the time they hit the MLS, they get bid up,” she adds.

If you’re trying to figure out how to find cheap houses to buy, take a look at some of our tips and use them to form a house-hunting strategy.

Find a Top Agent For Your REO Home Purchase

If you’re in the market for a real estate-owned home, the process can be a little different from a traditional real estate transaction. Work with an agent who specializes in REO sales.

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To find the best place to find REO homes, we did a lot of digging, looked at banks, the U.S. Marshals, auction sites, and government-sponsored enterprises, and talked with Chris Barnett, a real estate agent in Birmingham, Alabama, who specializes in REO properties. We have compiled this list of the best ways to find REO homes in any area.

What is an REO home?

Real estate-owned, or REO, homes result from the foreclosure process, which varies from state to state. If a homeowner is unable to make their mortgage payments, the bank can ultimately foreclose on the home.

Once the home is foreclosed, it will typically go up for auction. This happens in one of two ways: through the local court or sheriff’s office in a judicial foreclosure, or through the mortgage company in a power of sale or non-judicial foreclosure. If the home doesn’t sell at this stage, then the bank will take possession of it, and it becomes an REO home.

The bank will then work with a listing agent to list the home on the multiple listing service (MLS). These types of homes can be a great way to invest in real estate, offering a good deal and a higher return on investment (ROI).

The latest ATTOM report reveals that over 36,000 properties completed foreclosures in 2024, a 13% decrease from 2023 and a 75% decline from 2019. California, Illinois, Pennsylvania, Michigan, and Texas had the highest number of REOs.

Now that you know what a REO home is, let’s answer the pressing question: how to find REO homes in my area?

In this article, we break down the short sale process and share expert tips for crafting a competitive offer that will be accepted.

Step one: Talk to a few buyer's agents!

Tell us a little bit about your plans (where you’re looking to buy and when you want to make a purchase) and we’ll connect you with top-rated buyer’s agents in your area. It takes only a few minutes, and it’s free.

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What’s a short sale?

A short sale is when a homeowner and their lender agree to sell the home for less than what’s owed on the mortgage loan. Short sales are unique because they require the approval of the seller’s lender.

The bank or mortgage company is the linchpin of a short sale. This comes with some unusual challenges, the biggest one being that the lender has to agree to sell the home for less than what’s still owed on the mortgage.

Just like in a normal home sale, the buyer and the seller are united in their goal of closing the deal. A short sale tends to be a much better alternative than a foreclosure — something that the bank, and everyone else, for that matter, wants to avoid.

That said, the short sale lender will have to approve the offer price. The buyer really just has one chance to submit an offer that will pass the bank’s standards for approval. This is why it’s important to craft a strong, competitive offer that aligns with the lender’s expectations.

Learn how to prepare a winning short sale offer that will land you in your next home.

These auctions bring the opportunity to buy properties quickly at potentially low prices. While investors are known to attend and bid at foreclosure auctions, you can do it, too.

The key is to know where to look and understand the dynamics of the process.

But how do foreclosure auctions work?

Teaming up with an experienced agent on foreclosure properties and auctions, we’ll answer this question and more — to prepare you for what to expect at a foreclosure auction.

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What is a foreclosure auction?

John Durham is a successful real estate agent in McDonough, Georgia, and has purchased homes at auction for the majority of his career as a real estate agent.

“I’ve been in business for 24 years, and [auctions] have always been extremely popular,” says Durham.

The purpose of the foreclosure auction is to recoup money for missed mortgage payments or tax liens. To help collect this money, the home is listed at a foreclosure auction where it’s bid on and (ideally) won.

Are there risks associated with buying a house at auction?

Buying a home at a foreclosure auction comes with potential pitfalls, including hidden liens, unpaid property taxes, structural damage, and eviction issues with previous occupants. Unlike traditional home purchases, auction properties are typically sold as-is, meaning buyers don’t get the chance to inspect the home beforehand. Understanding these risks can help you make informed decisions and avoid costly surprises.

Where can you find foreclosure auctions?

Before bidding at a foreclosure auction, thorough research is essential to avoid financial or legal headaches. Buyers should check public records for outstanding liens, conduct a title search to confirm ownership history, and visit the property (if possible) to assess its condition. Consulting a real estate attorney or working with an experienced agent can also help uncover any red flags before committing to a purchase.

With the popularity of foreclosure auctions, you can find them in numerous places. Foreclosures are put up for auction both online and at live, in-person auction events.

Local newspapers can list upcoming foreclosures.

“In small towns, they have their own newspaper. That’s where people would put legal things like foreclosures.”

Durham says that in Georgia, foreclosures must be advertised for four weeks leading up to the sale. “If they miss one [advertisement], they have to start over the next month,” explains Durham.

You can also find foreclosure auctions on websites such as foreclosure.com or city and county public records. An experienced real estate agent can also help you find upcoming foreclosure auctions.

No homeowner wants to go through a foreclosure. If a homeowner falls behind on their mortgage payments, a short sale is one potential way of correcting course. It’s certainly not an ideal situation, but it can have fewer repercussions for the homeowner-turned-seller, and from a buyer’s perspective, it can be a great deal if you’re willing to wait for it.

That being said, the home purchase process is a lot more complicated and drawn out with a short sale because it all hinges on the oversight and approval of a third party: the mortgage lender. Short sales operate according to the lender’s approval, requirements, and timeline. These properties are typically sold as-is, without the option to negotiate repairs, and as the buyer, you’re unlikely to get the seller and their lender to agree to cover your closing costs.

Whether the lender agrees to pay some, all, or none of the closing costs depends on their bottom line and what you are bringing to the table as the buyer. If you’re interested in a short sale opportunity, get a better idea of what you’re in for and what closing costs you can get covered.

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Short sales 101: How does it work?

Let’s start with the basics: What even is a short sale?

A short sale happens when a homeowner owes more on a house than the house is currently worth … but they still need to sell the house. So in a short sale, the homeowner’s mortgage lender agrees to settle the mortgage loan for less than what the seller still owes on the house.

Sellers could owe more on the house than the home is worth due to decreases in home values, overextending the home’s equity, or other financial or economic hardships.

To be more specific, a homeowner could owe more at the time of sale than what the house is actually worth because there was a drop in housing market prices, or because the owner purchased at a high point in the housing market with an adjustable-rate mortgage (ARM), which raised the mortgage loan interest to an unaffordable amount.

The benefits of a short sale (for buyers)

There are some solid advantages to buying a short sale home, depending on your situation. For one, the buyer usually pays the true fair-market value of the home at that time and not an inflated price (which may have led to the short sale in the first place). Furthermore, the price could be listed below market value in an effort to attract offers, presenting a potentially great deal for buyers.

Other short sale benefits for buyers might include:

• The offer price will be locked in, even if there is a long approval process.
• The lender handling the short sale may also agree to finance the buyer, cutting out the mortgage lender search.
• Short sale homes are often in better condition than foreclosures because the owners are still living in and maintaining the home.
• There is less competition for short-sale homes because the homebuying process tends to be longer and more complex.

Though short sales aren’t as prevalent today as they were following the Great Recession, they’re not impossible to find, and buyers can still find good deals. To navigate the short sale process, you’ll need an experienced real estate agent and lots of patience.

Together with top agents Laura Sanders of Coral Springs, Florida, and Bob Wisdom of Elgin, Illinois, we’re exploring the question of how long a short sale takes, particularly the time needed for each step in the process, helping you understand important considerations along the way.

What exactly is a short sale?

A short sale happens when a homeowner has fallen behind on their mortgage payments and is approaching foreclosure. In a short sale, the homeowner owes more on the mortgage than the house is currently worth, and the bank has agreed to accept a lower price to satisfy the debt.

A short sale can help a seller avoid foreclosure, and — more importantly — short sales can offer real relief to a struggling homeowner.

These sales take time because the bank is an active third party in the process. It isn’t just a matter of buyers and sellers coming to an agreement with the help of their respective agents. The bank has to approve the price and conditions of the sale.

This means that the seller needs to prove adequate hardship to justify a short sale, while a buyer needs to be qualified to make the purchase and remain flexible on the terms of the deal.

Short sales are usually as-is sales, so inspections will generally be for your own reference rather than a tool for negotiating. And because there’s so much paperwork involved, and banks can take weeks (sometimes months) to process files, it’s essential that both sides stay vigilant with follow-ups.

The photos show a home that looks like it’s in good shape, and the price is neither suspiciously low nor alarmingly high. So what’s the deal? What does preforeclosure even mean?

Before you rush into (or out of) anything, let’s slow down and take a look at what you need to know about buying a home in preforeclosure. With the help of top agent and San Francisco Bay Area real estate expert Rick Fuller, we’ll cover nine important tips for shopping for and purchasing a preforeclosed home.

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1. Understand what preforeclosure means

As the term implies, the home in question is approaching foreclosure. The homeowner is behind on mortgage payments, and while they do still have an opportunity to catch up before the bank seizes the property, an official notice of default has been issued.

Because notices of default are public documents recorded with the county, this information is now public. “It doesn’t tell you by how many payments; it just means that there’s an official notice that this homeowner, this borrower, is in default,” says Fuller.

2. Know the difference between preforeclosure and short sale

At first glance, there may seem to be parallels between a home in preforeclosure and a short sale property, but the two are very different.

“The nature of a short sale is that the homeowner owes more than what the home is worth. We might also say that they’re ‘underwater,’” explains Fuller.

To avoid this deficit, short sale homes involve negotiating with the mortgage company to sell the property for less than what is owed. The seller can then typically walk away from the closing table without owing anything further.

Meanwhile, homes in preforeclosure generally have enough value to cover the outstanding mortgage.

“A preforeclosure doesn’t mean that the seller doesn’t have any equity; it simply means they are heading toward a foreclosure,” notes Fuller.

Read on for details about the different stages of the foreclosure process (including the possibility of snagging a great deal during the pre-foreclosure stage, or after a home has failed at auction), how to find local foreclosure auctions, and what to do so that you’re prepared when you attend.

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The stages of foreclosure

Foreclosure isn’t just an end state for a property; it’s a process with a few different points at which it might make sense for you to jump in as a buyer.

Pre-foreclosure

The owner is in default and unable to catch up on their mortgage payments, but the property is not yet up for auction.

Homeowners typically must be at least three months delinquent in order for the lender to send a notice of default, starting the pre-foreclosure timeline. This notice of default is often made public record.

The pre-foreclosure period can last 3 to 10 months. At any point during this period, the owner can pay off the debt and stop the foreclosure process. The owner may also opt to sell the house, possibly as a short sale with bank or lender approval.

Buying a pre-foreclosure can be beneficial to all parties involved. The homeowner who is delinquent on payments is able to get out of debt and avoid damage to their credit history. The lender avoids the lengthy and costly process of foreclosure. And the buyer has the opportunity to get a very good deal on the price.

Pre-foreclosures are not always easy to find, however. Your county recorder may post notices of default…or they may not. And a pre-foreclosure might come with some unexpected expenses, too: you may be responsible for unpaid taxes, property liens,  repairs, and renovations.

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The truth is that buying a home at auction is different from buying one the conventional way. And one of the biggest differences is that auction sales are almost always for cash.

However, there are ways you can acquire a home at auction, even if you don’t have the entire amount in your savings account. Here are seven ways to buy a home at auction without cash.

Step one: Talk to a few buyer's agents!

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How do short sales work?

First, it is important to understand the distinction between a short sale and a foreclosure property, so you know exactly what you’re getting into.

A short sale is initiated by the seller to unload their property before foreclosure, helping prevent an enormous foreclosure-related blow to their credit. A foreclosure is initiated by the lender, who repossesses a home when the property owner can no longer make payments.

Since short sales are complex deals with multiple parties, lenders typically only approve short sales when foreclosure is unavoidable. However, short sales do present some advantages for lenders. A short sale is an opportunity for a lender to recover more of their investment than a foreclosure and they do not bear the responsibility of repossession and maintenance of the home until it sells.

In this guide, we’ll share some of the best websites for foreclosures, including free, paid, and government resources. We’ll also provide essential tips and insights to help you make informed decisions on your path to finding a foreclosed home.

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What are foreclosure websites?

Foreclosure websites are online platforms that list properties in various stages of foreclosure. These websites compile data from banks, government agencies, and real estate services to provide comprehensive listings of homes that are being sold due to the owner’s inability to meet mortgage obligations.

By using foreclosure websites, potential homebuyers and investors can find properties often priced below market value. These sites typically offer detailed information about each property, including price, location, photos, and contact details for the seller or the agency handling the sale.

Some websites provide additional services such as market analysis tools, alerts for new listings, and educational resources to help users navigate the foreclosure buying process.

Free websites for foreclosure listings

Zillow foreclosures

Zillow offers a comprehensive search tool for finding foreclosed homes across the country. With an easy-to-use interface, you can filter your search by price, location, and property type. Zillow provides detailed listings, including photos, estimated mortgage payments, Zestimate, and neighborhood information. Additionally, you can set up alerts to notify you of new foreclosure listings in your desired area. Learn more on the Zillow Foreclosure Center page.

Realtor.com foreclosures

Realtor.com foreclosures is another valuable resource for finding foreclosed homes. This site, owned by the National Association of Realtors, aggregates listings from multiple sources, including the Multiple Listing Service (MLS). This helps ensure accuracy and a broad selection of properties. The user-friendly platform allows you to refine your search with various criteria, such as price range and property features. Each listing includes essential details like photos, descriptions, and contact information for agents or banks handling the sale.

Equator.com

Equator.com offers a comprehensive free website for finding foreclosed homes, short sales, and open market listings posted on the Hubzu auctions platform. The site is popular with real estate professionals and investors. With a user-friendly interface, you can search for properties by location, price, property type, and as determined by your investment goals. Additionally, Equator offers a buyer program tool to help determine investment potential and tools investors can use after the purchase to rehab, manage, and sell properties. It should be noted that not all listings on Equator’s website are foreclosures.

Bank of America foreclosures

Bank of America maintains a site with real estate-owned (REO) and bank-owned home listings. Inventory on the BofA site is limited. It currently shows home listings in only 12 states. However, as a major financial institution with vast resources, Bank of America offers helpful tools, resources, and mortgage products to assist buyers looking for a foreclosure property. Each listing includes comprehensive details such as photos, property descriptions, and contact information for the bank’s real estate agents.

Paid websites for foreclosure listings

Foreclosure.com

Foreclosure.com offers a free preview trial followed by a weekly subscription fee. This service targets investor buyers looking for the best house-flip deals. The site hosts a vast database of foreclosure listings nationwide. This site features a user-friendly interactive map search tool. You can search by location, property type, and auction date. You can also subscribe to receive email alerts. Foreclosure.com also offers educational resources in its Learning Center to help you understand the foreclosure buying process and make informed decisions.

RealtyTrac.com

RealtyTrac provides a premium service offering extensive foreclosure listings and market data. With a subscription, you gain full access to detailed property information about foreclosures, preforeclosures, bank-owned homes, MLS listings, distressed properties, auctions, and short sales. With a subscription, you’ll have access to the property owner’s contact details, auction dates, and estimated market values. RealtyTrac also provides tools for analyzing trends in the foreclosure market, helping you identify the best investment opportunities. While there is a free trial offer, this service is most fitting for active investors willing to pay a monthly subscription fee.

Auction.com

Auction.com bills itself as the “largest online source of foreclosure and bank-owned properties not on the MLS.” It is a leading platform for investors buying foreclosed homes through online auctions. The platform offers innovative technologies like its Remote Bid, which allows buyers to bid and win foreclosure properties using a mobile phone app. Each listing on the site provides detailed information, including starting bid prices. Auction.com also offers resources to help you understand the auction process, including bidding guidelines, financing options, and market insights. With real-time updates and alerts, you can stay informed about upcoming auctions and new listings that match your criteria.

Government websites for foreclosure listings

HUD Homestore

HUD Homestore is the official site for listings of government-owned properties, including those managed by the U.S. Department of Housing and Urban Development (HUD). These homes are typically properties that were financed with an FHA loan and have now been repossessed. Homes are often available at significant discounts and may qualify for special financing or closing cost assistance programs. The site provides detailed property information, photos, and instructions for submitting offers. The HUD Homestore offers 30-day priority access for buyers looking for a primary residence.

HomePath by Fannie Mae

HomePath is operated by the Federal National Mortgage Association, also known as Fannie Mae. The site offers an extensive number of listings of properties owned by Fannie Mae. These homes are typically foreclosed and available at competitive prices. HomePath provides detailed listings, including photos, descriptions, and information about financing options. The site also features a 30-day “First Look” period for buyers who plan to use the home as a primary residence. This initiative gives eligible buyers an exclusive opportunity to purchase properties before investors.

Homesteps by Freddie Mac

Homesteps is a resource for finding homes owned by Freddie Mac that have been acquired through foreclosure. The site offers a limited selection of properties, so you may need to be flexible about location, and patient in your search. Like HUD’s Homestore and Fannie Mae’s HomePath, Homesteps also offers a 30-day First Look priority access period for buyers looking for a primary residence. The site allows you to register for a free HomeSteps home search account so you can save your home searches and receive weekly email notifications about new homes that match your search criteria.

USDA foreclosures

The USDA foreclosures website lists properties owned by the United States Department of Agriculture. We almost left this one off our list of “best foreclosure” websites because it only has a small number of property listings. However, you may find something in your price range if you’re flexible about locations. The site’s interface is also not as flashy as the others on our list, but you can search for homes that are often located in rural areas and may qualify for special USDA financing.

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Step 1: Be clear on why you want to buy a foreclosure

Generally, lenders will take much less than top dollar for a foreclosure, which is good news for anyone looking to score a deal on real estate. But although you might pay less than you would on the open market, closing a sale on a foreclosure can take a long time, and properties may be sold as-is, without a seller’s disclosure. So there’s no guarantee on the home’s condition, especially if it has been vacant for some time. It’s not uncommon to get stuck with major repairs.

Even so, maybe this home makes sense as an investment because it has attributes that are hard to come by or it’s in that perfect neighborhood near good schools and sought-after amenities. But if you’re not an experienced investor who has a background in fixing up homes to flip or rent, buying a foreclosure might not be a strategy you want to tackle on your own immediately. There are a lot of other ways to invest in real estate.

Step 2: Understand the different types of foreclosures

Before you get started down the road toward buying a foreclosure, it’s good to know the different types of sales you might encounter.

Preforeclosure

A preforeclosure means the homeowner has stopped making payments or fallen behind on their mortgage payments. It is the first step (but a very serious step) in the foreclosure process.  A short sale is a type of preforeclosure; when a homeowner stops making payments on their mortgage and owes more on the home than the house is worth in the current market, then they will need to sell the house for less than they owe, and the lender will be “short” on the amount of money they accept in the sale.

However, unless homeowners can come current on their mortgage or negotiate a loan modification, they will lose their home. Depending on the state where the property is located, mortgage preforeclosures can range from a few weeks to a year or more.

Mary Stewart, a top real estate agent in Sugar Land, Texas, says that if the owners can prove there’s no way they can make a payment, the property can go to preforeclosure. “But it takes literally months. I mean, it takes probably, at the minimum, three to four months to get a short sale through.”

Foreclosure

A foreclosure means the house has been repossessed by the lender and is typically being put up for auction. A home isn’t considered repossessed until a foreclosure becomes final. However, if the homeowner manages to catch up on any missed payments before the final deadline, selling a house in foreclosure could be voided.

If the home does make it to auction, you probably won’t be able to get an inspection of the inside of a property before bidding, as sales of foreclosure properties are often sold as-is. Some auctions do allow interior inspections, so stick with those auctions if you fear buying a dilapidated and rundown property.

Stewart says that foreclosures may not take long to turn over if the mortgage company has already listed the property with an agent. “But it’s important to know the potential buyers may have a whole lot of work ahead of them because the homeowners likely didn’t have the funds to keep the property in good shape for the past several years.”

Real-estate owned (REO) homes

A real estate-owned (REO) home has been put up for sale at a foreclosure auction — but it didn’t sell. Now, the bank or another lender owns it and has listed it on the open market.

Lenders may prepare the property for sale and determine a listing price, which typically will be based on current market values, so don’t expect a tremendous deal. Although sold as-is, you can typically still get an inspection.

But it would be a mistake to think you’re automatically getting a deal with a short sale. Rick Ruiz is an agent in Las Vegas, Nevada, who works with 70% more single-family homes than the average agent in his area. He points out that the bank isn’t likely to sell the property for less than market value. “The loss mitigation department is going to make sure that the bank is not leaving any money on the table since they’re already taking a loss.”

For buyers, it makes the most sense to consider a short sale if homes rarely become available in a neighborhood you’re dying to live in, if the home has features you haven’t found elsewhere, or if you’re an investor and the property makes sense for your portfolio — and you can wait to close in every scenario.

Short sales fall into the category of “distressed” sales. Buying one won’t be a walk in the park, even if the home is next door to one. Could they be a good fit for you? Here’s when it’s good to buy a short sale house.

First: What’s a short sale?

A short sale is when the owner of the house is underwater on their mortgage, and the lender agrees to let them sell the home for less than what’s owed.

For example, the home’s current market value could be $230,000 but the homeowners owe $265,000. They want to sell the house, but the sale won’t generate enough to pay off the mortgage.

This means they’re “short” the funds to clear the debt. The homeowners’ mortgage lender will have to agree to accept less than they’re owed.

When is it good to buy a short sale?

Trying to decide if you’re the right person, in the right situation, to buy a short sale? Ask yourself these questions and evaluate the pros and cons.

Do you have a lot of patience?

These sales can take a long time because the bank is involved. After a short sale seller receives an offer that they’d like to accept, they have to take it to the bank. The bank could send the offer through several layers of bureaucracy before either approving or rejecting the short sale.

Ruiz thinks that most traditional buyers don’t fit the short sale market well “because they don’t want to wait for months to get an answer. They want to get a counter-offer in 48 hours and not wait.”

Can you find a short sale?

It’s not easy to find a short sale, especially if you live in a hot seller’s market. They aren’t exactly thick on the ground.

Being underwater on a mortgage isn’t enough for many sellers to get bank approval to list as a short sale. Often, they must meet other requirements (such as documented financial hardship).

Do you have a place to live now?

These aren’t good deals if you’re in a hurry to move in quickly.

Lease ending on your apartment and don’t want to renew? See if you can go month to month, because a short sale could take several months to close. If you need a place to live soon, a short sale likely isn’t a good fit.

And the deals often fall through — even in 2009, at the height of the housing collapse, only 23% of short sale offers actually closed. If you’d be left without housing if the deal fell through, consider looking for a conventional home purchase.

Will the bank approve the seller’s financial hardship?

Being underwater on their mortgage is only one piece of the seller’s puzzle — to get approval for financial hardship, the seller often has to prove they can’t make mortgage payments.

The bank could request proof of loss of income, such as a layoff. They could examine the seller’s other assets, such as retirement accounts, to gauge their ability to keep paying.

In 2014, Gretchen K.’s home was valued at $80,000 under her $170,000 mortgage. She reached out to the lender and asked for approval for a short sale due to the difference in value.

“They denied the request after several months of back-and-forth communication,” she says. “When I kept inquiring, they stopped communicating completely.” They wouldn’t say why they denied the request. Eventually, even though she would have preferred to work with them on some kind of short sale solution, she walked away from the house.

Can you get the house inspected before writing an offer?

Short sales are typically sold “as is.” In a conventional home sale, you could request that the seller make repairs or reduce the sale price if the home inspection reveals serious issues. The bank likely won’t negotiate after approving a short sale price.

If you can get the house inspected before you write the offer, you can factor the home’s condition into the offer price. A home inspection also gives you a better idea of what you’re walking into — like needing a new roof before winter.

Ruiz doesn’t always think it’s a good idea to get an inspection before making an offer; he advises waiting until you know if you’re the winning bidder. If the bank won’t allow an inspection, and you’re not comfortable taking this risk, then walk away.

Can you and the seller agree on the purchase price?

If you and the seller can’t agree on a purchase price, or negotiations have stalled, then a short sale purchase might not be for you.

Even if you and the seller can agree on the price, the bank has to approve the sale price, too. Often, banks try to recoup as much of their initial investment in the property as possible. They may refuse to consider the home’s condition or market deterioration. Lenders try to get top dollar or market value for a short sale to minimize losses.

Can you pay the closing costs?

A bank won’t negotiate much other than the sale price.

In a traditional home sale, you could ask the seller to pay some of your closing costs, but the bank is unlikely to concede here. If your home budget depends on someone else covering closing costs, you may want to either wait and save more money, or factor that into your offer price on a short sale.

Do you have flexibility in your budget?

If you’ve got a tight budget, think hard about a short sale. Even after you’ve agreed upon a price with the seller, after several months of negotiations and paperwork and back-and-forth, the bank could decide it’s not happy with that price and ask for more.

Let’s say you’ve reached an agreement with the seller, but it’s taken the lender weeks to respond. The lender could perform another valuation, and if the property has gone up in value, the deal could fall through. In Ruiz’s opinion, “it’s very risky to the buyer.”

If you’re unable to meet that increased price, you’d have to walk away from the purchase. And don’t forget that short sales are as-is sales; you aren’t going to have a lot of wiggle room to make repairs, either.

Are you a qualified buyer?

Unless you can pay for the house in cash, you’ll need to get a mortgage. You’ll still need to be a qualified buyer.

This means you need: a qualifying credit score, a down payment or access to a zero-down loan, and money to pay for closing costs. It’s a good idea to get preapproved for a mortgage before home shopping in general, but definitely before making an offer.

Can you work with the bank and listing agent?

In Gretchen K.’s case, the bank wouldn’t even respond to letters or phone calls from the current owner. To surrender the property, she had to send a certified letter.

Banks aren’t usually in the business of buying and selling houses, and when they find themselves in the position of selling one, they can be notoriously challenging to work with.

When Ruiz is involved in a short sale, he’s asking who the lender is and whether the listing agent has delegated authority to act on the bank’s behalf.

“On the buyer’s side, you really have to engage heavily with the listing agent to hold them accountable,” he says, and “make sure they’re going through the process with the bank, that the sellers are providing updated financials, anything that needs to happen to move the sale forward.” Deals can fall through if an inexperienced listing agent handles the sale.

Do you love the house?

Ruiz’s best advice? If you’re going to buy a short sale, “make sure it’s that “gotta have it” house.

“You’re going to have to be prepared to go on the emotional rollercoaster of waiting three, four, or six months — and it’s not happening.”

In his area, turnover in some gated communities can be quite low. If a buyer has been trying to get into a community, and a short sale comes on the market there, it’s often worth their wait.

It’s not for the faint of heart, so you’d better have your whole heart in that house!

Header Image Source: (dcbel / Unsplash)

“If you can get to a home as a preforeclosure before it goes into foreclosure, that’s the best route,” explains Donny Piwowarski, a top-selling agent who works with 84% more single-family homes than the average agent in his region of Tracy, California.

“A foreclosure goes to the courthouse steps, and with such constraint on inventory, it’s going to be very competitive, with well-seasoned investors that have a lot of cash to buy foreclosures,” he says. “Whereas with a preforeclosure, you have the ability to finance that transaction and the benefit of seeing the property. And because you’re working with the homeowners, you’ll have access to the disclosures.”

So you’ve identified the property, know why it could be a great investment — and now you need to know how to buy a preforeclosure. Here, we’ll walk you through the steps from beginning to end.

Step 1: Know the basics — what’s a preforeclosure?

A home is in preforeclosure when the owner has stopped making mortgage payments for several months and their loan is delinquent or in default — so the owner is approaching foreclosure. The lender has started foreclosure proceedings, but the house isn’t owned by the bank yet, and the owner still has a chance to catch up on payments.

At this stage, official notice of default has been issued and is publicly available. This means you might be able to get a discount on the house, but you’re dealing with a homeowner, not a bank — and that owner might not want to sell. (In fact, the homeowner might even have a plan to catch up on the mortgage, and in the end, the home won’t end up in any kind of sale.)

“Preforeclosure is where a homeowner is behind on their mortgage payments and the mortgage lender has recorded a public notice to make everybody aware that that is the situation for that borrower, and also to let the borrower know that if they don’t recover the situation, their home could be potentially sold at the courthouse,” Piwowarski explains.

Step 2: Get preapproved for a loan

You’ll need to know how much you can spend. Getting preapproved is the best way to be as sure as you can.

A preapproval will also help you be as competitive as possible in a hot market. And it shows both that you’re serious about buying and that you have the financial wherewithal to do so.

If you’re going to be buying the preforeclosure with a mortgage, your purchase agreement is contingent on your ability to secure a loan, so getting preapproved is important.

For this type of home purchase, you can get either a conventional loan or government loan (such as an FHA loan or VA loan).

Step 3: Find your house

Maybe you’re like our hypothetical example and you already have your eye on the perfect home. But if you haven’t identified a preforeclosure home yet, then you’ll need to find one. And that prospect can be tricky, as these homes aren’t as easy to find as a house that’s listed on the MLS because they’re not for sale. Working with a knowledgeable agent experienced in preforeclosure properties is a great place to start.

“Preforeclosures get what’s called a notice of default,” Piwowarski explains. “These are recorded in the local county courthouse and their public records, and most of them publish that information online. A lot of different websites will scrape that information and post it on their website as well.”

These usually aren’t listed on an MLS, but you might find them on certain real estate portals that specialize in preforeclosure and foreclosure properties, like RealtyTrac, Foreclosure.com, HomePath, and HomeSteps. (These often require paid access.)

Step 4: Learn everything you can about the house

From the neighborhood to the school district to who built the house and the development, this is your opportunity to dig into your new digs and make sure it’s right for you. What intelligence can you gather?

The current owners may let you walk through the home to gather data — but they might not.

Try to get as much info as you can on the current market, too.

Step 5: Reach out to the current owners

If you’re interested in a preforeclosure, reach out to the home’s current owner. But know that this can be a sensitive situation: The owner might be upset, embarrassed, or not even know their home is listed on real estate sites as a preforeclosure. The owner’s missed payments may result from a traumatic circumstance, such as a death, job loss, or divorce. So tread lightly.

“I think it all just begins with compassion,” Piwowarski says. “We never know what the situation is and why the owner fell behind on their mortgage payments. They might be bombarded or receive many notices in the mail regarding this situation. The best approach is to just come from a compassionate standpoint and say, ‘How can I help if you want to sell your home?’”

An experienced agent can give you some insight into how to approach homeowners so that they are receptive to your overtures.

Step 6: Make your offer

In preparation for making your offer, talk to your agent about what seems fair. You want the house, and you want a good deal, but you don’t want to upset the current owner in a potentially emotionally charged scenario.

Ideally, your offer will achieve a good balance between getting you a bargain and getting a fair deal for the seller, who also now has a path to avoid foreclosure.

Your agent can help you investigate the amount the seller still owes on the mortgage to help you make your best offer.

What makes one offer better than another? Offers with fewer or no contingencies are stronger, “and also understand that there’s not going to be any repairs whatsoever, or any kind of credit or concession,” Piwowarski says. “It’s a distressed property, and that means that there’s no one around to give any money at all.”

Step 7: Submit your earnest money

Earnest money, a deposit with your offer as a way to demonstrate you’re a serious buyer, can help you close the deal. Typically, earnest money comes in between 1% and 3% of the purchase price.

Look to your agent for guidance, and remember that earnest money can help you be more competitive. If you’re offering earnest money as part of the deal, get a cashier’s check or wire it to the escrow company to complete this step.

Step 8: Submit your mortgage application

Preapproval was only the first step: Now you have to actually apply for that mortgage. Mortgage approval can be a drawn-out process, so if the seller really wants a fast closing, you may want to consider going with a lender that offers pre-underwriting or any other steps you can take to speed it up.

Step 9: Get an inspection

With a preforeclosure “you can definitely ask for an inspection,” Piwowarski says. “Since you are working directly with the homeowner, you’re going to have access and you can arrange it. Whereas with a foreclosure, you’re buying the courthouse steps and you don’t have the ability to inspect the property.”

Even if you are waiving the right to ask the seller for repairs, you should get an inspection so you understand exactly what condition the home is in and what will be involved to repair it, if anything.

Step 10: Get the home appraised

Your lender will likely require this as part of the mortgage process. Be aware that appraisal issues could come up, depending on the condition of the home. If you doubt the property will appraise, make sure you write an appraisal contingency into the contract to protect your earnest money.

Step 11: Title review

This will uncover any unknown liens or other possible encumbrances with the title. Tax and mortgage liens are potential obstacles, and liens can arise from disputes with homeowner’s associations, contractors, repair services, and other events.

You should also strongly consider getting title insurance to protect yourself as the buyer.

Step 12: Final walkthrough

Don’t skip this step: You need to know what condition the house is in before you take possession, and the final walkthrough is your last chance to check it out and avoid any surprises that violate terms of your contract.

Step 13: Closing time

Unlike a foreclosure sale, closing on a preforeclosure property looks a lot like it does with any other type of real estate transaction. “With preforeclosure, you’re going to take this process through your typical escrow — all the typical steps you get when you’re buying normally,” Piwowarski says.

So once you complete the escrow and sign those closing documents, the home is yours. Congratulations, homeowner!

Header Image Source: (Igorsky / Shutterstock)

Worry not, we have answers. We enlisted the help of top experts and put together this handy guide on how buying a foreclosure works. Here’s what smart homebuyers need to know to stay ahead of the curve.

What is a foreclosure?

You see foreclosures listed on your favorite real estate sites, but what does that term really mean?

“A foreclosed property is a property that has gone through the legal process of foreclosure where the bank seeks to regain ownership of the property to make good on a debt,” explains top Seattle real estate agent Ken Crotts, who works with over 66% more single family homes than the average area agent.

But let’s back up a minute. Why would a lender “seek to regain ownership” of a home?

“If somebody hasn’t made their payments for a period of time, the law allows the bank to repossess the property to make good on the debt,” states Crotts.

Essentially, foreclosure works like this.

1. Missed payments: The homeowner stops making payments for a period of time, typically at least three to six months (though the timing depends on the state).

2. Preforeclosure: The lender sends a notice of default to inform the owner that they must get up to date on their mortgage payments within a certain timeframe — or they will face foreclosure. This kicks off the “preforeclosure” phase.

3. Foreclosure: If the homeowner can’t resolve their payments or work out some kind of forbearance plan with the lender within 90 days, the bank will carry out the remaining foreclosure process and repossess the home.

But that doesn’t mean the owner will be kicked out six months after their first missed mortgage payment: All in all, the foreclosure process takes an average of 922 days nationally.

4. Auction: Once the home has gone through the legal process of foreclosure and repossession, the property is auctioned to the highest bidder, typically on the courthouse steps, though foreclosure auctions are increasingly happening online.

5. REO owned: If the home doesn’t sell at auction, it becomes real-estate owned, meaning the bank or lender owns it. The home will be listed and sold similarly to other homes on the market.Another thing to note is that the foreclosure process can be a little bit different in each state. Check with your lender or real estate agent to learn more about how it works where you live.

How are foreclosures sold?

“There are [potentially] three different opportunities to buy a foreclosure property, at different times during the foreclosure process,” reveals Crotts.

These opportunities might include:

1. Pre-foreclosure sale
2. Foreclosure auction
3. REO listing

Let’s walk through each option and what it looks like in practice.

Pre-foreclosure sales

Sometimes, a homeowner will agree to sell their home before they reach foreclosure. This is usually done through a preforeclosure sale.

Remember that notice of default the lender sends out, initiating the preforeclosure phase?

“Some of these notices are made public, and when they’re made public, there are buyers that will directly contact those owners and seek to buy that property before it goes into foreclosure,” Crotts says.

Something to note here: Many of these preforeclosure homes are not listed for sale. Just because a homeowner is behind on their mortgage payments doesn’t mean they’re necessarily ready to sell their home.

However, investors and agents often see these preforeclosures as an opportunity. They routinely scour public lists of preforeclosures and proactively reach out to the owners — often through a phone call, a mailer, or a friendly door knock — to show their interest in making a purchase.

“That provides a remedy for the homeowner and stops the foreclosure,” shares Crotts.

However, it’s rare that everyday buyers go the preforeclosure route, as it’s usually handled by experienced professionals.

“When you’re browsing properties online, there are sites that will display preforeclosure properties. I would avoid those,” Crotts advises.

He says that in most cases, the homeowners aren’t really looking to sell, whether because they have a deal worked out with their lender, or because they’re planning to make good on their missed mortgage payments.

“You’ve got to contact a lot of those people to find one who’s in a position to sell and is willing to sell the property. So it’s an enormous amount of work to find a preforeclosure deal that will actually come together — literally hundreds of homes you’d have to go through.”

Foreclosure auctions

The next opportunity to purchase a foreclosure is at auction.

At this point, the home has been repossessed by the lender, who’s trying to unload it quickly by selling it for cash to the highest bidder — often on the courthouse steps.

The process differs by state, but most foreclosure auction sales are done quickly and in cash. Today, more of these auctions than ever are taking place online.

“Washington’s foreclosure process is 150 days, culminating in an auction at the courthouse steps,” explains Crotts. The property is then “bid upon by would-be buyers who have cash in hand and can purchase and take title to the property almost immediately, right on that day.”

Again, most foreclosure auction purchases are completed by professional investors, because these deals are typically done in cash, and foreclosed homes may involve risks that everyday homebuyers aren’t up for (more on that soon).

That doesn’t mean you can’t buy a home at auction if you’re a regular buyer, but you’ll definitely want to do your research. According to Crotts, you shouldn’t even think about buying a home this way until you show up and observe a live auction yourself.

“If you’re interested in buying foreclosures, it’s something that you should witness,” Crotts shares. “It’s a really fun and interesting activity — kind of a circus or carnival type of atmosphere.”

Think you might be up for the challenge? Check out our guide for navigating foreclosure auctions, and our how-to on finding foreclosure opportunities near you.

REO listings

Finally, a third way to buy a foreclosure is through a real-estate owned, or REO, listing.

This means that the home wasn’t purchased during the preforeclosure period or at auction, and instead it is now owned by the lender, who lists it and sells it much like a typical home sale.

Crotts explains that lenders often have systems for offloading these properties in a timely manner, usually through the help of asset managers.

This is the most common way that regular homebuyers purchase foreclosures, since it works similarly to any other home purchase. The one big difference is that the seller is a bank rather than an everyday homeowner.

The everyday homeowner might have a range of motivations for selling their property — including moving timelines and emotional concerns — but a bank will generally care most about their bottom line and recuperating as much money as possible from the sale.

Keep that motivation in mind if you plan to purchase a foreclosure! The bank will probably not want to offer the home at a massive discount.

“The asset manager — in protecting their client’s interest — has a specific process they’re going to follow to ensure that they get fair-market value for the property when they do sell it,” Crotts shares.

That’s why a top agent with experience buying distressed homes can be your biggest asset when negotiating a foreclosure purchase. They have relationships with these asset managers and understand their core motivations.

Is it a good idea to buy a foreclosure?

“All of that’s great,” you might be thinking, “but is it even a good idea to buy a foreclosure at all?”

That depends on the type of buyer you are and what you’re looking for in a home. But before we get into the buyers who are best suited to a foreclosure purchase, let’s run through the benefits and drawbacks of buying this type of property.

Pros of buying a foreclosure

You might get a good deal!

In a hot market, good deals are hard to come by. Crotts says distressed properties like foreclosures can offer an opportunity to pay a little bit less.

“The primary benefit of a foreclosure property is its condition and your ability to improve the condition of the property and build equity as a result.”

If you’re handy, patient, and have the cash flow to fix your new home up, you could get a good deal on a foreclosure and save some money in the process.

But again, understand that we’re not talking about a massive discount here — more like a modest savings and an opportunity to build equity as you improve the home.

You can build equity fast

Speaking of equity, “foreclosure properties offer a great opportunity to build equity in a home through improvement,” according to Crotts.

Most foreclosure properties need at least some work. Think of it this way: If the homeowner couldn’t afford to make mortgage payments, they probably weren’t able to afford upkeep or repairs, either.

That can present an opportunity to you, the buyer, to make value-adding improvements.

There’s less competition

Another plus of buying a foreclosure? There’s less competition from other buyers, since most are looking for move-in ready homes.

Keep losing out on bidding wars? Maybe buying a foreclosure and fixing it up over time is your path to homeownership.

Cons of buying a foreclosure

There’s more risk involved

That said, foreclosures are riskier than a typical home purchase. They’re considered “distressed properties,” and most need at least some repairs. They can even sometimes have squatters, or significant damage from previous owners.

If you buy a foreclosure, you’ll need to do your due diligence and understand the risks you’re taking. It’s important to protect yourself by having a top agent and a trusted real estate attorney by your side.

You’re buying as-is

“The seller’s not going to do a bunch of work to the property,” Crotts cautions. “They will do reasonable amounts of work if it means that the property gets sold. But in most cases, you’re taking the property more or less in as-is condition.”

As-is means take it or leave it — what you see is what you get. Make sure to get a good inspection, and know what you’re getting yourself into!

You may not be able to do an inspection

In some cases, it may not be possible to do an inspection on a foreclosure, or even to tour the home.

For example, if you’re buying a foreclosure at auction, then it’s very unlikely you’ll be able to enter the home or order a home inspection before making your bid.

“I would avoid properties that don’t have an inspection or won’t allow an inspection,” Crotts says. “Buying as-is is one thing, but buying without being able to see a property or get an inspection on a property puts you at substantial risk.”

Financing might not be an option

If you’re buying a foreclosure at auction, it’s unlikely that you’ll be able to get a mortgage to pay for it. Most auctions require cash and a quick payment, often within seven days — sometimes sooner. This is why most regular buyers avoid buying a home this way.

The good news is, most REO-listed homes do allow financing, so it still can be an option. But understand that some foreclosures (or all foreclosed homes at a certain stage of the process, such as the auction stage) may be out of your reach if you don’t have cash.

You’re at the bank’s mercy

Again, the bank owning the foreclosure is going to try to recover as much money as possible, and the buyer is essentially at its mercy. That means working on the bank’s timeline and potentially dealing with red tape in the process.

Who usually buys foreclosures?

“There are a few buyers out there that are purchasing properties for their own occupancy, but the vast majority are going to be considered investors,” Crotts reveals.

That’s because investors have the skills and cash flow necessary to make such purchases strategically. They’re usually able to fix up the property and either rent it out or sell it for a profit.

That doesn’t mean you can’t invest in a foreclosure for your next home. Real people can — and do — buy homes this way! One mega-investor started with buying a single preforeclosure more than a decade ago, and now he’s purchased hundreds.

But is buying a foreclosure a good fit for you?

What type of buyer is a good fit for a foreclosure?

Crotts says he sees two main types of buyers who tend to be a better fit for foreclosure properties:

1. Value-oriented buyers who are looking to roll up their sleeves and build some equity. These buyers might be looking for a full-time home, or a rental or long-term investment opportunity.
2. Choosy buyers looking for something very specific — whether location, lot type, or home style — which happens to be found through an available foreclosure. “Those types of buyers are very specific and need a lot of properties to look at in order to find that one that meets their criteria best,” Crotts adds.

Another possible reason you might go for a foreclosure is simply because you can’t afford a move-in ready home, and you don’t have much inventory to choose from where you’re looking.

Whatever your motivations, buying a foreclosure might be more accessible than you think. Just make sure to surround yourself with a top real estate team who can help you get a deal rather than a dud!

Header Image Source: (Jasper Graetsch / Unsplash)

Those are all very fair — and very common — questions. Foreclosures may present the perfect opportunity to buy in your ideal neighborhood at a low price. Or they may offer an affordable fixer-upper you can turn into your dream house. But, on the flip side, they may also come with headaches, repairs, and challenges that may end up costing more than you hope.

So how do you buy a foreclosure and make sure it’s the right home for you? We talked with veteran real estate agents with a combined 30-plus years working with foreclosures to bring you a comprehensive guide to the often confusing world of distressed properties.

What is a foreclosed home?

A foreclosed home is a property that has been seized by the bank after the homeowner failed to make their mortgage payments. This could happen for many reasons, including financial difficulty, divorce, a death in the family, or just because someone ignored their payments.

Of course, foreclosure isn’t an overnight process. In fact, the average foreclosure proceeding in the U.S. took over 900 days as of the second quarter of 2021. A home goes through several steps before the bank physically takes over the house and sells the property. The exact steps vary from state to state, but let’s take a general look:

Pre-foreclosure: As the name implies, a pre-foreclosure isn’t in foreclosure yet, but it’s on the way there. Usually, a home goes into pre-foreclosure after several consecutive months of missed mortgage payments, and the lender issues a notice of default. Again, the timeline varies by state, but this typically begins three to six months after the first missed payment, according to the Department of Housing and Urban Development (HUD).

Foreclosure: If a homeowner cannot resolve their payment issues within another grace period (usually 90 days) after the default notice, formal foreclosure typically begins, and the bank takes over the home. They’ll put the house up for auction either in a sheriff’s or public trustee sale (the name depends on what foreclosure process your state follows).

Bank-Owned or REO: If a home doesn’t sell at auction, it becomes a real-estate owned home, meaning the bank or lender officially owns it. The bank will then list the property on the market and try to sell the home in a similar fashion to your average property.

Note: Most states follow either judicial or non-judicial foreclosure proceedings. You can find your state’s exact foreclosure laws using this nifty tool.

Different types of foreclosure sales

During the COVID-19 pandemic, foreclosures stalled across the U.S. due to both federal and state-imposed foreclosure moratoriums. Distressed sales accounted for just 1% of all home sales in April 2021. However, as those forbearances end toward the later part of 2021, foreclosures will likely become more readily available and may even hit the market in droves, says Florida real estate agent Christina Griffin, who has 20 years of experience in the industry.

So, it’s helpful to know precisely how to find them. Let’s take a look at the most common foreclosure sales and how they work.

Short sale

A short sale isn’t necessarily a foreclosure sale, but it’s common to see a short sale done to avoid foreclosure. With a short sale, a lender agrees to a property sale for less than the remaining mortgage balance. For example, a homeowner and lender agree to sell a house for $200,000 even though there is a balance of $250,000 on the mortgage loan. A seller will usually have to prove financial hardship for the lender to agree to the sale.

Short sales can typically be found through the MLS database or your buyer’s agent. There are even some real estate agents that specialize in short sales that may have more resources than your typical Realtor.

Pre-foreclosure

After a notice of default, a homeowner might opt to sell their house to stave off foreclosure and avoid the messy legal proceedings. This is different than a short sale because a pre-foreclosure seller usually still has equity in the house (meaning the home value is more than their mortgage balance). So selling the home at this point will avoid foreclosure while the seller still might have the potential to walk away with something from the sale.

Your real estate agent should be able to search for homes in pre-foreclosure. However, online sites like RealtyTrac and Foreclosure.com will also have pre-foreclosure listings available.

Auction sale

Once a bank takes possession of a house, it will usually want to get it off their hands as quickly as possible. They’ll put it up for auction either at a sheriff’s sale or public trustee’s sale, depending on the exact foreclosure process your state follows. Simply put, a representative from the lender will typically take bids from those in attendance, and the highest bidder will win the home. The goal here is for the lender to at least earn back the balance left on the mortgage.

A foreclosure auction typically takes place in person at a county courthouse or public space, but online auctions are becoming increasingly popular, especially since the start of the COVID-19 pandemic.

Note: You can find foreclosure auctions in almost every county in the country. They can typically be found through your county’s public records or even through specialty websites like Auction.com.   

Bank-owned/REO sale

If a home doesn’t sell at auction, the bank will formally take ownership of the house and list it as a real-estate owned property. These typically sell through a similar process to your average home, but there are more ways to find them. Many properties will be listed on the MLS database while many lenders may have REO listings available right on their websites (for example, Bank of America and Wells Fargo have sites dedicated to their REO properties).

Foreclosure programs

If none of these programs work for you, you can always go straight to the source. Many foreclosed properties end up in the hands of HUD or the government-sponsored enterprises (GSE), Fannie Mae or Freddie Mac. These organizations have their own programs to buy distressed properties and even offer incentives for some first-time buyers.

Fannie Mae has its HomePath program, Freddie Mac has a HomeSteps program, and HUD has HUD homes. HUD also provides a Good Neighbor Next Door Sales program that offers foreclosed properties at a steep discount to teachers, law enforcement officers, and other first responders.

Benefits of a foreclosed property

You may find a good deal

The biggest reason a buyer might seek out a distressed property is that they’re looking for a good deal, and they might be in luck. Distressed properties sold at a 36% discount compared to the average home price during the third quarter of 2020. After all, lenders and banks don’t want to hold onto a property if it’s not making them money, so they want to move it quickly, even if that means taking a lower price.

However, Griffin, our Florida real estate agent, cautions that may not always be the case. Depending on the property, a foreclosure might look like a great deal on paper, but there may be hidden costs. We’ll cover that more later on.

Chance for less competition

Griffin believes the world of foreclosure can open up a whole new level of inventory for homebuyers, and if done correctly, that may also mean less competition. She says the average buyer typically doesn’t seek out a foreclosed home, so investors and cash buyers will be your main competition. However, some special programs give you a leg up to get in first. For example, Fannie Mae’s HomePath program provides a “First Look” window that lets owner-occupants (meaning those who will use the home as their primary residence) view and purchase a foreclosed home before investors.

Chance for a clean slate

If you’re looking for a fixer-upper that’s available at an affordable price, a foreclosed home may be your best bet. Kyle Keller, an Arizona real estate agent who has flipped over 75 properties, says a distressed house may be perfect for someone looking to buy a home and make it their own. Plus, a physically foreclosed property will typically have its liens wiped out during the foreclosure process, so you know you’re typically getting a home with a clean title. However, Keller cautions that a pre-foreclosure and auction sale might still have multiple liens on a property, so he warns all buyers to complete a title search before closing if possible.

Drawbacks of a foreclosed property

They’re usually sold ‘as-is’

Many foreclosed homes, especially REOs and those sold at auction, are likely to be sold “as-is,” or in the exact condition you find them. That means the bank is highly unlikely to make any repairs before the sale or even offer any credits toward them. So, it’s essential to make sure you know you will be on the hook for all future repairs and issues lurking inside the home. That’s why a home inspection is so important if you’re able to do one.

It’s a riskier investment

While a foreclosure might present a good deal on paper, both Griffin and Keller agree it can sometimes be a gamble. Distressed properties can often be in rough condition, especially if they’ve gone through a prolonged state of disrepair or sat vacant. Griffin says she’s worked with many homes that have had their air conditioning units ripped out and walls completely stripped while they sat during the foreclosure process. On top of that, if you’re buying at auction, you’ll most likely be buying the property sight unseen, and you may also be responsible for any liens or debts on the property.

Griffin also cautions that, while uncommon, you may become responsible for evicting the previous homeowners if they were allowed to stay during the foreclosure process. That could involve legal eviction proceedings and actions to get the previous owner out. So a home that looks like a steal might just end up causing you more money and headaches down the line if serious issues surround the property.

It can be a drawn-out process

The average home closing in the U.S. can take anywhere from 30 to 60 days, but with a foreclosure, you might be looking at a much longer process. After all, a home can take upwards of 900 days to go through foreclosure proceedings. Buying a distressed property requires more paperwork, more approvals, and more time, so the process may get dragged out. That’s especially the case if you’re hoping to finance your purchase, which can be tricky depending on the condition of the home and the property requirements your lender has.

How do you finance a foreclosed property?

That brings us to our next question: Can you finance a foreclosure in the same way as an average property? Griffin says that depends on how you’re buying the home and its condition.

If you’re buying a home at auction, you most likely won’t be able to finance your purchase, except in rare cases. Instead, you will probably need to buy your new property in cash due shortly after your winning bid.

However, if you’re buying a pre-foreclosure, short sale, or REO property, financing is still an option as long as your property isn’t in disrepair. Your home needs to meet the property requirements required by your loan type. These are to make sure the house is “safe, sanitary, and secure,” Griffin says.

If you’re buying the home through a foreclosure program (like HomePath or HomeSteps), then the house will most likely meet all of these standards, Griffin says. However, sites like Auction.com warn that traditional financing might be hard to obtain when buying one of their homes due to their condition. Griffin adds, in that case, you may need a hard-money loan, equity line of credit, or cash to purchase the property.

“When you get traditional financing, you have to have [the standard utilities], electric, heat … water running,” Griffin says. “If there’s a problem with that, that’s where you have to be able to pivot your financing.”

Here are some other options to keep in mind if a conventional loan doesn’t work out: FHA 203(k) loan, also known as a rehab loan; Fannie Mae’s HomePath ReadyBuyer program, which gives closing cost assistance for REO homes; or Fannie Mae’s HomeStyle loan, another type of renovation loan commonly used to purchase and restore a property.

6 steps to buy a foreclosure like a pro

Buying a foreclosure can be a complicated process, but it doesn’t have to be as hard as it seems. With the help of our veteran agents, we developed several must-follow steps to make the process as simple as possible.

Note: These steps are geared toward buying a home that has already been physically foreclosed on. Buying at an auction is a bit of a different process and requires another set of skills.

Get pre-approved

Just like a traditional home search, getting pre-approved for a mortgage should be your first step when buying a foreclosure. This will give you an idea of what you can afford and even streamline the process once you actually find a home.

Find a trusted agent with foreclosure experience

Griffin believes this is the best way to set yourself up for success when pursuing a foreclosure. Find an agent who has experience working in the world of distressed properties and knows how to navigate its ins and outs. Ideally, your agent should be a “hunter,” Griffin says — someone who can seek out opportunities for you and stay on top of the process, anticipating any challenges that might pop up.

Conduct a thorough home search

Your agent can help you find foreclosures listed on the MLS database, but it’s helpful also to do your own research. County records will have properties entering pre-foreclosure and those going to auction. Specialty sites like Auction.com and RealtyTrac also offer databases for distressed properties for sale, while foreclosure programs like HUD homes will also have extensive listings available.

If you find a home you’re interested in, Keller advises researching comparable homes, or comps, in the area to ensure the price is reasonable compared to the average home. He says you don’t want to pay more for a distressed property than you would on a house in good condition.

Make an offer

Once you have your ideal property, it’s time to submit an offer. Your research should have given you an offer price that’s both fair for the seller/bank and beneficial to you. However, it’s important to know there might not be much wiggle room on negotiations since the bank is looking to recoup the money it lost from its mortgage loan.

Griffin suggests adding a title review period into your offer and contract to make sure you can check the title for any liens or judgments. If you’re unable to do that, she strongly recommends conducting a title search yourself (along with your agent’s help) before locking into any contract.

Gather a team of experts

Your real estate agent will be your go-to expert when navigating foreclosures. However, it’ll take an entire team to make sure you’re covering all of your bases. On top of a home inspector, Griffin suggests finding a trusted general contractor who can take a look at your potential new home because they can “look at things a little differently.” They may be able to offer a more comprehensive insight into what repairs you might be facing.

It’s also important to find a trusted real estate attorney who can make sure you’re writing your real estate contracts correctly and protecting yourself in case of any complications.

Pay attention to the details

Griffin stresses that all foreclosures are different, and the purchase process may differ depending on the situation. On top of that, most banks and lenders don’t operate in the same way, so there isn’t a one-size-fits-all guide when buying a distressed property. So, it’s essential to read your documents carefully and pay attention to the details right up until closing, she says. This will not only ensure the transaction will continue without any hiccups but also that you’re properly protecting yourself.

That way, you can make it to the closing table with as few problems as possible. And when you officially sign the documents for your new home, you can feel comfortable knowing you’ve made a sound investment.

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Though it’s a less conventional path to homeownership, buying a house at auction isn’t as unusual as it may sound. Whether you’re looking for a new home for yourself, or if you’re just getting started in real estate investing, auctions are an action-packed way to (potentially!) score a great deal.

Since there are a few tricky caveats — you’ll need to manage your expectations and arrive well-prepared — we’re taking a deep dive into how to buy a house at auction with the help of real estate experts like J. Perrin Cornell, a top agent in Wenatchee, Washington, who works with 82% more single-family homes than the average agent in his area. From getting ready for auction day to what first-time auction buyers should really know, we’re covering it all.

Let the bidding begin!

What houses go up for auction?

In most cases, houses at auctions are foreclosures. This means that the homeowner stopped making payments on their mortgage, and the bank seized the property to recoup the funds.

Given the various types of mortgages that are available, the auction process may differ depending on whether the loan on the house up for auction was government-backed or a conventional loan.

There are also tax auctions, wherein the IRS has seized a home due to unpaid property taxes and is now attempting to recover losses.

Where do home auctions take place, and how do I find one?

Like auctions for just about any other item you can think of, home auctions can take place either in-person or online.

Live, in-person auctions are often held at the county courthouse, but — perhaps unsurprisingly — counties are increasingly turning to online auctions for the time-saving efficiency. While these auctions are not usually front-page news on county websites, they’re not terribly difficult to find.

“You might search the name of your city and state, along with keyword phrases like ‘public records’ and ‘foreclosure auction,’ and easily find eligible listings that way,” suggests Ben Reynolds, an investment expert based in Houston, Texas. He notes that these listings will generally indicate whether a home has been cleared for a scheduled auction and, if so, its estimated resale value.

Reynolds adds that “using a real estate agent who’s familiar with foreclosures in your local area may be valuable and more time-efficient” than simply searching online.

Meanwhile, homes that were purchased with a government-backed loan will almost certainly be sold via online auction and can be found through the U.S. Department of Housing and Urban Development (HUD) homes for sale portal.

What types of auctions are there?

If you’ve ever done any bidding on eBay or similar auction platforms, you’ve probably seen terms like “minimum bid” and “reserve.” These are applicable in the home auction world, too.

Absolute

An absolute auction is the quintessential auction type. The item in question — in our case, a house — is sold to the highest bidder, no matter what their bid price. Since there is no reserve price (more on that in a second), absolute auctions start at $0 and let the bidding process unfold from there.

Minimum bid

Unlike an absolute auction, a minimum-bid auction begins with a certain number in mind. This is usually the outstanding balance owed on the defaulted mortgage, but it may also include tax liens and other fees associated with the bank’s expenses in servicing the property.

Reserve

Reserve auctions are similar to minimum-bid auctions in that there is a fixed price that must be met to finalize the sale, but a reserve price is kept under wraps, while a minimum bid is clearly stated.

A reserve auction helps the seller potentially earn more because bidders won’t know exactly what the seller has in mind, nor what other bidders have offered.

So, how do I actually buy a house at auction?

First things first, you’ll need to have a plan to pay for the home.

If you have the cash on hand to cover your purchase — great! But if you’ll need financing, now is the time to talk with a lender. Many home auctions require full payment at the time of purchase, while others may allow a short grace period to finalize financing.

But remember, when a house is being sold at auction, it’s because someone is trying to recoup a loss. There isn’t going to be room for negotiation or special contingencies. You need to be ready to buy.

“Buying a house through an auction has its risks, and you can minimize them by understanding the auction rules before you register,” says David Clark, a Michigan-based attorney with 35 years of legal experience. “Be prepared to pay an up-to-10% non-refundable deposit based on the selling price of the property.”

Cash is king when it comes to buying a house at auction, though, so having as much on hand as possible will help your chances of winning the bid on your desired property. If there’s no way around your need for financing — and that’s totally fine! — just make sure you’re definitely good for the loan and that it fits with the terms of the auction.”

“If you’re using a mortgage to buy the property, never start bidding before you’re pre-approved,” warns Reynolds.

“Not all auctions will allow you to use a mortgage, so be diligent with your research on each property.”

Be aware that many lenders won’t finance a property you buy at auction due to the lack of an appraisal contingency to confirm the value of a home, even if the auction accepts financed bids. It might not be easy to find a loan to buy a house at auction.

How do I sign up to participate in an auction?

So you’ve found a home that’s coming up for auction and your finances are in order — now what? It’s time to register.

Depending on the auction, you may need to prove that you have adequate funds to buy a house, usually either with a bank statement or a preapproval letter from your lender. Otherwise, the registration process should be straightforward.

But this isn’t a time to skip your due diligence — be sure that you fully understand the rules of the auction and what the payment terms are if you’re the successful bidder.

Even if you’ve participated in a home auction before, don’t assume the process and rules will be the same each time. Read the fine print and ask questions if anything is unclear.

Finally, if it’s an in-person auction, don’t be late.

“When you register at the auction, it can take 30 minutes to complete the process, so arrive at least an hour early,” suggests Reynolds.

“You never want to get there a few minutes before the auction begins.”

How should I prepare for the auction?

Aside from getting finances in order, a responsible auction-goer will do some homework before committing their dollars.

Do your research

While you won’t be able to go inside a given property, you can at least drive by and perhaps walk around the exterior if the home is vacant. You can also do a little digging to find out who previously owned the home. You might even be able to find real estate sales photos from the last time the home was on the market, which can offer a valuable glimpse into the interior — just remember that there are no guarantees as to the current condition.

Homes sold at auction are sold on an as-is basis, meaning you won’t be able to negotiate for repairs or schedule inspections for a full overview of what you’re getting into. This is why buying a home at auction can be risky, but for many investors and home renovation experts, the opportunity to buy a home at a great price makes it a worthwhile gamble.

Property inspections aside, Reynolds recommends conducting a proper title review before bidding “to ensure you won’t be stuck with other financial responsibilities after the sale.” Tax, construction, or homeowner’s association liens may follow the home or even inhibit the sale entirely. And you’ll also encounter red tape if the homeowner has filed an objection to the foreclosure sale and is attempting to reclaim the house.

Estimate post-purchase expenses

When buying a foreclosure property — at auction or otherwise — the purchase price is rarely the only expense. Especially if you’re planning to use the property as a rental investment or flip it for profit, chances are high that you’ll need some cash pretty quickly to satisfy repair and renovation costs.

Though it’s hard to assign a reliable figure to expenses when you can’t inspect or even go inside a home before buying, based on the size, age, and location of the house, you can probably ballpark an amount to get things started. An experienced real estate agent can help refer you to a construction expert if you don’t already have someone in mind.

Understand the fine print

Because buying a house at auction is a fast-paced process, there won’t be much time for questions or deliberating when the house you have your eye on comes up for bidding.

“Consult with a legal expert who can check the terms and conditions of the sale contract, the professional building report, and all the due diligence documents,” recommends Clark.

In short: Carefully review all available documents pertaining to the house in question and the terms of the auction. Further, be aware that there may be auction and transaction fees above and beyond the purchase price of the home.

Get a preview of the action

One great way to prepare for an auction, especially if you’re planning to register for one that takes place in-person, is to attend a live auction as a spectator. You’ll be able to watch and learn and get a feel for how the process works before you’re the one holding up a card to do the bidding.

How do I make a bid?

Auction day has arrived, and now it’s time to get down to business!

In-person auctions are fairly straightforward when it comes to the bidding process. Simply “raise the auction bidder card if you are prepared to pay for the price being announced by the auctioneer,” Clark states. He adds that it could take at least 10 days for the release of the certificate of title, and in the meantime, you’ll have the certificate of sale.

The bidding process for online auctions may vary depending on the platform and the auction type. In some cases, such as with absolute or minimum-bid auctions, the auction will often go live, and bids can be submitted as long as the clock is still ticking.

For online reserve auctions, it’s possible that you’ll need to submit a bid, and it will then be rejected or accepted based on whether it meets or exceeds the reserve price.

Open vs. blind bidding

Open bidding is a fully transparent bidding process. Everyone can see or hear the other bids that have been made, and then make their next move accordingly.

Open bidding drives competition and can result in bidding wars when two buyers are especially eager for a particular house — or when someone is comfortable playing fast and loose with their cash.

In Cornell’s experience as a real estate agent, “there’s always going to be three or four people at the courthouse trying to outbid you. They may not know anything more about the house than you do, but there’s usually one or two sharks, and then there’s one or two folks who’ve read a book about how to make $1 million in real estate in 48 hours.”

Remember to bid within your means and to avoid the allure of a bidding frenzy.

Blind bidding, on the other hand, keeps each bid under wraps. This is similar to submitting a purchase offer on a home listed for sale — you won’t know what other hopeful buyers are offering; you can only work with your own highest and best proposal. For this reason, sellers tend to prefer blind bids because motivated buyers have to come in strong from the beginning rather than waiting to see what other potential buyers are doing.

What happens after I win?

If you’re the successful bidder on the house you’ve had your eye on, it’s now time to do the paperwork.

Pay for the home

Since you’ll already have your financing lined up and you’ll have already reviewed the sales terms of the auction, you’ll know whether you’re due to pay in full or put down 10% (or some other deposit amount) immediately following your win.

Buy title insurance

Though you’ve — hopefully — already had a title search conducted on the property, now is the time to purchase title insurance. This insurance will protect you against any undiscovered liens or objections, and you’ll want to do this as quickly as possible after your successful bid.

Clear to close

As long as the title is clear and the home is vacant, the closing process following a sale at auction should be fairly quick — especially if you’re paying cash and don’t have to wait on a mortgage loan to be finalized.

If the home is still occupied at the time of your purchase, you may have to go through the process of eviction — rules for which vary by state and county — or negotiate privately with the resident for them to leave the premises without involving the legal system.

Just remember to wait on the certificate of title before you start putting money into the property beyond its purchase — you’ll want to be sure you are the free and clear legal owner of the home.

“You should never invest any of your money in the property until you’ve claimed the certificate of title,” cautions Reynolds.

Fortunately, this certificate should come through in about 10 days, barring any unforeseen issues.

Move in or start working

When all is said and done and the home is yours, it’s up to you and your plans for the home as to whether to move in or begin renovations.

Either way — congrats! You’ve bought a house at auction!

First time buying at auction? Proceed with caution

If the variables and risks involved in buying a house at auction aren’t already clear, Cornell warns first-time buyers of a few further possible complications and expenses with foreclosure properties.

“You’re buying blind, you know? It’s not for the faint of heart.”

Be prepared for your auction home to need repairs or additional investments in:

• Turning electricity and water back on if the home has been vacant for an extended period
• Replacing taken-for-granted items like door handles, light fixtures, built-in appliances, and anything else a prior homeowner may have been able to remove
• Taming a neglected yard (landscaping isn’t cheap!)
• Damage to areas you simply can’t have access to until you already own the property (think basements, attics, and so on)

An important tip for buyers yet uninitiated to the world of foreclosures: Sometimes houses simply don’t sell at auction. In these cases, the banks will often seek a market valuation from a real estate agent and eventually put the home up for sale the old-fashioned way.

“I advise my clients that, unless they’re really knowledgeable and really know what they’re doing, let’s just pick up that house when it goes back on the market,” says Cornell. “And if it doesn’t? Well, we’ll have the next one.

“You can probably do better for yourself if you wait until [the house] comes on the market, because then you’re able to set up electricity and do the inspections.”

Ultimately, buying a house at auction comes down to your budget, risk tolerance, and level of patience. Good luck!

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Experienced REO buyers swear by this method of wealth-building through real estate. “One of the best lessons I have learned over the years from other investors is that you don’t find deals, you make them,” explains Mark Motes, a real estate investor at Mark Buys Houses, who buys fixer-upper properties in the Birmingham, Alabama, market with a team of local experts.

“There is never a perfect investment situation. It is your skill as an investor to make educated decisions about your investment decisions.”

So how can you develop that skill that makes the pros so confident — and drives major return on investment? Start here: This primer on buying REO homes is packed with advice from seasoned experts with many successful transactions (and a few not-so-successful ones) under their belts.

What is an REO sale?

These are properties that have been foreclosed, and the ownership has fully transferred to the bank or lender. Properties get to this point after the borrower stops making mortgage payments for a period of time. At that point, the property is then foreclosed, and the house goes up for auction and is sold to the highest bidder.

If it sells, the lender recoups some of the outstanding loan amount through the sale. If not, ownership passes to the lender, and the house becomes an REO property.

But lenders would rather recoup their money than own a house. So if it doesn’t sell at foreclosure, the lender will list it on the market, a process that might include removing liens on the property, evicting any occupants, and possibly making necessary repairs to ensure the house is livable.

Finding REO homes: How the experts do it

You can look for these homes on the multiple listing service (MLS) or on various auction sites. Check them often.

“In this business, there is a saying: Old data is bad data,” Motes says. “So making sure your data sources are current is crucial to finding these properties.”

There are online tips and tools available to help you find bank-owned homes. But the best, most personalized and local way is to connect with a real estate agent in your area who has helped other buyers looking for this type of property.

“Most REOs are sold on the MLS,” explains Todd Miller, who worked in mortgage banking for over a decade, has purchased several REO homes, and now runs the personal finance website TightwadTodd.com. “However, some brokers have the exclusive listing of these properties with the owner. So find out who is listing the current REOs and work on developing a relationship with this person or company.”

Grant Wydeven, a 25-year old investor who has already purchased multiple REO and wholesale properties, suggests people seeking to buy REOs might join a local real estate investing group and meet with property wholesalers. “Get on their email list, and soon you’ll be getting multiple emails a week about great as-is properties,” he says.

Andrew Ervin, founder of Maxsin Investment Group, which buys several REO homes a month, suggests doing the extra legwork to find homes like this before the bank even gets custody of them, if possible. “Go to your county’s office and ask for the pre-foreclosure list,” he says. “Reach out to people on the list, and give them an offer!”

Will buying an REO home be a good investment?

To figure out whether a property is worth it to you, first establish what you intend to do with it: Do you intend to live in it, flip it, or hold it as a rental property? What will it cost to renovate it so you command either market rent or a sale at a price that represents a margin you’re comfortable with? Alternatively, Miller says, “If you’re planning to live in the home, you’ll need to determine the amount of equity you’ll want to have created from restoring it.”

From there, you’ll obviously want to look at the list price as a factor. But that’s only part of it.

“The second and really most important thing is you bring a contractor in with you to find out the cost of the repairs,” explains Joseph Baylis, a top-selling agent in the Trenton, New Jersey, area who has significant experience in short sales and REOs, and who specializes in dealing with investors.

“You add those two together, you get a licensed RealtorⓇ that you know and trust to let you know the after-repair value (ARV). Then you calculate your carrying costs, your commission on your exit, and you make sure that you have a comfortable profit that makes sense for you.”

Baylis says that the rule of thumb in his area is to feel confident you can clear at least $30,000. “That’s the minimum profit that you’d wanna make on a flip,” he says.

He cites an example of a $200,000 purchase that needs $50,000 in repairs, plus carrying and commission costs of about $30,000 — all of which adds up to $280,000. “You better make sure that you can clear $310,000 [on the sale] or it’s not worth it.”

While all investors are looking for return on investment, most take a similar approach, slightly varying their target ROI: For Motes, he’s looking to see if he can purchase the property for a maximum of 80% of the ARV, minus the rehab costs. “That gives us some breathing room for closing costs, holding costs, and selling costs, while still having the ability to make a reasonable ROI,” he says.

Ervin puts it similarly: “The best way to get a good deal on a banked-owned house is to do your due diligence and over-budget your rehab cost… because you never know what you’ll run into.”

To that end, his team comes up with an estimated repair budget — and sets it on the higher end, “so we have a little wiggle room if we missed any repair cost.” They calculate the square footage of the home, then multiply that figure by the cost needed for light, medium, or heavy rehab. In his estimates for his area, light rehab costs about $15 per square foot, medium costs $30 to $35, and heavy $45.

In the end, they settle on an offer that is lower than what they’ll really pay, in order to leave room for a counteroffer from the bank.

His pro tip? Never go over your maximum allowable offer in a bidding war unless you are an experienced investor with your own contractors, or if you plan on doing most of the rehab yourself.

“Learn how to walk away and go find the next deal — there are plenty out there,” he says.

Potential pitfalls of buying REO homes

These homes are sold as-is, and in many cases, the ROI comes from the fix-up. But you need to do your legwork to confirm that the neighborhood comps support your purchase, and that the home isn’t a clunker that could cost you way more than its earning potential.

“I’ve had some that I’ve sold that needed very, very little. The investor made a lot of money, and they were very happy, and then they came back for more,” Baylis says. But the deals don’t always go like that.

“I sold one to a good friend who wanted to get started in real estate but was inexperienced,” he recalls. “It was over an hour away from where he lived. It took him a lot longer than it should’ve. He made lots of mistakes along the way, and he ended up losing money when he sold it. And that was painful, because he was a personal friend of mine.”

Plus, consider all the possible hidden issues with REOs, and understand that you may not get a detailed, accurate seller’s disclosure because the bank doesn’t necessarily know much about the property’s condition.

For example, Baylis says, “I often run into underground oil tanks that weren’t disclosed. If there’s an underground storage tank that leaks, it’s a huge issue because the EPA gets involved, the state gets involved, and you have to have a licensed contractor dig up the tank. Typically, that’s $5,000 to $10,000 but I’ve seen it go $2 to $3 million because any seepage has to be cleaned up.”

Bottom line, he says: “If you’re buying a house with an underground tank and you’re not doing any testing, you’re really rolling the dice.”

Another issue that can happen with an REO? Squatters.

“Sometimes they’re actually the previous owner who never left and doesn’t have rights to the house now,” Baylis says. “Or people see that the house is vacant for years, and they move into it, sometimes even turning on utilities in their name and living rent-free for years.”

When that happens, the police aren’t the solution, Baylis says, because law enforcement considers it a “landlord-tenant issue.” So an REO buyer might be in a position to have to evict a squatter after purchase — and consider that there’s been a longstanding eviction moratorium due to COVID.

And even when you do manage to evict a squatter, Baylis says, “They might destroy the place on the way out.” So you might very well be much happier purchasing an REO home without a squatter problem.

In summary, there’s a lot of risk exposure to a buyer when there’s no disclosure.

Working with the bank on buying an REO property

Remember that working with a bank is much different than buying from an individual, as you would with a traditional sale. “You’re having to go through a lot of protocol and bureaucracy that [you wouldn’t with] an individual seller,” Motes says.

Indeed, patience is key — because working with a bank can slow down the whole process in a major way. “The bank controls every aspect of the transaction,” Miller says. “They determine how fast the process moves, when you’ll close, and often which attorney will close the transaction. Buyers who buy REOs are at the complete mercy of the banks who own them.”

To that end, he had an REO purchase that took six months to close. “I complied with their every wish within hours of receiving it, and since they dragged their feet for so long, they re-negotiated the purchase price with me,” he says. “And not to my benefit!”

Baylis describes another common issue he encounters when working with the banks on REOs: For an REO, the buyer typically comes with cash or has at least 20% down. “But let’s say an REO is listed at $200,000, and somebody has a preapproval from their lender for a purchase for $200,000,” he says. “They don’t realize that that’s for a house that they’re going to live in. So I have people putting in new offers all the time for full price, and over full price, and they send me their pre-qualification — but it says they’re qualified if that house was ready to live in. Buyers don’t realize that that prequal does not allow them to buy an investment property. And that’s a big problem.” (For such a property, you’ll need at least 20% down, or cash, or to get a rehab loan.)

Why bother buying REO homes? This is why

Does all of this sound like a lot of potential for drama? Well, that’s a logical interpretation, because there are a lot of potential pitfalls and headaches involved with this type of sale. And there’s certainly no guarantee of success.

But savvy investors say it’s well worth the risks and effort as a way to build personal wealth through real estate.

“Buying rental properties listed on the open market with conventional financing is way too slow,” says Wydeven, the 25-year-old real estate investor. “Unless you can save $30,000 to $50,000 a year for a down payment, you’ll be old by the time you’ve amassed a sizable portfolio. It’s all about getting creative with finding and financing properties!”

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The truth is: it depends. Real estate-owned homes for sale may be sold at a discount and can present an attractive path for some homebuyers. But they also may come with many potential challenges, including significant need for repairs, long closing timelines, and tricky financing. Unless you’re entirely prepared to deal with these types of homes, they may just produce more expenses and heartache than you’re willing to take on. That’s why it’s important to fully understand what real estate-owned homes for sale really are, what potential risks they hold, and how to do your due diligence to determine if you’re willing to take on the process.

We’ve talked with a veteran real estate agent who has flipped over 75 properties and worked extensively with bank-owned homes to bring you a comprehensive guide to these unique properties. So if you’re up for the challenge, you’ll be ready to compete with the best of them in finding a real estate-owned home that’s right for you.

What are real estate-owned homes?

Real estate-owned homes, also known as REOs or bank-owned homes, are properties that have gone through the stages of foreclosure, failed to sell at auction, and have been taken over by the mortgage lender, most commonly a bank. They arrive in the lender’s hands after the borrower defaults on the mortgage payments and, after the foreclosure proceedings, the bank takes ownership of the house. On some occasions, a property may become real estate-owned if a homeowner gives the lender the deed to their home in lieu of foreclosure.

You may also find REO properties owned by government-sponsored enterprises (GSE) such as Fannie Mae and Freddie Mac. After all, both organizations are in the business of buying mortgage loans from banks and other non-bank lenders.

Interesting fact: The term “real estate-owned property” originally comes from a bank’s accounting terminology. Most banks have an “other real estate-owned” section on their balance sheet to list assets owned by the bank that are not part of their primary business. For example, a foreclosed property is now back in the bank’s hands and no longer produces any income for the bank. Eventually, the term was taken to label these bank-owned properties.

How do you find REOs?

According to Arizona real estate agent Kyle Keller, who has over 20 years of experience, real estate-owned properties are found everywhere, but you’re seeing less of them since the COVID-19 pandemic started. In June 2021, distressed sales, which includes REO sales, foreclosures, and short sales, represented just 1% of sales in the U.S, according to the Department of Housing and Urban Development. That’s because many states enacted foreclosure moratoriums that prevented lenders from evicting homeowners, especially those facing financial hardships, during the crisis. But Keller emphasizes they may become more common once those protections end throughout 2021.

However, for the real estate-owned homes that do come onto the market, there are several places buyers can look to find them. Let’s take a look.

• Real estate agents/ MLS database: Your best bet to finding real estate-owned homes for sale is through a licensed real estate agent, Keller says. Buyer agents have access to the MLS database, where agents can search for REO properties or other homes in foreclosure. Your agent will also walk you through the risks and challenges your specific REO home might hold.
• GSEs and government agencies: Fannie Mae has its HomePath program, Freddie Mac has its HomeSteps program, and HUD has HUD Homes.
• Bank websites: Many lenders have real estate-owned property listings available right on their websites. For example, Bank of America has a whole website dedicated to searching for REOs and foreclosed properties in certain states. This may be a good place to look if you’re just dipping your toes into REOs to see what’s out there.
• Specialty websites: Just like you can find websites focused on online home listings, you can find many websites focused on foreclosure and REO listings. Sites like Auction.com and RealtyTrac offer databases for real estate-owned homes for sale in your area.

Stages of foreclosure

As we mentioned, a real estate-owned property usually goes through several steps of foreclosure before it’s officially in the hands of the lender or bank. While the process may differ by state, there are certain general stages that are important to know when looking at REOs.

• Short sale: This isn’t necessarily a stage of foreclosure but an option to avoid foreclosure. A short sale is when a lender agrees to a sale of a property for less than the outstanding mortgage balance. The homeowner doesn’t have to be in default for a short sale, but they will usually have to prove financial hardship.
• Pre-foreclosure: When a homeowner fails to make their mortgage payment for a certain amount of time (usually three consecutive months), the lender will issue a notice of default. This is the beginning step for all foreclosure proceedings. Typically, a lender will give 90 days (again, it depends on state laws) for the borrower to get back on track with payments before proceeding.
• Sheriff’s sale or trustee sale: If the borrower doesn’t resolve the foreclosure within the 90-day grace period, they are given a notice that the house will be sold. The house will then go to auction, which is typically either called a “Sheriff’s sale” or “trustee sale,” depending on your state and the foreclosure proceedings. The bank will often have a minimum opening price that is not necessarily based on market value, but what it is trying to recoup from the mortgage loan it initially provided.
• Bank-owned properties: If the home doesn’t sell at auction, the property goes into the hands of the lender. Most banks have or contract REO specialists that will handle the house from here. They will ensure it gets back on the market, review offers, make sure the property is in good standing, and complete the transaction from the bank’s end. It’s not uncommon for homes to make it to this stage. In May 2021, lenders repossessed over 1,300 homes in the U.S., making them REO properties.
• Government-owned properties: While a government-backed mortgage, such as an FHA loan or USDA loan, may provide some protection or support during foreclosure, a borrower that defaults on payments still may face the possibility of losing their home. If foreclosure does occur, the government repossesses the house and sells it via government-registered brokers.

Are real estate-owned homes cheaper?

The biggest reason a buyer might seek out real estate-owned homes for sale is that they’re looking to score a good deal. But are they actually cheaper? The short answer is: usually, but it depends.

Keller, our Arizona real estate agent, says some REOs can be bought at a discount, at least compared to homes in the same area. After all, banks generally don’t want to have properties on their books that aren’t bringing in any money. So if a home doesn’t sell at auction, a bank may likely want to get rid of it, even if that means it’s at a lower price. In fact, REO properties sold at a 36% discount compared to the average home price in the U.S. during the third quarter of 2020.

At the same time, the deal might not always be as sweet as it looks on paper. Like any business, banks are looking to make money — or at least recoup their losses from the defaulted mortgage previously on the home. So, depending on the circumstances, they will still try to get a fair price for the home, meaning some REOs don’t come at the deep discount you might expect.

Risks of buying an REO property

Even if you can get a real estate-owned home at a good deal, there’s usually a trade-off. Let’s take a look at the challenges you might face.

They’re usually sold “as-is”

Most lenders sell their REOs “as-is,” meaning in the exact condition you find them. Unlike a typical seller who might be willing to negotiate on potential repairs or at least offer a credit, the bank will usually leave all of those potential issues in your hands.

They may be distressed

Keller warns that many REOs may be in rough condition, especially if they’ve sat vacant for a while. In most cases, you can still ask for a home inspection, but you’re most likely not going to receive a seller’s disclosure, Keller says. So it will be harder to learn the property’s history than it may be with a typical transaction.

Plus, if a home has been vacant, it might have been subjected to squatters and vandalism. Keller says he’s seen many real estate-owned homes for sale where the air conditioner units have been taken, as well as copper pipes and wiring stolen. That will only add to the cost of repairing the home.

“Once you figure out how much money it’s gonna take to get the home in good condition, you could actually end up spending more money buying an REO home than buying a regular home that’s already in good condition,” Keller says.

It may be a lengthy process

The average closing time on a home in the U.S. takes anywhere from 30 to 60 days. But when you buy an REO home, you’re not dealing with the average seller. You’re working with an organization that has rules, a hierarchy, and approval processes. That means the transaction and closing may be held up with delays — ranging from a few weeks to more than a month — and the potential for inconsistent communication, especially if the bank that owns the home isn’t local.

Financing may be tricky

Many banks and lenders will approve a loan for an REO home. However, financing may be tough to receive depending on the condition of the home, Keller says. That’s because many banks and government-backed loan programs have minimum standards a home needs to meet for mortgage approval.

Due to that, Keller says cash buyers might be better suited for an REO property, especially those who have the resources to make extensive repairs. That’s why investors tend to look at REOs. They may have the cash, time, and resources needed to pursue these types of homes that many traditional buyers don’t have.

How to buy an REO

Buying a real estate-owned home isn’t that much different than buying your average property, but there are some unique aspects. Let’s take a look at what those are and what steps you should take to protect yourself.

Get mortgage pre-approval

Getting pre-approved for a mortgage is beneficial in any home search. However, when buying an REO home, it can help speed up the process and potentially make you a more attractive buyer to the bank. This can be especially true if you get preapproved through the same bank that’s selling the home as this might streamline communications a bit as you work your way  through the transaction process.

Find a real estate agent

Again, a real estate agent is extremely valuable no matter the home you’re buying. But a knowledgeable buyer agent can help you find the right REO home, walk you through the challenges, and help you protect yourself throughout the process. An REO transaction can become all too confusing, but a trusted agent will tell you what’s worth pursuing and what’s too good to be true.

Research comparable homes

Before you make an offer, take a look at similar homes in the area and pay attention to what price they sold, Keller says. This will give you a good idea of what the REO may be worth and if the listing price is reasonable. It will also give you a better idea of what your offer should be. Keller also says to keep in mind any potential repairs you’ll have to do and the associated costs. It’s essential to look at the entire amount you’ll invest in the property, not just what the purchase price will be.

“Make sure that homes in that neighborhood in good condition aren’t selling for [less than your investment],” Keller says.

“At that point, you might as well just buy a traditional home in good condition.”

Make an offer

With help from your agent, your research should have given you an initial offer amount that makes it a good deal for you and fair for the bank. Now it’s time to go for it.

Include a cover letter that states why you’re interested in the home and why you’re the best choice for the bank. Keeping the amount as close to the listing price and with as few contingencies as possible may help you close the deal as well. And, if you’re willing, it may be helpful to state in your letter you’re willing to take the property “as-is.” The bank will most likely be looking for a clean offer that makes the transaction a little easier.

However, that doesn’t mean you should just give up any negotiating power you have. Keller says, like a traditional transaction, it’s still ok to ask for a home inspection. That way, you can include an inspection contingency and potentially back out of the deal if you find too many issues.

Protect yourself

Just like any average home purchase, there are ways to protect yourself in the process. Keller recommends getting a home appraisal and completing the home inspection, even if you’re buying the property in cash (if you’re financing, the lender will require an appraisal). Even if they don’t allow you to back out of the sale, they will at least provide you more information on what you’re getting into.

A title search to check for liens or judgments is helpful during this step, but not always necessary, Keller says. He says a bank-owned property will most likely have a clean title and no lien issues because the bank usually straightens that out during the foreclosure process, but you should always check to confirm.

Secure your financing

As we mentioned before, financing can be challenging with real estate-owned homes for sale, but it’s not impossible. If a conventional loan doesn’t work out, take a look at a few special programs that may help with bank-owned properties.

• FHA 203(k) loan: A 203(k) loan, sometimes known as a rehab loan or a construction loan, is a government-insured loan that provides financing for the purchase of a house and the cost to repair it. HUD’s FHA program sets certain requirements that need to be met. There may also be higher interest rates and mortgage insurance premiums you need to keep an eye on. However, since many lenders won’t approve financing if your home is in bad shape, this can be a good option for REOs that are fixer-uppers.
• Fannie Mae’s HomePath ReadyBuyer program: This first-time homebuyer program gives buyers up to 3% in closing cost assistance toward an REO home from Fannie Mae. You need to complete a homeownership education course before you can qualify, however.
• Fannie Mae’s HomeStyle loan: Like an FHA 203(k) loan, this type of renovation loan will cover the purchase price and repair costs. It will allow you to finance your purchase and at least a portion of your renovations all in a single mortgage. However, depending on your loan-to-value (LTV) ratio, you may have to complete a homeowner education course before getting approval.

After you have your financing approval, you should be all set to sail through your closing. Pretty soon, you will have your (previously) real estate-owned home in your own hands. And you’ll have all the information to know you made a sound, secure investment every step of the way.

Header Image Source: (Maximillian Conacher / Unsplash)

Sometimes, missed mortgage payments can be remedied with a phone call and a bit of paperwork. Between forbearance programs and loan modification options, if you’re behind on payments by just a couple of months and only need a moment to breathe before your financial situation improves, it’s often possible to find a solution that will allow you to keep your home by talking with your lender — especially if there’s equity in the property.

If things are more urgent, such as when a public notice of default has been issued and you’re now in preforeclosure, or if the amount owed on your mortgage exceeds what the home is worth, it doesn’t take long to feel backed into a corner. Though options may be limited when you’re upside down on your home, getting the lender to agree to a short sale can bring much-needed relief.

As for where you’ll go next? Well, that depends, but if you’re wondering if it’s possible to short-sell your house and buy another, you’re not the first to consider this quandary.

While it’s not impossible, it’s also not as simple as hopping from one closing table to the next. With the help of Jennifer Seeno Tucker, a top real estate agent in Elmont, New York, we’ll break down exactly what a short sale is and how this option impacts your ability to buy your next home.

What is a short sale?

You may already be familiar with the concept, but to recap, a short sale is when the lender agrees to the sale of a home for less than what is owed on the mortgage.

In these cases, there is typically little to no equity in the house, or you may even owe more than it is worth, and recouping losses would be difficult either due to the condition of the home, the current goings-on in the local real estate market, or some combination of both.

If a homeowner is in a situation where discussion of a short sale is on the table, foreclosure is a real threat. Being able to sell the house and walk away without owing anything further is often a big relief.

Short-sale transactions function mostly like a regular deal, though they can invite delays as the lender has to be involved, which leads to more back-and-forth between parties.

How does a short sale affect credit history?

According to both Equifax and Experian, short sales can do nearly the same damage to your credit report as a foreclosure. Though the lender will have agreed to a compromise on the sales price, the transaction will likely still be reported as either “settled” or “not paid as agreed.” Both line items mean that, in the eyes of the national credit bureaus, you ultimately did not uphold your end of the deal after signing your mortgage documents.

While major marks on your credit report can stay there for seven years, your credit isn’t necessarily decimated following a short sale. If your accounts are otherwise in good standing (and you continue to keep them that way), you may have a shot at another mortgage after just two years.

Credit score algorithms place more emphasis on what has happened during the past 24 months, so it’s possible that a lender will be willing to chat after the dust has settled.

What if you can’t make your mortgage payments?

Financial strain can arise through any number of circumstances. Whether due to job loss, a family emergency, medical issues, or some other unforeseen happenstance, few things are more stressful than realizing you won’t be able to make your mortgage payment.

If this happens, there are a few people you should have on your contact list.

Talk to your lender

Your first step should always be to contact your lender as soon as possible and explain the situation. Even if you only anticipate a month or two of problematic payments, it’s always in your best interest to be transparent and see if there’s any leeway for a late payment without penalty, a change in the date that your payments are due each month, or some other relatively minor but relief-offering solution.

Under the COVID-19 pandemic relief legislation, you may be eligible for temporary forbearance, which could impact part of or all of your payments. Just keep in mind that forbearance is not a payment forgiveness program; it only serves as a pause on having to make payments. You’re still ultimately on the hook for the full balance of the mortgage. At the time of this writing, coronavirus forbearance will be active through June 31, 2021.

If you are worried it may be more than a month or two, it’s also worth speaking to your lender to discuss options for loan modification or if to see if you might qualify for refinancing. Many homes have increased in value over the past year, and interest rates have been remarkably low. Depending on your situation, you may be able to refinance your home and not only keep it, but also save money in the process.

Keep in mind, though, that in order to refinance, you’ll still have to qualify for a home loan. So if your income and credit score aren’t in great shape, this option is unlikely. Likewise, if you’ve missed mortgage payments without a forbearance plan put into place, you’re unlikely to qualify for a refinance.

That’s why talking to your lender is so important. Even if you can’t refinance, they may be willing to provide you some form of loan modification that will allow you to stay in your home until you can get back on track.

You will also have to negotiate with your lender anyway if you are considering the possibilities of a short sale, so starting that conversation and discussing what options are available to you is something best done sooner than later.

Talk to a real estate agent

If your situation is such that forbearance or refinancing are implausible solutions, it’s time to contact an expert.

An agent can help you determine the market value of your home as a first step toward deciding what to do next — and this could bring about some much-needed good news.

“If you’ve been keeping up [with payments] until COVID-19, there may be an opportunity,” says Tucker.

“In my local market, we’ve seen an almost 6% rise in home prices, and that can be the difference in a homeowner walking away with tens of thousands of dollars instead of walking away with nothing. In this market, people may not realize they have equity in their home.”

An experienced agent will be able to share the latest information on what’s happening in the neighborhood and how your home is likely to fit into current trends. When you’re facing the possibility of a short sale, it’s important to gather as much knowledge as possible.

Talk to a financial advisor

In the spirit of gathering information, it can’t hurt to speak with a financial advisor to discuss your options from multiple angles. Especially if you have savings, bonds, or investments that can possibly be tapped to bring your mortgage back up to speed, it’s worth exploring all avenues with a financial professional.

Further, you should understand that your mortgage lender may not approve a short sale if you technically have funds available elsewhere. Short sales aren’t meant to be a get-out-of-jail-free card, so you’ll need to submit a hardship letter and be able to prove that your income and assets are not sufficient to satisfy your mortgage. A financial advisor can help you suss out your net worth and put together key details.

Approach a short sale as a last resort

Once you’ve reached out to everyone who can offer advice or potential solutions, the reality may be that a short sale is, in fact, your best option.

In a true short sale, you won’t make a profit on the sale of the home; all proceeds will go to the lender. This is why it’s so important to tap the expertise of a real estate agent first, because a hot seller’s market could mean there’s demand for your home that you didn’t even realize and knowing your home’s approximate value also puts you in a strong position if you need to go to your lender to discuss the possibility of a short sale.

So, you sold your home in a short sale. Can you buy again now?

As noted earlier, if your lender reported the short sale as anything other than “paid in full,” your credit history now carries a metaphorical red flag for at least two years.

How the short sale will be reported is something you can try to discuss with the lender as the process is happening, but even if your specific representative is a kindhearted individual, their hands will likely be tied to policies that they hold no power to override. If rules require the reporting of a short sale with a terse “settled” or “not paid as agreed,” there’s little hope of arguing.

What you can do in the meantime, however, is make sure that your other accounts — credit cards, auto loans, student loans, utility bills, mobile phone, and so on — remain current and in good standing. As your financial situation improves, you can start to save for a down payment and, in combination with an otherwise gleaming credit report, potentially be able to secure a new mortgage in time, even if your credit score has taken a dip.

Tucker recommends proceeding with a short sale rather than letting a home go into foreclosure whenever possible.

“A short sale is really the best way to go as opposed to foreclosure because you’re able to recover after two years and purchase your next home,” she says. “Do the short sale and then wait those two years and see where your credit is at. After year one, you might look to some sort of credit repair specialist to see what makes sense.”

So, while it’s unlikely that you can sell your home via short sale today and buy another home tomorrow, it’s not the end of the road. Take this time to get back on your feet, refocus, and move forward.

“It’s okay,” says Tucker. “Things happen, and we move on from them.”

Header Image Source: (Matt Hardison / Unsplash)

At some point, through perusing the details of the listing, or perhaps through something as obvious as a small rider attached to the yard sign, you realize this home is in foreclosure.

What does that mean? Can you still buy it? How? And why is it priced so low?

Answering these questions, as well as others that will occur to you, requires a look at the sometimes wacky and sometimes wonderful world of foreclosures.

Foreclosure as a process

The first thing to understand is that foreclosure is what happens to a home when the owner stops making payments on the loan used to purchase it. It’s similar to what happens to a car when the owner fails to make payments on the auto loan. That is, the lender takes possession of the asset — in this, case, the home. That gives you, the prospective homebuyer in search of a great house at a great price, the opportunity to buy it.

Also understand that foreclosure is a process — sometimes a lengthy one — and that foreclosed homes come in two main varieties depending on their place in that process: preforeclosure and post-foreclosure.

“Preforeclosure could mean one of two things,” explains Ed Kaminsky, who works with 66% more single-family homes than the average Manhattan Beach agent and has an annual sales volume of over $180 million. “It means for sure that the homeowner is behind on their payment. It could be that an actual notice has been given to the owner that they are behind and the bank is about to take action against them if they don’t get caught up. It doesn’t mean the home is going to be foreclosed on.”

So a house doesn’t go into foreclosure as soon as a homeowner misses one mortgage payment. Instead, there’s a process, and it will be slightly different in terms of timing depending on where you are buying.

“Each state has their own rules on how much notice has to be given,” Kaminsky says. “In California, if a homeowner is 30 days behind on their mortgage, the bank has the right to issue a notice of default. That means they’ve defaulted on their payments.

“This is a 90-day notice that the bank has the right to foreclose on the home. Once those 90 days are up, the bank can go to the next step, which is a notice to foreclose.”

Even in California, many lenders may not file that notice of default after one missed payment; they’ll usually try to work with the borrower first. But as a rule, no matter where you are, after the homeowner has missed between three and six months of payments, the lender will record the notice of default with the city or county recorder.

Now the house is in preforeclosure. However, the homeowner still has a chance to work out some kind of deal with the lender to stay in the home. Again, depending where you are, this grace period could be from between a month and several months long.

“At any time, the homeowner can contact the bank and work out a payment plan to stop the foreclosure,” Kaminsky says. “Most banks don’t want to foreclose. They want to avoid foreclosure.”

If no deal can be arranged, or the homeowner doesn’t try to stave off foreclosure, the house will go into foreclosure and the lender will take possession of it. But that is unusual.

Kaminsky estimates that 90% of homeowners who receive notices of default manage to work things out with their lenders and avoid foreclosure.

Buying a home in preforeclosure

With all this in mind, you can potentially buy a house that is in preforeclosure. As long as the homeowner is in default (the bank has not yet foreclosed and taken possession of the house) and is still the home’s owner, they can decide whether or not they want to list the house. And they sometimes do.

Also, your agent may have become aware — likely through checking county records of notices of default — of a home that isn’t listed for sale but is in preforeclosure. This can give you (or any other buyer) the opportunity to submit an unsolicited offer.

Sometimes homeowners in default welcome such offers. They might be looking for a way to get out from under their mortgage payment. Your offer to buy it could be their way out.

There’s no guarantee, however. Some defaulted borrowers will consider an unsolicited offer to be an unwelcome distraction from their effort to catch up on missed payments or otherwise settle the matter with their lender. For instance, a deed-in-lieu-of-foreclosure agreement lets the homeowner avoid foreclosure, and the resulting hit on his or her credit, by simply handing over the home.

Another possible wrinkle is that the balance on the loan might be more than the house is worth. If that’s what’s going on, it would be sold as a short sale. The lender has to agree to a short sale, even if you and the seller agree on a price. If the lender doesn’t like the offer, they can and will reject it. Either way, it could take months for the lender to give the offer the thumbs-up or thumbs-down.

To find out what’s going on, ask your agent to contact the homeowner to find out the details. He or she may already have done that.

“It’s a method of agents to find new listings to call homeowners who are in default before the banks take the property,” Kaminsky says.

Keep in mind that houses at any stage of foreclosure may need significant repairs. If you’re buying a preforeclosure from the current owner, you can and should order an inspection. However, a seller in financial distress may not be able to fix much so the sale could be as-is.

Otherwise, assuming it’s not a short sale requiring the bank’s okay, a preforeclosure sale is no different from another purchase.

After the foreclosure

When an owner doesn’t or can’t sell or keep up the payments, the process of foreclosure continues until, often after months have passed, the bank takes possession of the house. At that point, the first and only thing the lender wants to do with the house is sell it — lenders aren’t in the business of owning property.

Lenders usually sell repossessed properties at foreclosure auctions. Foreclosure auctions happen everywhere, in just about every county in the country. You can find out about foreclosure auctions in a variety of ways, including local newspapers, courthouse postings, and online databases of them.

And, although the process varies somewhat depending on where you are, the standard foreclosure auction happens at the local courthouse. A representative of the lender solicits bids on the property, the bidders bid, and the highest bid wins the house. (That’s a simplified version.) During the coronavirus pandemic, many auctions have been taking place online only.

“You have to check with your jurisdiction,” Kaminsky says. “But, generally, they’re live auctions held by a trustee of the bank. They literally are standing on the courthouse steps.”

There are different types of auctions. Sometimes the bank will accept the highest bid no matter what it is. Other times, if the highest bid is lower than a predetermined minimum, the bank can decline to sell to the auction winner.

In Kaminsky’s experience, the first bid amount set by the lender is usually the balance owed on the mortgage. “If it’s a $1-million home, and the homeowner owes $550,000, the first bid is typically $550,000,” Kaminsky says.

Getting ready to bid

If you want to bid on a house at a foreclosure auction, you’ll have to prepare. This is not like ordinary house-hunting.

For one thing, you won’t be able to get the home professionally inspected or even walk through it to check for problems before making your bid. “You have to buy the house sight-unseen,” Kaminsky says. This means, among other things, that you need to have a cash cushion to address any repair issues that aren’t visible before the auction.

That’s not all. Kaminsky notes that many foreclosed homes still have the former owners living in them. “You have to find a way to legally get them out of the house,” he says.

There’s more, starting with the way you’ll finance the purchase. In short, you likely won’t finance it. Although local practices may vary, the majority of foreclosure sales have to be paid for with cash, either on the day of the sale or very soon thereafter. “There’s no option,” Kaminsky says. “You can’t finance a foreclosed property if you’re going to the courthouse steps.”

Another important concern: No title insurance for homes purchased at a foreclosure auction.

“Title insurance ensures that you’re getting title to the property and there are no senior loans,” Kaminsky says. “You’re buying, in a sense, not the house at auction, but the loan. If there’s something senior, such as a government property tax lien, you’re responsible for paying those off. So you need to do due diligence with a title company to find out what you’re buying.”

As if that’s not enough, you may do your due diligence, come up with the necessary cash, take a deep breath and submit the highest bid — only to find out that the current owner of the house doesn’t have to give it up after all.

In states with “right of redemption” rules, borrowers have a certain amount of time to come up with the amount they owe on the loan and stop the foreclosure process, so this can be another snag in the process.

After the auction: REO homes

Often, foreclosed homes don’t sell at auction. If this happens, it becomes a bank-owned home — what is known as an REO property, which stands for “real-estate owned.” A foreclosed REO home is likely to be listed on the market for sale as-is.

“The moment the bank gets the property after an investor doesn’t buy it, they hire a real estate agent and put it up for sale on the local market,” Kaminsky says. “You buy it through the normal process.”

Government home loan programs have set up entire systems to ease the process of buying their REOs.

• HomePath is a system set up by Fannie Mae to sell its REOs.
• HomeSteps is run by Freddie Mac to help buyers shop its REO inventory.
• HUD Homes is the Department of Housing and Urban Development (HUD) system for selling its REOs.

Some major private lenders also operate online tools to help you buy their REOs.

In addition to being easier to find, you do have the opportunity to inspect or walk through these homes — although they’ll be sold as-is. You can also buy them with the same sort of financing you’d use for any home purchase, although some lenders are cautious about foreclosure loans.

This last approach, buying an REO, is probably the easiest, most accessible way for you to buy a foreclosed home. And the good news is, REO lists are where many foreclosed homes wind up.

“A very large percentage of homes that get foreclosed upon do come in the open market, and you can buy it with traditional financing, traditional title insurance, and buy it safely,” Kaminsky says.

The state of the foreclosure market

Of course, along with location, timing is very important in real estate. And right now, thanks to recent and current price appreciation trends, there aren’t that many houses in foreclosure. The reason is because when a homeowner gets behind on the mortgage in a house that is worth a lot more than is owed, most of the time they don’t go through foreclosure.

“We’re not in a foreclosure market right now,” Kaminsky says.

“We’re in a hot market where most sellers have plenty of equity. If they fall behind on payments, there’s still a good chance they can put it on the market and sell it and get their homes paid off.”

Clearly, buying a home in foreclosure is a bit tricky. Working with an agent who has experience with these deals (at any stage) can keep you from potentially making an expensive mistake.

But for the right kind of person whose dream home shows up as a foreclosure, it is worth the effort. “If you’re an opportunist and can pull together cash,” Kaminsky says, “learning about the foreclosure process can be very risky — and very profitable.”

Header Image Source: (Andy Dean Photography / Shutterstock)

“Huh,” you think, “I wonder why there are no pictures.” Yet you find yourself intrigued. The home is just the right size at the right price, and it’s located in the neighborhood you’ve been dreaming of — a neighborhood that doesn’t have a lot of homes available for sale.

There’s only one problem: This preforeclosure home likely isn’t for sale at all, and the owner may have no idea it’s even listed on major real estate sites (more on that soon).

But that doesn’t mean you can’t buy a preforeclosure. With a little patience and a lot of tact, that perfect preforeclosure could be yours. But you have to know how to take the right approach.

We talked to top experts with years of experience buying preforeclosures to get the rundown on how the process works, plus their best tips for buyers. Here’s what you need to know.

What’s a preforeclosure?

When a homeowner stops making mortgage payments for at least three months, their home loan typically goes into default, and the lender initiates the foreclosure process. Preforeclosure is the first stage of foreclosure, so the home isn’t being sent to auction — yet.

The preforeclosure period usually lasts anywhere between three and ten months. During this period, the homeowner can catch up on their missed payments and end the foreclosure process, or they can choose to sell their home to avoid foreclosure.

If the owner decides to sell and owes more on the home than it’s worth, they’ll have to get the lender to agree to a short sale (meaning the lender comes up “short” on the sale). If they’re in a good place with their equity, they can sell the home just like any other typical home sale.

However, if the homeowner doesn’t sell and remains in preforeclosure, it’s a waiting game while the lender finalizes the foreclosure proceedings, and then the home is typically sold at auction.

Unless, of course, you get in there first.

Are preforeclosure homes on listing sites really for sale?

Preforeclosure homes aren’t technically for sale. Only homes listed for sale are for sale.

So if you’re interested in purchasing a preforeclosure, understand that it’s not for the faint of heart. You’ll have to convince the homeowner to sell their home to you rather than go through foreclosure proceedings.

You might be wondering why someone would prefer to go through a foreclosure — and accept all of the damage it does to their credit — rather than sell their home. You’d be surprised to learn how many homeowners take this route!

“Just because somebody’s in foreclosure doesn’t mean they want to sell their house,” reveals William Tingle, a real estate investor who’s been buying preforeclosures for more than a decade.

In fact, most people in preforeclosure don’t want to sell.

Tingle says he’s talked to hundreds of homeowners in varying stages of foreclosure, and roughly 80% have no interest in selling, even if selling means avoiding foreclosure.

The pros and cons of buying a preforeclosure

Okay, so let’s say you can convince this homeowner to sell you their home before they hit foreclosure. You probably want to know whether buying a preforeclosure is a good idea. Here are a few pros and cons to consider.

Benefits of preforeclosures

• You can sometimes get a good deal on the price since you’re not facing as much market competition for the home.
• A preforeclosure may make a neighborhood accessible to you that wasn’t before.
• Preforeclosures tend to be in better shape than foreclosures because they’re typically still occupied by the homeowner and haven’t been sitting vacant.
• You’ll be helping the homeowner get out of a bad situation and salvage their credit from the longstanding consequences of a foreclosure.
• Because preforeclosure takes a while, the buyer usually has time to finance the home (unlike with foreclosure auctions, which tend to be cash only).

Drawbacks of preforeclosures

• Preforeclosures can have title issues because the homeowner is in financial distress and may have taken out other loans on the property.
• Since the owners are facing economic hardship, preforeclosure homes may have deferred maintenance and need some repairs.
• Preforeclosure homes aren’t for sale, so you may never hear back from the owner — or they could react poorly to your approach.
• Negotiations tend to be more sensitive with preforeclosures, and those will likely involve the owner’s lender and attorney.
• How much the seller is able to accept for the home may depend on what they owe their lender, so you might not get that great of a deal.
• Depending on what stage of the foreclosure process the home is in, it might be too late to get out in front of the foreclosure.

6 top tips to buy a preforeclosure like an investor

Investors buy the majority of preforeclosures, and there’s a good reason for that. They’ve got lots of specialized knowledge in buying distressed properties: They know which deals to jump on and which to avoid.

“There are some pitfalls if you don’t know what you’re doing,” Tingle warns.

Yet he still enthusiastically believes anyone can buy a preforeclosure — with the right guidance, of course. Here are six top tips to help you avoid major preforeclosure pitfalls and buy like an investor.

1. Hire the right real estate agent (and team!)

When it comes to preforeclosures, all real estate agents are not equal. You’re going to need the right agent, one with the specialized knowledge and skills required to deal with a sensitive transaction.

“Definitely look for someone who specializes in foreclosures and short sales and understands title and lien issues, and knows how to negotiate in those scenarios,” advises top Florida agent Cinthia Ane’ McGreevy, who works with 80% more single-family homes than the average area agent.

Ane’ McGreevy says to confirm that the agent has special certifications for distressed properties. A few of the major certifications include:

• Certified Distressed Property Expert® (CDPE)
• Federation of REO Certified Experts (FORCE)

Another way to check the agent’s credentials is a question you can ask during the interview process: How many buyers do they help purchase distressed properties each year? And how does that compare with how many buyers they help with more typical purchases?

Their answer can give you an idea of how much of their business is devoted to understanding the complex issues that can come up with foreclosure proceedings.

An agent who devotes 75% of their business to distressed properties is going to have a lot more expertise than an agent who helps one or two buyers purchase foreclosures each year.

All of that is to say, the right agent is your secret weapon when buying a preforeclosure.

But you’ll also need a few other key members on your real estate team.

“Make sure you’ve got a good title company or attorney on your team,” Tingle shares.

He says most issues with preforeclosures come up on the title report, so a great title search team is an absolute must for protecting your investment (we will get into that soon).

2. Know where to look for properties

When he first started buying preforeclosures about 11 years ago, Tingle was living in Georgia. He says back then it wasn’t so easy to get preforeclosure information, and investors would show up to the courthouse each day to research the latest filings.

Thankfully, technology has made it a lot easier today.

“Nowadays, a lot of that stuff’s online,” Tingle explains. “For example, I’m in Colorado Springs right now, and I can just go to the courthouse website and see what was filed since yesterday. So if a lender files an official notice, it’ll be there, and I’ll know immediately.”

Check your county’s courthouse website to see if preforeclosure information is readily available.

Another way of finding preforeclosures is to buy lists of homeowners in your area that are 30, 60, or 90 days late on their mortgage payments.

Tingle says these lists are popular with investors. They’re easy to come by, and there’s no reason regular homebuyers can’t take advantage of them, too. Your agent can help you locate them if you’re having trouble tracking them down.

3. And know where not to look

What about the preforeclosures you see on major listing sites like Zillow? According to Tingle, investors and agents in the business tend to avoid these so-called listings because they frequently contain outdated or inaccurate information.

“You call or you try to inquire and they’re off-market, and they’re not updated very regularly. So I never use them as a source,” he shares.

If you’re looking for the most accurate information available, stick with the courthouse filings and late payment lists.

4. Use every online research tool at your disposal

Since the home isn’t for sale, you’re not going to have the advantage of asking a listing agent about the specifics of the property. You’ll want to learn everything you can about the home before you send your agent to a distressed homeowner’s door to make an offer.

So how can you figure out if this is the right property for you?

Court listings don’t tend to give a ton of information about preforeclosure properties, but Tingle says there are plenty of tools online you can use to do your research.

For example, the county’s tax assessor website likely has information on the home’s square footage, the number of bedrooms and bathrooms, its buy and sell history, and sometimes it will even have photos of the property. Some counties even include past land surveys, which map out the property and all its land features.

You can also try to find the home’s past listings on major real estate websites. This is a great way to find interior photos and learn more about the home and its features.

5. Be mindful of how you approach the seller

As you’ve probably gathered by now, the process for buying a preforeclosure is a bit more delicate than a typical home sale. You can’t simply make an offer to the listing agent, and the homeowner may be downright hostile to any approach about selling.

So first, you have to find out if they’re even interested in taking offers at all.

Tingle’s strategy is to start with a soft approach.

“I don’t typically call them. I’ll mail them a card and let them know about my interest,” he says.

A few homeowners do reach out to him this way. For those that don’t respond, as it gets closer to the auction, Tingle will often go knock on the door and offer to buy the property. Still, he says, the majority turn him down — even days out from auction.

This soft approach works well for investors like Tingle, who are casting a wide net. But if you’re a buyer interested in a specific preforeclosure property, you probably don’t want to take quite this soft of an approach. If you’re in the market for a home, you probably don’t have months to wait around to maybe never hear back from a homeowner.

For the typical homebuyer, Ane’ McGreevy says a personalized note can go a long way.

“Get with your agent and have your agent reach out to the owner,” Ane’ McGreevy says.

“I would send a letter. A nice, handwritten letter I find works really, really well.”

She says this tactic has helped her land dream homes for buyers — and it helps out a struggling homeowner in the process.

No matter how you decide to approach the property owner, it’s probably best to let your real estate agent make contact on your behalf.

A foreclosure is often a sensitive and devastating time in a person’s life, so having a strong and compassionate communicator on your team can make all the difference.

6. Never skip out on due diligence

The reality is, when a homeowner is in financial distress and not able to make their mortgage payments, they’re usually forced to defer maintenance on the home, as well. This can cause problems for buyers, especially when small problems — like minor roof leaks — spread and turn into bigger problems.

When it comes to buying a distressed property, due diligence is your best friend.

“There’s a lot that has to be checked out with foreclosures,” Tingle shares.

Enter the home inspection and the title report.

Home inspection

A home inspection is technically optional, but you don’t want to skip it, especially with a distressed property.

Including an inspection contingency with your offer gives you the option to walk away from the deal if something major comes up — like, say, it turns out that minor roof leak is actually a major leak, and the whole roof needs to be replaced.

Title report and insurance

Tingle says clearing the title report (and having a title contingency!) is also particularly important for preforeclosures because many have second or even third liens on them — money you could be on the hook for if you don’t protect yourself with a proper title search and insurance.

“Most of the issues with preforeclosures are hidden in the title report. Do they have junior liens or judgments against them?” Tingle says.

Without knowing the extent of what’s owed on the property, and to whom, you can’t know what you’ll end up paying for it.

In today’s seller-friendly market, it can be tempting to waive your inspection and title contingencies, but Tingle says it’s seldom advisable to do so with a preforeclosure.

For example, one of his investor students was recently buying a distressed property and had no idea it was in foreclosure. She just thought she’d found a motivated seller.

After talking to the lender and getting some more information, she learned that the house was in foreclosure. The owner had filed bankruptcy the year prior and hadn’t made payments in quite some time.

“So it’s going to cost some money to pay up the back payments,” Tingle adds.

Hiring a great title company is one of the best ways to protect your investment and make sure you don’t end up footing the bill. And a real estate agent who works regularly with foreclosures is going to be your best line to find the title company that’s a great fit for you.

Header Image Source: (diann boehm/ Unsplash)

Yes, a short sale can be a great chance for a buyer to get a good deal on a home, and that added bang for the buck might allow you to buy more house, or to buy in a better neighborhood than you might get with a traditional home sale in your budget.

But while short sales offer potential opportunities, they come with plenty of potential pitfalls as well. So hunting for this type of home can be tricky business requiring patience, finesse, an experienced real estate agent on your side — and all the knowledge you can possibly gather to inform the process.

To help you gain that nuanced know-how, here are 13 expert-backed tips to follow to make sure your short sale-buying experience goes as well as possible.

1. Know if a short sale is the best option for you

If you’re considering a distressed home, weigh the option of a short sale against the possibility of buying a foreclosure or bank-owned home.

A short sale happens when the seller owes more on a property than it’s worth, and the lender agrees to sell the home at a loss — coming up “short” on the sale.

Generally speaking, short sales will be in better condition because they are likely to be occupied given that the homeowner still owns the property.

These properties may not be fully updated, but they aren’t likely to have some of the problems common among foreclosures that have been sitting vacant (such as vandalism or theft). Correspondingly, short sales will also likely cost a bit more than the other options. And they’ll take longer, too.

“Foreclosed properties go a lot quicker because they’ve already gone through the foreclosure process,” explains Andrew Monaghan, a Phoenix-based agent with 20 years experience, who has sold 77% more single-family homes than the average agent in the area. Whereas, he notes, short sales are much more entangled.

2. Know where to find them

If you’re searching for a short sale, first find a local buyer’s agent who knows both the area and the business of short sales as much as possible. Many brokerages provide lists of short sales for interested buyers, so ask your agent to provide it.

Short sales are generally available directly through the MLS. You can also find short sales through the newspaper; by posting an ad announcing your search on community bulletin boards or social media; and generally by networking in your community. Some online platforms also have search filters for short sales.

Do note that in a strong housing market, short sales will be much rarer and harder to find, because it’s far less likely for a homeowner to end up underwater.

3. Read between the lines to understand a listing that interests you

Sometimes short sale listings are flagged explicitly as such. If not, some language in the listing might provide clues that they are in fact short sales, such as “subject to bank approval,” “notice of default,” or “headed for auction.”

The city or county clerk’s office has lists of people in loan default, or pre-foreclosure, but note that there’s a period of typically about six months after a homeowner’s last missed mortgage payment before the bank will actually foreclose. So these homes may become short sales, but it’s not a sure thing, and whether it sells as a short sale or a pre-foreclosure depends on the home value and the loan amount.

4. Not every agent understands short sales

These are specialized listings, and working with an agent who isn’t familiar with short sales can cost you in both time and money.

The National Association of Realtors offers a short sales and foreclosure resource certification that distinguishes the experts.

5. Certain government loans might not work for short sales

In general, getting a loan for a short sale works much the same way as getting any other home loan. That said, FHA and VA loans require homes to be in certain conditions, which a short sale might not meet.

One tip: You can try to get preapproved or secure a loan with the seller’s lender in an attempt to expedite the short sale buying process and make sure you’re in the clear.

6. Be ready to deal with a third party

The seller may approve your offer, but the seller’s lender has to sign off on the deal, too — which means you’ll need that lender’s approval.

The lender is aware of the market value of the property, and it won’t sign off on a larger loss than is absolutely necessary. That means you might get a deal on the house, but you aren’t likely to save that much money.

7. Get an inspection

Short sales are sold in as-is condition, so you aren’t going to get the seller to make repairs. That said, you want to know what you’re getting into even if you can’t ask the seller to fix it — so definitely get a home inspection.

It’s a good idea to decide in advance what repairs you are and are not willing to inherit, and the inspection will help you determine how much work and expense this home would require if you were to become its owner.

8. Pay attention to the appraisals

The process of buying a short sale involves two appraisals: one when your own lender funds your loan, and another one for the seller’s lender to make sure they’re not losing too much money. If the appraisal for your lender comes in under the home’s offer price, you may need to come up with the additional funds or call it a day and walk away.

On the other hand, if it comes in high, this is a circumstance where the seller’s lender might ask for more money or perhaps even cancel the deal.

9. Cultivate your patience

As we’ve discussed, you’ll be waiting for a bank to get back to you, which is not simple or fast. Even if the seller approves your offer quickly, the lender must approve your offer next — and that can take many months of waiting.

During that time, the market might strengthen, and that can be good news for your potential equity if the sale finally closes at your offer price. But it can also be an opportunity cost if you lose the house — or other, better living spaces — while you wait.

10. Lock in your rate

Because the timeline for a short sale can be long, you’ll want to remain in close communication with your lender during this time. And ideally, you’ll want to get your interest rate locked in for as long as possible.

Some lenders will let you lock in your interest rate for up to 90 days. Therefore, if interest rates go up while you wait, you’ll keep your own rate from rising along with it.

You might also try to arrange a float-down option so that if mortgage rates fall below your locked-in rate, you can get that even better rate when the time comes.

11. Be ready to pay more in closing costs

You might be asked to bring more to the table as the buyer in closing costs than you would ordinarily, and that’s a detail you should factor into your budget.

Short sale buyers likely have to pay the full buyer closing costs, whereas you can often negotiate with the seller to have them cover some closing costs in a traditional sale. Though in a strong seller’s market, sellers have little incentive to cover a buyer’s closing costs.

The bank probably isn’t going to pay your closing costs because they’re trying to recoup as much on the loan as possible. (However, it might if doing so seems to support the interest of avoiding foreclosure.)

12. Title insurance is important

This will protect you from any unknown claims, liens, or heirs in case the title review misses something. It’s especially important for short sales, where there are more unknowns.

“Maybe there’s a second loan and maybe a third. Maybe there’s a solar lease,” Monaghan explains. “Title insurance can protect the borrower against a number of things like that.”

He adds,

“It’s extremely important. You want to make sure that any and all liens on the property, or people who have a claim to the title on the property, are satisfied before you close.”

13. Have the strength to walk away

Short sale purchases are typically long, drawn-out, and complex processes. So buyers should come prepared with major endurance as well as nerves of steel to stay in the game for the long haul. And if it’s not working the way you hoped? That’s OK too: Know when to cut your ties.

“There’s just a lot more that can go wrong than people think,” Monaghan says. So manage your expectations — and be prepared to walk away if that great-sounding deal starts to look like anything but.

Header Image Source: (Zoran Pucarevic / Shutterstock)

On the surface, a short sale might sound like a great deal for a would-be buyer who is better positioned to benefit from the seller’s tough spot. And it might very well be: It offers the new buyer the possibility of a great bargain.

But that’s far from a guarantee. This type of sale comes with plenty of challenges, including a drawn-out closing process and little room for negotiation with an as-is sale.

For a deeper dive, here’s our expert-backed list of pros and cons to weigh before searching for that short sale so you know exactly what you’re getting into.

Short sale pros

Why would a buyer want to deal with an as-is sale that might take longer? There are some advantages to purchasing a short sale.

1. Sellers are motivated to work with you

With short sales, sellers are motivated because they’re facing a short sale as a last hope of avoiding foreclosure. That means you as the potential new buyer will probably have an easier time negotiating with the seller compared with a seller who plans to get top-dollar in the traditional market.

2. You can get a bargain

You may be able to get the house for below fair-market value — obviously a big win for a buyer hoping to get a deal and the possibility of building equity fast.

3. You get more out of your budget

And because you’re likely to get a better deal, you can get more house for your budget, which means you might be able to buy a home in a neighborhood that you wouldn’t otherwise be able to afford. So short sales are often good opportunity generators for buyers.

Put simply, “You’ll be able to buy more, and get more bang for your buck,” explains Andrew Monaghan, a Phoenix-based agent with 20 years of experience who has sold 77% more single-family homes than the average agent in the area.

4. You have major equity potential

With a short sale — by definition — the seller owes more on the mortgage than the house is worth. And for that reason, the home in question is not likely to be renovated, updated, or otherwise readied for sale. That can net you a discount below comparable properties where the sellers are better positioned to make the house appealing for sale, and to squeeze every possible dollar out of it.

“You get an opportunity to build your equity through sweat equity when you get into the house,” Monaghan says.

Beyond that, you might even start building equity before you get the keys: “For instance, there’s the fact that if you get an offer accepted today and the market is still going up, you’ve got six to nine months, probably, before the entire process is over,” he says. “So, the buyer has got a gain of equity even in that period.”

5. Short sales are in better condition than foreclosures

While short sales may not be fully updated or readied for sale, they are likely to be in better condition than other distressed sales. That’s because they are often still occupied — after all, the homeowner currently owns the property, not the lender.

These owners might not have been able to make all recent repairs, but the homes probably haven’t been sitting vacant. So they haven’t been squatted, burglarized, vandalized, or flooded for weeks without anybody noticing — and the condition is probably OK.

6. You can get an inspection

Plus, you can get a short sale inspected, unlike you would when buying a foreclosed property at an auction. So if you are going the distressed route, a short sale feels like a less risky option, with more data points around the home’s condition available to the buyer.

7. There’s less competition

Further, there’s typically less competition for this type of listing. You don’t have to worry as much about other buyers swooping in and disrupting your deal, which can add a lot of stress with a traditional sale in a hot housing market.

“Some people just don’t want to get into it,” Monaghan explains. “They don’t want to have the emotional roller coaster.” And that’s good for you … if you’re up for it.

Short sale cons

Of course, there are also good reasons why some buyers should be wary of short sales.

1. You won’t save that much money

We’ve established that buying a short sale can be an opportunity to save some money on a home purchase.

But the reality is, you aren’t likely to save that much cash. That’s because the lender approving the short sale will usually conduct a detailed valuation to determine the property’s current fair market value before deciding whether to accept your offer, and it will likely only agree to a significant discount if the house isn’t updated or in the same condition as neighborhood comps.

2. Short sales can drag on forever

Because the lender is involved and must approve your offer after the seller does, a short sale takes much longer than a regular sale — it could be several months while you wait for the bank to respond to the offer.

It’s just not going to be a quick sale, and therefore it won’t be right for a potential buyer who needs to move in quickly. “A short sale is anything but short,” Monaghan explains.

3. Short sales are sold as-is

Again, these homes are purchased as-is. You can (and should) get an inspection, and include a contingency that says you can back out of the deal if the condition is really problematic. However, you won’t be able to negotiate repairs — you simply must take it or leave it.

4. You have little room to negotiate

With a short sale, you don’t have as much room to negotiate as a buyer — both in terms of price and concessions (asking the seller to pay closing costs). The bank is well aware of how much money they stand to lose on the deal, and that limits your wiggle room.

5. Not every agent handles short sales

Because these are specialized listings, not every agent can handle a short sale with the expertise, the finesse, the specific negotiations know-how — and the endurance — they require.

These sales are more complicated, with more players and more sign-offs, and you want to make sure you pick the right agent for the job. That’s going to be one specifically experienced with short sales.

6. Listings can be hard to find

These listings simply aren’t always easy to find. This type of sale comes about as the result of a specific homeowner circumstance, and that circumstance isn’t equally likely to happen everywhere (or at least not often everywhere).

You’re less likely to find them overall when the market is strong, whereas in the Great Recession — which was at its core driven by the housing market — they were available in abundance almost everywhere.

“At this moment in time in the market, there are very few short sales,” Monaghan explains. “Because the market is moving at such a level right now, there are very few homes that are underwater.” (He notes that this may change when moratoriums related to the coronavirus pandemic lift.)

Overall, there are many potential upsides to buying a short sale — and many potential pitfalls, too. So approach your house hunt with an open mind.

And know this, according to Monaghan: “This is a market for a subset of a buying population, but it’s not necessarily for everybody.”

Header Image Source: (Andy Dean Photography / Shutterstock)

In urban and beachside markets, condos are often a great option for purchase, as long as you’re well-informed about the process. But what happens if the property you’re considering is a condo and a short sale? Should you cross it off your list? Or could it be a wise purchase?

The answer isn’t always so clear-cut. Ron Wysocarski, a Florida real estate agent who specializes in condos, says, “It depends. Buyers need patience and risk tolerance. There’s some delayed gratification involved.”

What is a condo short sale?

A condo short sale is a real estate transaction that occurs when the seller owes more on their condo than what it’s worth. To better understand the idea here, let’s start by defining the terms in greater detail.

What a condo is and isn’t

A condo (or condominium) is an individual dwelling that’s part of a larger, multi-unit building.

Condos are individually owned –– just like a single-family home –– but they may share walls with neighbors above, below, or on either side, depending on the layout of the condo building.

Typically, a condo differs from an apartment mainly in ownership. Each condo has an individual owner, though some condos are rented out by that owner to short-term or long-term renters. By contrast, most of the time, an apartment building has one owner who rents out each individual apartment to tenants.

A condo differs from a townhouse mainly in layout, though precise definitions vary by property. Usually, a townhouse is lower to the ground (between one and three stories), and many townhouses only share side walls with neighbors, not ceilings or floors. Townhouse owners might also own and maintain private yard and patio spaces, where condo owners may not.

What a short sale is and isn’t

A short sale is a property transaction that happens when the amount still owed on a property exceeds its current market value. Many times, short sales precipitate from an economic crisis that causes a large drop in property values. The owner of the property initiates a short sale, and their mortgage lender (or lenders) will need to approve it.

A short sale differs from a foreclosure sale in timing and initiation. A foreclosure sale happens after the owner has defaulted on their mortgage payments and the lender has seized ownership of the property. A lender initiates a foreclosure sale; buyers deal with the lender’s trustee as the seller.

How is a condo short sale similar to a single-family home short sale?

A condo short sale is a nuanced transaction, but it shares some basic similarities with “normal” single-family home short sales.

Both need approval from the seller’s lender

In a short sale scenario, the seller’s lender must sign off on the deal because often it means they’ll end up with less than the amount that they are owed. To gain approval, the lender must be assured that a short sale is in their best interest. Basically, they want to know that taking this short sale deal is more advantageous than going into foreclosure.

On the buyer’s side, the most important thing that will be required is patience. Negotiating with the lender, who doesn’t have the emotional stake to keep things moving, can take anywhere from a few weeks to several months.

Wysocarski says,

“It would be unreasonable to think you’ll get the short sale offer approved in 30 days. It takes about 90 days in most cases, and then you still have to do your inspections and get your financing together.”

Your real estate agent can help guide you through this process as a buyer. When making the initial offer on a short sale, your agent may advise you to put an expiration date in the contract, so you’re not tied up with this property indefinitely.

Both require an appraisal

The seller’s lender is going to want proof that this property is really upside-down (it’s truly not worth what’s owed on it) and worthy of a short sale. The only way to do that is through an appraisal that will show the current market value.

From a buyer’s perspective, this really isn’t a problem. If you’re planning to get a mortgage loan on the property, your own lender will need to see an appraisal anyway. (And if you’re paying cash, then you’ll want to know that you’re getting a fair deal for your money!)

Some buyers think that short sales add up to great deals. But the truth is, you probably aren’t going to be able to ask for significantly under current market value. Remember, the seller’s lender is going to look at the appraisal and determine if it’s in their best interest to do a short sale or a foreclosure. For them it’s literally all about numbers. They won’t agree to a short sale when the appraisal shows they could recoup more through other means.

An inspection and title protection is best in both cases

When sellers find that they can’t afford their mortgage payments, they may be less inclined to keep up with home maintenance. That’s why an inspection is so important from a buyer’s perspective. In a short sale, you’ll most likely be buying the property as-is; lenders aren’t going to want to sign off on repairs.

With the guidance of your real estate agent, you can always include an inspection contingency in the sales contract. That way, if the inspector finds more than a certain level of damage, you have the right to terminate the deal, even if you can’t negotiate repairs.

A title review and title insurance are of utmost importance during all short sale proceedings. A title review will help eliminate any unknown heirs or other liens that could affect the sale. Title insurance will safeguard you after the sale –– a point that’s especially important when there are several stakeholders involved.

How is it different?

While the basic facets of a short sale remain the same, condo short sales have a couple extra layers to consider.

Mostly, these extra considerations come down to the condo owners association, or COA (which may also be called homeowners association or HOA in some condo buildings). COAs govern the regulations and upkeep of the condo building to varying degrees.

The COA can make or break a condo short sale … from both the selling and buying angle! Before you go too far in a condo short sale, you’ll want to make sure that the COA is not going to create any problems in the sale, and that you want to be a part of this particular COA.

The COA’s approval of the short sale

In some instances, a COA will have to sign off on a short sale deal. Yes, that means yet another layer of red tape to go through in addition to the seller’s lender. Ask your real estate agent or legal advisor early on if COA approval is necessary for this deal, since regulations differ by locale.

The most common reason that a COA would deny short sale approval is for delinquent COA dues. If the seller hasn’t been paying their dues, the COA may have already taken out a lien on the property.

The COA will want to know who will be responsible for paying the delinquent dues before agreeing to the deal; they’ll likely need to receive payment in full before lifting a lien. The seller’s lender may agree to pay the COA dues if the seller cannot, or they may issue a promissory note for the seller to repay the dues over time.

The overall health of a COA

As a buyer, you’ll want to make sure you’re comfortable with the COA before entering the short sale proceedings. Here’s a list of questions to ask before you get too far in the process. Your real estate agent can help you get these answers.

• Can I see the latest financial report for the COA? It’s common for this to be provided to you as a prospective buyer.
• Does the COA have a healthy budgetary reserve? Positive reserves are necessary to cover upcoming repairs and unexpected expenses.
• How many units are in arrears on COA dues? If several condos in the building owe the COA money, it could be a red flag.
• Are there any assessments under consideration? Assessments are expenses above and beyond COA dues that owners are required to pay. Examples might include fees for roof, balcony, or parking lot repairs.
• Is the condo building FHA approved? This means all the units in the building are approved for FHA loans. If not, you can get units individually approved.
• What are the COA rules and regulations? Look for rules on things that are important to you, such as pets, noise, visitors, and/or rental terms.
• How many units are occupied by renters vs. owners? Having more owners living onsite could indicate a greater involvement in the COA.

How can you be successful?

Buyers who are flexible with timing are usually well-suited to be successful in a condo short sale. Research and communication are key … along with a lot of patience!

Wysocarski tells buyers, “If it’s the right place and you get a great deal, then it’s absolutely worth the wait.”

Working with experienced professionals can be the key to streamlining the process from start to finish. Make sure that the real estate agent you choose has dealt with condo short sales before. Your agent should be able to construct a deal where you can walk away if necessary.

With information, adaptability, and a great team, you can definitely make condo short sale work for you!

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Here are the pros and cons of buying short sales, foreclosures and bank-owned homes, along with some ideas about how to manage the risks and maximize the potential rewards.

Short sales

Short sales, foreclosures and bank-owned properties correspond to steps in the process of a home going from being owned by the occupant to being repossessed and sold by the lender. In this process, short sales are at the first step, when the homeowner is getting behind on payments and in fact owes more than the house is worth — but the lender is not ready to try to take possession.

“A short sale is basically when the homeowner is upside-down in their mortgage,” explains Desari Jabbar, an agent who works with 70% more single-family homes than the average agent in Stone Mountain, Georgia. “They owe more than the property is worth.”

Owing more than the property is worth is what makes a short sale a short sale. If the property is worth more than what is owed, a homeowner who is having trouble making payments can simply sell the house and pay off the loan with the proceeds. But when the property is worth less than the balance on the loan, the solution to the problem is not quite so simple, and it becomes a short sale situation.

A major difference when buying a short sale is that the seller’s lender will have to agree to the deal. That’s not necessarily bad, because it takes the emotional component out of negotiating.

“Sometimes if you’re dealing with a seller who gets emotional, it can be difficult,” Jabbar says. “This is totally numbers.”

If you make the lender a reasonable offer that allows the bank to avoid foreclosure and cover whatever other costs it’s assumed, your offer has a good chance of being accepted.

While the seller and the bank are probably motivated to sell, the buyer needs to be able to justify the offer by showing it’s not too far off market value. But a short sale can be a good way to cut a good deal.

Short sale pros

One of the pluses of short sales is that it is often possible to buy a home before it goes on the market. “You might just know of someone that’s in distress,” Jabbar says. “Then you can go with the seller to the lender and try to get them to allow you to purchase the property for what the lender believes a fair market value is.”

Short sale homes are also often in better condition than homes that you’ll encounter later in the foreclosure process. Short sale owners are likely to be short on funds and unable to fund needed repairs. But because it’s still relatively early, the deferred maintenance may not have accumulated so much. And you can also have your short sale inspected before you close on the deal, so you know exactly what you’re getting yourself into, repair-wise.

Short sale cons

While getting a short sale under contract with the seller can be as quick as a normal purchase transaction, waiting for the lender to sign off on the deal can take some time, often months. “It’s a lengthier process than normal,” Jabbar says.

As part of the lender’s short sale authorization, the homeowner who is selling has to submit documents showing, among other things, that they are truly in financial hardship. “There’s a lot of paper to be considered by the lender,” Jabbar says. “They have to make sure they have their tax returns and any other documents the lenders might request.”

One potential stumbling block can crop up if the house appraises above the list price or offer price. If that happens, the buyer may be asked to pay more, up to the appraised value.

Also, if the inspection shows repairs are needed, the seller probably won’t have extra funds to pay for them. And repairs are likely to be necessary. “If the seller can’t pay their mortgage, they probably can’t take care of any maintenance,” Jabbar says. So as the buyer, you’ll have to determine how many repairs equals too much work for you.

Finally, while it’s great to identify a potential short sale before it goes on the market, you can’t buy a short sale from just anybody. “If you are a relative of the homeowner, you won’t be allowed to purchase the property,” Jabbar says. “It has to be an arms-length transaction.”

Short sale tips

To increase the chances your short sale purchase will go smoothly, talk to the seller about getting the short sale approved by the lender in advance. Then all you need to do is make the offer and line up financing.

Since the lender is also a part of a process that normally includes only two parties — buyer and seller — a little more effort will have to go into coordination. “The way to approach the short sale is to work hand-in-glove with the lender and seller,” Jabbar says.

The best advice if you want your short sale deal to work well is to work with an experienced agent. “A lot of agents just don’t get it,” Jabbar says.

“When you’re dealing with foreclosure, you have to really know what’s going on.”

Foreclosures

A foreclosed property is at the next step in the process of ownership reverting to the lender. “A foreclosure is when the homeowner has not been able to keep up with their mortgage payments, and unfortunately the bank has to take possession of the property,” Jabbar explains.

There is a step called pre-foreclosure, when the owner has gotten behind on their mortgage payments but the lender hasn’t begun foreclosure proceedings. At this point, the owner can catch up on payments and save their house. However, once the owner has received a notice of default from the lender, unless the payments are caught up, the property is on a road that can lead to foreclosure.

The major difference between short sales and foreclosures is that the lender is forcing the foreclosure sale, while a short sale is voluntary on the part of the seller. However, although the lender may be forcing the seller to relinquish ownership, the fact is that lenders don’t want to own real estate. So, they put the properties up for sale to try to recoup as much of their investment as they can.

Typically, foreclosed properties are sold at auctions, often held literally on the steps of the local county courthouse. Investors arrive at the auction, often held on the first Tuesday of the month, and make cash bids for properties presented for sale.

Foreclosure pros

Because lenders are focused on trying to cut their losses and turn unwanted properties into cash, foreclosures can be a great buying opportunity. Sometimes, although not always, the bank will accept the minimum reserve bid at auction (the minimum reserve is the lowest amount at which the lender is willing to accept bids — usually the outstanding amount owed on the mortgage). Because the auction bid generally starts at the amount that is owed on the mortgage, and not at the market value, a buyer at foreclosure auction is often able to get a home for less than market value.

Because your average homebuyer isn’t as interested in purchasing homes that are in foreclosure, there won’t be as much competition for the deal from the masses. There will likely be competition from investors, but because investors are focused solely on the dollars and cents of the investment, emotion isn’t as likely to drive up a selling price in a bidding war.

Foreclosure cons

One potential downside is that foreclosure sales are typically as-is. “You have to look at that house and decide if this is something you want to get,” Jabbar says. “Because most of the time the bank is not interested in doing any repairs.”

However, it can be difficult to get a look inside foreclosure properties. Buyers often have to bid on properties without even a walkthrough, much less a professional inspection.

Often, properties are still occupied by the former owners or tenants. Owners upset at the foreclosure may strip or vandalize property. “I had one that was foreclosed on that was a $400,000 house, and the next thing I know they had squatters in there,” Jabbar says. “Not only that, they did a quit-claim deed.” (This means that the owners transferred their ownership in the property without going through a traditional sale.) “It took two years for it to be resolved.”

A significant obstacle is the requirement that foreclosures purchased at auction be paid for immediately with a certified check. Financing a foreclosure, especially one purchased at auction, is unlikely.

Sometimes the former owner of the property will have a period of time — varying by jurisdiction — after the auction during which they can pay the lender what they owe and retain ownership. If that happens, the buyer’s deal to purchase the property is null and void.

Foreclosure tips

To succeed as a foreclosure buyer, do as much research on houses as you can before submitting bids. This may be limited to driving by and taking a look at the exterior, but any information you have is better than no information.

Learn how auctions work in your county before you bid. Ask an experienced auction-buyer, such as a licensed real estate agent, to tag along while you watch what they do. If you don’t feel comfortable you can do it, consider finding another way to buy a home.

Before you attend an auction intending to bid, make sure you’ve got your financing lined up. Bear in mind: You may need to present the auctioneer with a certified check for the full amount of the purchase. Other times, you may have a few days or even weeks to arrange financing. Know your local practices.

Bank-owned or REO homes

When a property has gone through the foreclosure process and not been sold at auction, it is referred to as a bank-owned or REO property. The lenders that own these properties are generally still anxious to unload them.

And, as is the case with short sales and auction purchases, you may be able to get an attractive deal on an REO house. But this process is friendlier to buyers than an auction.

REO pros

The process of finding and making an offer on a bank-owned property is much more familiar and comfortable than bidding at an auction or even negotiating a short sale. Bank-owned properties may be listed on popular real estate portals, including your local real estate association multiple listing service.

Buying a home from a bank is closer to the experience of buying a home from an individual owner. The difference is that the bank asset manager is primarily only concerned with getting as much return as possible as soon as possible. If you can make a good case that your offer is fair, based on comparable sales, you have a good chance of having it accepted.

Financial institutions, including the government home financing goliaths, have well-developed systems with online listings used to sell their REOs. Fannie Mae has HomePath and Freddie Mac has HomeSteps. The Department of Housing and Urban Development has HUDHomes.

You should be able to do a walk-through on an REO home before making a bid. The home will be unoccupied, since the bank has taken complete possession of it. Doing a walk-through reduces the chance you’ll be buying a home that needs major repairs.

Waiting can pay off here. If the home doesn’t sell quickly, the bank is likely to lower the price. “Every 25 to 30 days, they’ll do a price adjustment so it won’t sit on the market,” Jabbar says.

“They’re keen on getting these properties sold.”

Also, again unlike auctions, lenders selling directly are likely to give preference to first-time homeowners over investors. “They’re giving them first look at the properties,” Jabbar says. “Those are some great opportunities for buyers to purchase homes.”

REO cons

In keeping with the general theme of buying distressed and foreclosed properties, REO houses are sold as-is. Plus, they’ve been sitting vacant, sometimes for months or even years, so all kinds of problems, from vandalism to untended water leaks, could have wrought havoc on your future living space.

If REO homes are easy for you to find online, they’re also easy for others to find. That means there’s likely to be more competition for REOs than, say, a short sale that never even gets listed.

Because you negotiate with a bank asset manager rather than an individual homeowner, it’s all business. Sometimes buyers in competitive situations can convince a non-bank seller to accept their bid by making a personal appeal with, say, a letter describing what the home will mean to their family. But that won’t work with a bank. The higher-priced, better-financed offer will win almost every time with an REO.

Tips to make buying REO better

Getting your financing lined up with a preapproval letter is always a good idea before shopping for a home. With an REO, you might consider seeking a loan from the lender that owns the REO property. That could help speed things up and make your bid more attractive than competitors.

Document your offering price. Don’t just hit the bank with a low-ball offer. Present data on comparable sales showing why your offer considers the property’s fair-market value. That doesn’t mean you have to offer that much. An offer somewhat below fair market value should receive consideration if you have supporting evidence.

Because the property is sold as-is, getting an inspection may be even more important than with other sales. Bear in mind, the lender is unlikely to make any repairs, but you may be able to make a case for discounting the sale price to cover some fixes.

Don’t go it alone. Work with an agent who’s experienced in buying homes in this fashion. And, as is the case with all distressed, short sales, and foreclosures, be sure it’s an agent familiar with local laws and practices because they vary widely.

“I believe in having a qualified agent helping you through the process,” Jabbar says. “These are not easy if the agent doesn’t know the process.”

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As the buyer in the transaction, you might think this twist doesn’t affect you, but it absolutely could. If the seller doesn’t come up with more money, the entire deal could be derailed.

What should you do if your short sale requires a cash contribution? We’ve researched the topic thoroughly and discovered some possible options to help you see your short sale deal through to the finish. If you’re considering making an offer on a short sale, it’s a good idea to be prepared for such a scenario.

What is a short sale?

A short sale occurs when the homeowners owe more on their mortgage than the home is worth and are in danger of being foreclosed on. Instead of foreclosing, however, the lender agrees to let the homeowners sell the house. It’s a “short” sale because the lender may settle for the proceeds even if they fall short of the remaining amount due on the mortgage.

Lenders agree to short sales because it saves them the cost and trouble of foreclosing on the home and maintaining the property until they can sell it. However, in a short sale, the lender will insist on approving the deal between the seller and buyer.

The lender’s goal is to be sure it gets the most money possible out of the deal and to limit its losses. That can slow down the homebuying process and complicate it because more parties are involved in the sale — the buyer, the seller, and the seller’s lender or the company that currently owns the mortgage.

Sometimes more than one department at the lender has a say in the deal, and those departments may not communicate well with each other.

What causes short sales?

Short sales were common during and after the Great Recession, tapering off after 2010. That recession involved a housing bubble; home prices fell, and some people found their homes were worth less than the mortgage on them.

While you don’t hear as much about short sales these days, homeowners can still find themselves in that situation, especially when they take out a no- or low-down-payment loan and get overleveraged.

Kelly Hollowell, an agent in the Chesapeake, Virginia, area, who works with 75% more single-family homes than the average agent in her area, expects fewer short sales to come out of the economic downturn the COVID-19 pandemic has caused.

Hollowell, who has 26 years’ experience as a real estate agent, noted that home prices went up during the 2020 downturn, rather than dropping as they did in 2009. Rising prices give homeowners more equity in their houses, so they’re less likely to be underwater, owing more than the home is worth.

So far, short sales don’t seem to have increased because of the economic downturn caused by the pandemic. Homes in preforeclosure, which would be likely candidates for a short sale, were down more than 80% in November 2020 from 2019, according to RealtyTrac. The decline in preforeclosures is likely tied to loan forbearance rules included in the pandemic relief CARES Act that was enacted early in 2020. However, there is no way to predict how much relief homeowners will receive in the future, or if the low numbers of preforeclosures will continue once the law’s protections end.

What’s a cash contribution in a short sale?

Sometimes, the lender in a short sale will ask the seller for more than the proceeds of the sale as a way to reduce their loss taken on the loan. This is known as a cash contribution.

In some cases, the seller might have a second mortgage on the house, and the lender holding that second mortgage is the one seeking a cash contribution.

The size of the requested cash contribution varies, depending on several factors, including details of the mortgage and the seller’s financial condition. It could be as much as several thousand dollars, although the seller may be able to negotiate the amount down.

When might a lender ask for a cash contribution in a short sale?

The lender is most likely to ask for a cash contribution when they know that the seller has liquid assets, such as money in a bank account. Fannie Mae — a government-sponsored entity that purchases and securitizes mortgages in the United States — lists two instances in which the mortgage servicer must request a cash contribution.

• The seller has cash reserves of more than $10,000, not including money in retirement funds.
• The seller’s housing expense-to-income ratio is less than 40%. In other words, the mortgage costs — including principal, interest, property taxes, and homeowner’s insurance — add up to less than 40% of the seller’s income.

While you, as a buyer, don’t know the details of the seller’s financial condition, a few situations provide a clue that a cash contribution is likely.

For instance, if the property was an investment or vacation home instead of the seller’s primary home, the lender may want a cash contribution. (You may be able to do some research to see if the house was ever a rental, indicating it was an investment property.)

Another situation where the lender might require a cash contribution is if the seller refinanced the house to pull money out of equity.

Other clues that the lender might require a cash contribution include:

• The seller has maintained a good credit score
• The seller doesn’t have a lot of other debt
• The seller was able to keep up with mortgage payments

What are your choices when it comes to making a cash contribution?

If you’re lucky, as a buyer, you won’t have to deal with the seller’s cash contribution issues at all. In fact, Hollowell says she’s never had to deal with the problem. Neither has her manager, who has 30 years in the real estate industry.

So, in the best-case scenario, the buyer never even hears about the cash contribution.

Likely, the seller will follow one of these options:

• Make the cash contribution the lender requested
• Convince the lender to reduce or waive the amount altogether, possibly by sending the lender a hardship letter
• Give the lender a promissory note — basically, an IOU — stating that they will pay the amount later
• Borrow the money from family or friends

What if the seller asks you to put up some cash to help with the contribution?

Your first step should be to suggest the seller exhaust all their other options, from writing a hardship letter to seeing if a relative will loan them the money.

But if it comes down to you, what should you do?

Don’t act hastily. “It can take months to get approval on a short sale,” Hollowell notes, and if a buyer thinks that throwing in some more cash will get the sale done, they might want to jump on it. However, adding more money to the deal could disrupt your financial picture or even disqualify you for the mortgage you’re approved for. Talk to your lender to make sure you’re not jeopardizing your mortgage before agreeing to spend more.

Also, carefully consider whether you can spare the money. Short sale homes often need repairs, and if you were saving that money for a new roof or maintenance issues, think about whether those home improvement projects can wait.

If you do decide you’re willing to provide the cash, Hollowell suggests you first learn whether  raising the sales price on the house would work. Otherwise, you’ll have to make sure the lender will allow you to provide the money as a gift to the seller, with documents that clarify it’s not a loan that must be repaid.

Consider a short sale negotiator

Short sales are complex deals that can easily take several months to complete. Working with a qualified real estate agent who can guide you through the process is a smart move.

Some attorneys specialize in short sale negotiations. Sellers who want to get out of their mortgage with a short sale may hire these lawyers when they start negotiating with the bank, but both buyers and sellers benefit from working with a specialist, says Hollowell.

She suggests that you and your agent might want to “look for short sales that are being handled by attorneys that specialize in short sales. You’ll cut your time and frustration if you’re working with a professional negotiator.”

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To help get you started, we’re talking to industry experts and assembling our best tips all about investing in foreclosures. Let’s jump right in.

What exactly is foreclosure?

While foreclosure can yield great deals on properties for a savvy investor, there’s an underlying human element that buyers should keep in mind.

Foreclosure is a legal process following default on a loan. Usually, this means that the homeowner has missed several monthly mortgage payments, and now the lender is attempting to recoup funds by seizing and reselling the home.

Foreclosure regulations will vary by state and the specific terms set forth in each mortgage agreement, but generally speaking, foreclosure is a result of financial hardship suffered by the borrower.

The stages of foreclosure

The process of foreclosure can take anywhere from six months to well over a year, depending on the state and individual circumstances. For keen investors, there are opportunities to pursue homes at each stage of the process.

If you’re new to the game, working with an agent who is experienced in buying foreclosures will be essential to finding properties and navigating this unique buying process.

Pre-foreclosure

As the term implies, pre-foreclosure is the point where a homeowner is behind on their mortgage payments, perhaps far enough that they have received a notice of default. The notice of default will indicate how much time the borrower has to catch up on their loan before the property is seized by the lender, and these notices are typically public record.

Investing at the pre-foreclosure stage is similar to a conventional home purchase in that you’ll have the chance to walk through the home, order an inspection, and secure financing if necessary.

The downside is that competition for homes in pre-foreclosure is high, since the property is often still in good condition and can likely still be sold at a favorable price. From the current homeowner’s perspective, selling while in pre-foreclosure can be a welcome lifeline when the home is worth enough to recover debts and satisfy the balance of the mortgage.

Short sale

A short sale occurs when a homeowner is delinquent on their loan but the house is not worth enough to satisfy the remaining balance on the mortgage. The lender must sign off on a short sale, as they are effectively agreeing to settle debts for less than what is rightfully owed.

While you’ll still be able to walk through, inspect, and obtain financing for a short sale home as an investor, there’s typically less room for negotiation and less opportunity for a great deal; few lenders are willing to let the property go for significantly below market value.

Foreclosure auction

A property typically becomes available for auction when the home has legally been foreclosed.

While processes will vary from state to state, foreclosure auctions allow for a quick recoup of funds. Sometimes banks will set a required minimum sale price, and sometimes they’ll simply sell to the highest bidder — which can translate to big savings for foreclosure investors who are willing to take a chance.

Homes that are up for auction are sold on an as-is basis, which means that there are no walk-throughs or inspections. Securing financing for an auction property can be difficult, so consider this a cash-is-king situation. If the property can be financed, you’ll need the full down payment amount available at the time of your bid.

Finally, keep in mind that auctions are fast-paced and there’s a lot of competition. You’ll need to be prepared to act quickly.

Bank-owned

Also referred to as real estate owned (REO), these are properties that did not sell at auction and are now fully owned by the bank. Since the pressure of the auction is off, you’ll often be able to walk through and perform inspections — without electricity or running water, in most cases — if you’d like, but you’ll still be limited in your ability to ask for repairs or allowances.

Bank-owned or REO homes will be listed at their appraised market value, so discounts may not be as deep as you might anticipate from a foreclosure. On the upside, there can be less competition to buy these homes, and you’re back in the realm of financing possibilities if cash isn’t your preferred option.

Distressed loan bulk-buys

While this approach is less common for first-time investors, some experienced foreclosure investors will purchase distressed mortgage loans from lenders in bulk.

These investments require a lot of upfront cash to acquire the loans, but there’s money to be made if homeowners can catch up and continue paying their mortgage, or if homes are already vacant and ready to be prepared for tenants.

Is it better to fix and flip, or buy and hold?

No matter which path you take to find your foreclosure investment property, you’ll need to have a plan for what comes next.

Fixing and flipping a foreclosure

This is when a buyer purchases a house below its market value, then goes in and makes any necessary repairs or value-adding upgrades with the intention of selling the property for a profit.

While many folks have built successful businesses out of flipping houses (just look at all the fixer-upper shows on HGTV!), putting the finishing touches on a foreclosure is no guarantee of forthcoming riches.

“There [can be] so many hidden costs,” warns Jennifer Young, a top real estate agent with 19 years of experience selling homes in the Cincinnati, Ohio, area.

“A house may look good from the surface, but when you start getting in there… People are [sometimes] angry that they were losing their house. They might steal things or destroy the house, cut the wires and so on — it can get very expensive, very quickly.”

Being mindful of your budget is critical when it comes to purchasing a foreclosed property with the intention of flipping it. If you pay too much for the house itself, spend too much on renovations, or aren’t able to fetch your intended resale price, then you could end up losing money on your investment.

“Generally, it’s the area and the price that dictate whether a house might be a rental or a flip for me,” says John Durham, a top real estate agent based in Atlanta, Georgia. Durham is a foreclosure investment expert who owns more than 20 rental properties and estimates that he has been involved with flipping approximately 500 houses over the last two decades.

He notes that there are fees for selling a house — between agent commissions, marketing fees, and closing costs — so if margins are thin on your investment, it may make more financial sense to keep the property as a rental.

Buying and holding a foreclosure

This is a popular option for first-time foreclosure buyers, as holding a rental property can be an effective way to generate passive income. Once the house is purchased, renovated, and ready for a tenant, you’ll have two starting points:

• Short-term renting. Depending on the home’s location, it may be feasible for use as a short-term or vacation rental. Platforms like Airbnb and Booking.com have made it easy for property owners to connect with travelers and holidaymakers to rent out their homes for flexible, customized lengths of time.
• Long-term renting. Alternatively, you can seek a long-term tenant and not have to worry about vetting new applicants and deep-cleaning the property every few weeks or months.

In either situation, you’ll need to decide whether you wish to manage the process yourself, or whether you’d prefer to place the home with a property management company.

“If this is your first rental property, I would say to hire a management company,” advises Durham.

He notes that if you have a background in construction or real estate and have an idea of what to expect, you may be fine to manage your own rental — but sometimes these things are best left to professionals.

“You’ll hear stories from people who’ve had a rental and say they’ll never own one again because they don’t want to be unclogging toilets in the middle of the night,” says Durham. “Well, I have 20 rentals, and I never unclog a toilet that isn’t my own; but those are the kind of horror stories you’ll hear because people try to do it on their own, and they don’t know what they’re doing.”

Fixing wayward toilets is only a fraction of the work involved in managing rental properties, and the task starts with understanding the fair-market rental rate for your house.

Ideally, you’ll be able to rent out the property for a higher amount of money each month than your mortgage costs you to pay — thereby earning a profit — but you’ll also need to factor in property management fees, as well as maintain a buffer of cash for emergencies and repair needs that may arise during tenancy.

Your management company will help you determine a fair rate, but if you’re going at it alone, you can get an idea of where to start by researching your local rental market. Consider:

• The district or neighborhood in which your rental property is located. What are nearby homes of similar size and amenities renting for?
• Availability of rental properties. Is your market saturated with vacant rentals, or are would-be tenants struggling to find available homes?
• Length of desired agreement. Are you aiming for short-term or long-term tenants? Long-term rentals may earn a lower dollar amount each month, but the income will be more stable.

Finding your first foreclosure

So, you understand how foreclosure purchase opportunities arise, and you know what to keep in mind when deciding on what to do with your future investment property; now it’s time to start searching for a house.

Work with the right agent

It’s worth reiterating the importance of working with an agent who is experienced with foreclosures. Not all agents are interested in this side of the business, which is understandable when considering how time-consuming it can be to hunt down distressed properties and prepare (likely multiple) offers in what is often a high-competition, low-earning scenario.

These agents, even if they do agree to work with you after a consultation chat, are also less likely to have awareness of their local foreclosure market.

“A lot of the banks right now are doing auctions, and there are literally hundreds of different auction sites,” says Young. “The average Realtor isn’t going to know where to look for these sites or find information on these properties. [A foreclosure specialist] will have more of an inside track to what might be coming up if they’re working with a bank or getting foreclosure listings.”

Understand that selection may be limited

The COVID-19 pandemic of 2020 has sent the nationwide real estate scene into a frenzied seller’s market of low inventory and multiple offers, so — quite honestly — if you’re reading this article in the midst of coronavirus, understand that right now may prove a challenging time to make your foray into foreclosures.

“For somebody looking to buy a foreclosure, they need to expect to overpay in this market,” says Young, speaking to current conditions in Cincinnati. “They need to expect that the property is probably going to be in deplorable condition and missing a lot of the major components, like furnace or hot water heater, messed-up plumbing, that kind of thing.”

From his base in Atlanta, Durham agrees that foreclosure inventory is low, but he remains optimistic for those who are willing to be flexible and trust their agent.

“You need to find a good agent and listen to them, you know? If your agent says, ‘Hey, we’re going to make a blind offer,’ and it’s your first time and you’re freaking out going, ‘No way,’ you should probably listen to them,” says Durham. “As long as they’re competent, you’ll be much better off.”

In a more balanced real estate market that offers some choice with inventory, certainly it’s worth doing your research to identify neighborhoods in which your investment will carry less risk. Foreclosed homes that can be acquired for a great price in areas with solid infrastructure, new development, good schools, and job growth have high potential to turn a profit whether you flip or rent thanks to the desirable location.

Deeper research into surrounding home values and the types of homes that are in demand (both for purchase and for rent) will yield more clues as to whether your investment property is most suitable for flipping or holding.

Assemble a team of experts

A knowledgeable agent is just one of the experts you should have in your arsenal as you pursue investment in foreclosures. From accessing funds to carrying out renovation work, even the most devoted do-it-yourselfer is likely to need a hand from time to time. Key players may include…

A loan officer

Unless you have the cash to purchase a foreclosure outright, chances are high that you’ll need a mortgage or some form of financing to purchase these homes. Developing a relationship with a loan officer or a trusted lender can offer a leg up when it comes to financing, particularly if you reach a point where you’d like to acquire multiple properties.

“Get to know your local banker,” suggests Durham. “And when I say banker, I mean a bank that has a local board.

“A local bank might be willing to look at you and your financial strength, they’ll look at the strength of the deal, and as you develop a relationship with them, they’ll be more likely to continue to do those deals as long as they make sense.”

Contractors and repair specialists

If you’re not a contractor by trade, you’ll be well-served to find one you trust as your go-to for your foreclosure projects.

A good contractor can help you assess repair needs, upgrade opportunities, and loop you into their network of specialists (think electricians, plumbers, landscapers, and so on) to accomplish tasks as efficiently as possible.

A property manager

As we mentioned earlier, putting your rental property into the experienced hands of a property management company can alleviate countless headaches when it comes to finding, vetting, and interfacing with tenants.

Property managers will market your property, they’ll collect rent and handle the general maintenance of the home, and they’ll consult with you if something major crops up. Service fees and scope of what you get in return can vary, so ask around and do your homework during the selection process.

Cleaning services

Cleaners can prove invaluable if you’re planning to use your foreclosure investment as a short-term rental with tenants regularly moving in and out, but a professional cleaning service can also put the final shine on a flipped property, or help you tackle the initial mess if you’ve found yourself with a real project on your hands. Ask for recommendations from your agent or other investors to find a top-notch cleaning team.

Go forth and go for it

However (and whenever) you choose to get into the business of investing in foreclosures, the best advice is to be flexible, keep an open mind, and don’t be afraid to take a risk.

“If you watch TV, you’ll know that flipping houses and being a chef are two of the hottest things in the world — everybody wants to do it,” says Durham.

“The flipping business is not the hardest; you don’t have to be the smartest person in the world to be able to flip a house. Get a good agent, they’ll tell you what [the house] is worth. Maybe get a second opinion and if [the house] is worth that, you’ve just got to figure out what you can get it for.”

Header Image Source: (ThomasPhoto / Shutterstock)

Short sales are rarer in the housing market nowadays. However, they’re still around and can yield an excellent deal for buyers. Purchasing a short sale is not that different from buying a regular home, but there are slight variations on the process.

Before you rush into buying your short sale dream home, let’s take an in-depth look at all the finer details involving buying one. We’ve done the research and interviewed experts to gather all the important facts in one place on short sale requirements for buyers.

What’s a short sale?

A short sale is when a property is sold at less than what’s owed on the remaining mortgage balance. This type of situation usually occurs when the owner is financially distressed and no longer able to make their monthly mortgage payments.

When a home is listed as a short sale, the lender forgives the remaining balance of the loan. Typically, a lender agrees to a short sale when the property is worth less than the balance of the mortgage.

When you are a buyer looking at purchasing a short sale, you’ll get a mortgage just like you would to buy any other house.

What are the short sale requirements for buyers?

Buying a home is a complicated process. The best way to save time, money and stress is to be prepared. Preparation at every step of the process is the best way to protect yourself! Here are a few of the things you’ll need to do to buy a short sale property.

You’ll need to get preapproved for a mortgage loan

Before you can make an offer, you should be preapproved by a lender. If you want to try and expedite things, you can use the same lender that owns the seller’s mortgage. However, it’s strongly recommended you shop around with your choices to find a lender with the best rates.

According to Melanie Hunt, a top-selling real estate agent in Fort Worth, Texas, who has sold 74% more single-family homes than the average area agent, “Getting a preapproval is one of the most important things a buyer can do to improve their odds of securing a short sale.”

She adds, “You need a strong pre-qualification letter from a legitimate lender, and there’s no getting around that. You can also help yourself by doing the inspection upfront, knowing the seller likely won’t get any repairs done. Also, you should know that you can’t be related to the seller when it comes to short sales.”

There is a process you must follow to get pre-approved for a mortgage. You also need a good credit score and savings for a down payment set aside. Let’s take a more in-depth look at these requirements.

To get preapproved, you will need:

The lender you apply to for a mortgage is going to ask for a lot of paperwork. It’s best to prepare in advance and start collecting documents ahead of time. You’ll want to have:

• Proof of income: You’ll need proof of income, such as tax returns with W2s or 1099s for the past two years. You’ll also need pay stubs for the past 30 days.  Bank statements can also be used for certain mortgage loans if you have a non-traditional job or a side gig.
• Fair to good credit: You need a minimum credit score of 580 to qualify for an FHA loan. If you apply for a conventional loan, then you need at least a score of 620 or higher. The higher your credit score, the better your terms will be. And when the economy is tight, lenders tend to raise credit score standards.
• A down payment saved up: A recent report by the National Association of Realtors found that the average down payment on a house for first-time homebuyers is around 6%. If you’re not securing an FHA loan, many conventional lenders will allow a 3% to 5% down payment, but you’ll need a good credit score and will have to pay mortgage insurance on the loan until you reach 20% equity.

It’s even better if you also have:

Remember that the short sale home you’re interested in buying has possibly been neglected. People who are in financial distress and forced to do a short sale often don’t have the funds to maintain the home or make repairs when something breaks.

Keeping in mind that you don’t know what state the home might be in, you’ll want additional savings for fees and expenses beyond just the down payment. There are  also potential repairs to budget for (which the seller likely won’t be able to do since this is a short sale), as well as closing costs.

The closing costs are the second-largest chunk of money you’ll need to account for, right behind the down payment itself. Closing costs can add up to thousands of dollars in fees. On average, closing costs comprise between 2% and 5% of the loan amount.

And it’s even better if you can get pre-underwritten

If you’re thinking that because you’ve been preapproved for a mortgage loan, nothing can stand in your way now … not so fast. Preapproval is exactly as it sounds. The lender has given you temporary approval, but that approval is still contingent on many factors. Your mortgage could be in jeopardy if your credit score drops, if your bank statements show any signs of financial distress, or for several other reasons.

Preapproval typically requires you to submit your financial information to a lender. Underwriting is the step in the loan approval process when an underwriter goes through all of that financial information, every last document, with a fine-toothed comb, to verify all the information and make sure you qualify for the loan. If the underwriter finds a discrepancy in your application, you’ll have to fix it before the loan can proceed.

Consider getting pre-underwritten to bolster the chances of your offer being accepted. Some lenders offer pre-underwriting, including HomeLight Home Loans, so that you can have a fully verified preapproval. You don’t need any extra stress when buying a home!

You’ll need the ability to find a house and negotiate a short sale deal

When you are shopping for a home to purchase, it’s essential you work with a top agent who can guide you through the process. Many short sale homes are listed on the MLS, and if you want timely access to these sales, you’ll need a real estate agent to help.

There are a lot of reasons why you need a real estate agent to buy a home. A 2019 report from the National Association of Realtors found that 38% of buyers using an agent got a lower price on the home, and 47% got better sales contract terms thanks to their agent. Using an agent can save you thousands of dollars in the long run!

You’ll need the patience to work with multiple lenders

Short sales require you to have a bit of patience and fortitude during the process, not mention a little luck. A short sale has to be approved by the lender that owns the seller’s mortgage loan, and they can sometimes take more than a month to respond to your offer. On average, you could wait between 60 and 90 days to hear back.

However, once you do finally hear back, you can expect things to move fast. Oftentimes, the bank will require you to be ready to close within two weeks.

That’s why it’s vital to be preapproved beforehand because without a preapproval or pre-underwriting, it’ll be difficult to meet the bank’s closing deadline. Be sure to mention to your loan officer or mortgage broker that you’re interested in a short sale so that they’ll be aware of your rapidly evolving situation.

You’ll need the ability to walk away if things go south

There are instances where it’ll be in your best interest to walk away from the sale. It is important that you don’t become transfixed on one home. This helps you let go of a buy when you need to. Emotion can get in the way of business.

Maybe the lender wants you to take on more of the closing costs than you’re comfortable with. Perhaps the home inspector uncovered several expensive issues that you don’t want to have to deal with repairing. Every dollar spent on repairs is a dollar that comes out of your bottom line.

Cris Didonato, who has worked as a home inspector for over 30 years and is now a consultant for Accurate Home Inspections, has inspected homes that had enough problems that the buyer walked away. “Two out of 10 times, a home I inspect will have numerous, costly problems. Normally it’s a roof or structural problem. Sometimes these issues were caused by drainage problems and lack of proper grading.”

If you work with a top real estate agent, they’ll protect your interests and make sure that you can still walk away from the home based on these contingencies. If the short sale house you’re interested in is morphing from a dream home into a waking nightmare, then it’s time to say goodbye and look elsewhere.

Follow these tips from experts on short sale requirements for buyers and you’ll be fast on your way to securing your dream home. Happy house hunting, and good luck!

Header Image Source: (Shreya Kollipara / Unsplash)

Christina Griffin is a top agent who’s listed and sold thousands of foreclosures in Florida. She was drawn to foreclosures because, “For me, having a house that has equity has always been important. I’ve always looked for deals and opportunities, and I’m really great at finding foreclosures.” Many homebuyers like buying and knowing that they have immediate equity, above and beyond the down payment, in the house.

If you’ve thought about buying a foreclosure, plenty of websites offer advice — or even promise to teach you the tricks of buying foreclosures and flipping homes for a “low fee” of several thousand dollars. But what’s missing are the stories of real-life homebuyers who’ve actually bought a foreclosure.

What’s it really like to negotiate with a bank? What happens if the copper plumbing is stolen out of the house between the offer and close? If you’ve ever wished you could sit down with someone who’s been through the process and is willing to share their experience, here are five homebuyers on what it’s really like buying a foreclosure.

A great opportunity

Homebuyers Oron and Lauren saw a great opportunity in the foreclosure they bought. They hadn’t been specifically looking for foreclosures when they found the bank-owned property back in 2015, but it was an amazing deal.

“It was on a dead-end cul-de-sac with three other houses,” Lauren explains, “with almost an acre of land, two outbuildings, and priced at only $75,000.” They made an offer of $70,000, which the bank accepted.

Their Realtor, Annette Wilcox, helped them make the offer for less than the asking price. “We weren’t sure what to expect, but they accepted it,” Lauren says, “and we didn’t have any trouble getting a mortgage.”

Luckily, Oron is handy, because the home had sat vacant for 18 months and needed a little work.

They did most of the cosmetic updates before moving in, replacing the HVAC and water lines.

Lauren’s advice to other foreclosure buyers is that they should “Always know that there’s going to be more money involved than you think for repairs — add 20% to what you think your budget is going to be.”

They also updated the home to match neighborhood comps — such as adding butcher-block countertops and upgrading the flooring.

They sold the Norwalk, Ohio, home three years after purchase for $160,000 — even though they’d intended to stay long-term, a job opportunity in Costa Rica proved too much to resist. When they sold, they realized a healthy profit of $90,000.

So needless to say, they’re happy they bought a foreclosure, and they would do it again!

A quick flip

Barry Karch works with 70% more homes than the average El Paso agent, which positioned him well to flip a house. He knew the market and what the home could capture in terms of sales price once it had been fixed up. Even though he’s normally a buy-and-hold investor (also known as a landlord), he couldn’t pass up the potential deal.

His flip was, “Super dirty and had all kinds of junk in there, so it didn’t look very attractive,” he says, “but it was fine once it was cleaned out.”

It didn’t need any repairs, and he never even made a payment on the mortgage he took out to finance the purchase. Closing on the sale didn’t take long — as the bank already owned the property — and with a quick turnaround, he’s satisfied with the roughly $15,000 he made.

Moving on after divorce

It’s not uncommon to have to sell the house and split the proceeds in a divorce, or to see one partner buy out another, but sometimes keeping the kids in the same neighborhood and schools can be tough. When Kristin S. got a divorce back in 2015, the only homes she could afford in the areas she wanted were foreclosures. Buying one got her a lot more house for her money.

“I purposefully used the listing agent working for the bank to also represent us,” she says, “since I knew that, by law, they had to represent us both fairly.” (This is not permitted in every state.)

Because her divorce wasn’t final, she had to work out a deal with the bank. Her mother and stepfather bought the home with the agreement that the bank would let Kristin take over the mortgage as soon as the divorce finalized. The unique circumstances meant that she did have to put down 20% on a purchase price of $245,000. Homes in the neighborhood now sell for upward of $300,000.

The house needed a lot of work, but the biggest issue was mold all over the garage walls and sheetrock. Contractors came to the house while the agent was there and gave bids on the spot.

“It’s a tuck-under garage and bedrooms above,” she describes, “so the listing agent agreed to pay for half of the repairs for a total of $6,000 because my son has asthma and his bedroom was above.”

Her best advice for other buyers looking at foreclosures is that it’s not for the faint of heart. “If you are an anxious personality, buying a ‘fixer-upper’ of any kind may be too much,” she warns. You should know, going into it, how much uncertainty you are willing to stomach.

She’s almost completely remodeled the home since closing, and has enjoyed the process, but not everyone has the vision to see what can be. “Know thyself” particularly applies when buying in the foreclosure market.

An unexpected buy

When Marie S. started shopping for foreclosures, she wasn’t looking for herself. She and her husband had decided to start investing in real estate, but they didn’t have a lot of cash, so a foreclosure looked like the perfect option. But when their agent showed them a cute house on the east side of St. Paul, she fell in love.

“It had a built-in buffet and original woodwork, a nice backyard, and a two-car garage,” she says. It was even in a better neighborhood than their current home. But when they made an offer to Fannie Mae, another buyer came in higher. They moved on.

Until their phone rang two months later. “I was completely shocked when my agent told me that the other buyer’s financing had fallen through,” she says. They had an opportunity to get the house, but they had to make a decision that day. As well, Fannie Mae was only giving them two days to overnight mail the earnest money deposit.

Their agent took them through the house again, and they decided to jump on the opportunity. It was a scramble to transfer funds from an out-of-state bank, get a cashier’s check, and drop it in the mail, but by Friday night, they’d won the house.

When they arrived for the inspection, the home inspector told them that the house was in great shape cosmetically, but it needed a new roof. He asked if they wanted to go ahead with the purchase or walk away; since the house was already such a great deal a new roof was doable. But when he went into the basement, another problem emerged.

Sometime in the two months between when they’d originally walked through the house and when they’d had their offer accepted, someone had broken in and stolen all the copper plumbing. When buying a Fannie Mae house, there’s no way to negotiate for any repairs after a home inspection; it’s either buy the house or walk away.

“It was really frustrating dealing with them,” Marie explains.

“We tried talking to them and explaining that the house was now missing the copper, and that we’d made an offer on a house with the copper intact, so in our view they were responsible to fix it, but they wouldn’t budge.”

They wouldn’t drop the price, and they wouldn’t replace the stolen pipes.

Even so, at $60,000, they went forward with the purchase and rented their existing home. And then the first water bill came.

“In addition to stealing the copper, the thief had stolen the water meter. But the city had replaced it before the home inspection, so we didn’t know about it,” Marie sighs. “Fannie Mae hadn’t paid the bill, so now the city was billing us!” She remembers the bill being around $500.

Once again, Fannie Mae didn’t want to pay. But this time, Marie and her husband had some leverage.

“Because they’d received the bill two months before closing, and the city proved they’d billed them, our agent was able to force them to pay it. But it was a nerve-racking week waiting to hear back.”

Finally, all was set in their new home. When she sold it five years later, she realized an almost $100,000 profit, even after repairs. Her advice for foreclosure buyers?

“Be patient; things will go wrong, and it’s not easy to deal with Fannie Mae or a bank as owner. It won’t be like negotiating or working with an owner as a seller.”

Buying a family home

While agent Annette Wilcox had hoped to find a foreclosure, it was a seller’s market in her area.

“It was more about looking at neighborhoods and the size of the house,” she explains, “but we’d hoped to find a house we knew we could do some fixing up and having instant equity.” As an experienced agent who works with 77% more single-family homes in Norwalk, Ohio than other agents, she knew the power of built-in equity.

When she found the perfect house, she bought it — twice. “We were the winning bid at auction,” she says, “but when I presented the offer, I realized I had been bidding against the bank!” She withdrew, irritated, and decided to wait. Sure enough, it came back on the market a few months later, and she began negotiating with the agent.

It took six months of bargaining with the bank — which she believes had over-priced the house by $60,000 because they’d compared it to non-distressed sales — to land it for $220,000. Her husband is a veteran, so they used a VA loan, and she selected a local title company she trusted to handle the closing.

The house only needed cosmetic repairs — like raising the floor in the sunken living room — and her husband and family members got them all done before they moved in.  She estimates the value of the repairs at about $25,000.

Even though it took months to finalize the deal, Annette is thankful with how things turned out. “With buying it cheaper than the neighboring houses and my husband doing the construction work, I had instant equity.” She now puts the home’s value around $325,000.

Should you buy a foreclosure?

Whether flipping the house, or living in it for a while before selling, all four homeowners made money when they sold. They also all had to deal with unexpected repairs, and not all of them were able to get estimates for the work before they closed on the house. But they’d all do it again.

If these stories have convinced you to look at foreclosures, you’ll need an experienced agent. Marie S. would have had to pay for a new water meter if her agent hadn’t known who to call at Fannie Mae! An agent who’s experienced in the neighborhoods and types of homes you want to buy will be one of your biggest assets when you buy a foreclosure.

Header Image Source: (Andy Dean Photography / Shutterstock)

Doing your research and being prepared can go a long way toward reducing house-hunting anxiety. But what if you’re buying a short sale? Does that mean you might encounter even more reasons to cry while trying to get a short sale mortgage loan? Well, it depends.

Securing a short sale mortgage loan isn’t that different from purchasing a standard home. We’ve gathered the pertinent facts and interviewed experts to help you streamline the process and reduce the odds of you shedding tears.

Here’s what you need to know.

What’s a short sale?

In real estate, a short sale happens when the current homeowner is financially distressed and the lender agrees to let them sell the property for less than the amount still due on the mortgage.

In a short sale, the owner owes more on their mortgage loan than the house is worth. The lender recognizes that they’re going to be unable to recoup the full amount of the loan and so agrees to a short sale.

For buyers, the advantages are…

A short sale home can be a good investment opportunity.

With a short sale, you have a chance of getting a better price on the house than you might with a regular seller. The best way to get a deal on a short sale is to find one that’s priced under fair-market value. However, understand that the seller’s lender is going to try to recoup as much money as they can on the home, so you’re unlikely to score a majorly underpriced home.

You’ll also find that you may face less competition from other buyers with a short sale. Many homebuyers will steer clear of a short sale due to the belief that it involves a more complicated process, because they’re on a tight timeline, or because they think a short sale will require a mess of repairs.

Short sale homes tend to be in better shape than foreclosures. A foreclosed home can sit empty for months or years on end and deteriorate because of it.

Disadvantages include…

When it comes to a short sale, you need patience and perseverance.

One of the biggest obstacles you’ll encounter buying a short sale is time. “You have to wait for the current owner’s bank to approve the short sale,” says Jessica Sanchez, Director of Underwriting and Loan Management at HomeLight. “That process can take a long time.”

To ensure they get a good deal, the bank will review things such as the current owner’s payment history, current market state, and also comps. Comparable sales involve analyzing similar, recently sold properties in the area.

On average, you can expect a short sale to take between 60 to 90 days before you get the bank’s approval on your offer. Because the timeline often takes longer than with a traditional home, you’ll need to be sure to inform your lender that it is a short sale. They can usually work with you to extend your preapproval and locked-in mortgage rates.

While you can expect a short sale home to be in better condition than a foreclosure, there’s still the possibility it’ll need repairs. Even a brand-new home is often in need of at least one minor repair before closing!

Of course, there’s also no guarantee that the seller’s lender will accept your offer. Then your time has been wasted and you must begin the process of finding a house anew.

Can you get a mortgage loan for a short sale?

The short answer is: Yes!

In general, acquiring a loan for a short sale home is no different than getting a loan for a standard transaction. You can even get an FHA loan for a short sale, but be aware they have guidelines around this type of sale.

For example, you cannot purchase the short sale house as an investment property if you have an FHA loan. So if you’re hoping to turn the house into a rental, the property won’t qualify for the FHA loan.

What buyers need to consider with a short-sale mortgage

There are several different factors that you need to keep at the forefront of your thoughts while considering your short-sale mortgage options and determining which house is right for you. The more prepared you are, the better chance that your offer will be accepted.

Timing

All short sales require bank approval. This means you’re going to probably spend a fair amount of time waiting to hear back from the seller’s lender regarding whether they accept the deal.

Patience is key here: You could be waiting for several months.

“Sometimes a property might have a first mortgage, a first-position lien, then also a second-lien second mortgage,” notes Sanchez. “Then you have two separate banks that have to sign off in approval. This can extend the timeline substantially.”

Melanie Hunt, a top-selling real estate agent who has sold 74% more single-family homes than the average Fort Worth, Texas, agent, says: “It’s going to take longer than you think to get approved.”

There are steps you can take to increase your odds of securing approval, though. Hunt adds,

“Make sure you have a really good lender. You need a preapproval letter secured. The bank needs to know they can really close when the time comes.”

Once the current homeowner’s lender (or lenders) accept the deal, you’ll likely be given a tight deadline to close —sometimes as little as two weeks. That’s why it is essential that as the buyer, you’ve already secured a preapproval from your own lender.

If your lender offers the option, speak with them about getting pre-underwritten. Pre-underwriting can help to streamline the mortgage process and in the right circumstances, it can also help you close faster. With pre-underwriting, the mortgage company vets your financial information upfront and approves a specified loan amount.

Pre-underwriting also makes your offer more attractive to the selling lender. It shows that you’ve already acquired solid financing from a lender.

Rate locking

Because the timeline for pursuing a short sale typically takes weeks longer than a typical home sale, you’ll need to stay in close communication with your lender about a number of variables. One includes your interest rate lock: You’ll want to get your interest rate locked in for as long as possible.

Some lenders will let you lock in your interest rate for up to 90 days. The benefit to this is that if interest rates rise, you’ll be protected against your own rate going up. You might want to request a float-down option so that if mortgage rates fall below your locked-in rate, you can “float” your rate down.

The appraisal

When you’re looking into buying a short sale, the house will have to undergo two appraisals.

Your own lender will want an appraisal done before they fund your loan. They will want to ensure that the short sale house is worth the amount they are loaning you.

You will use this appraisal as part of the short sale package you submit to the seller’s lender to hopefully sign off on the deal.

The seller’s lender will also want an appraisal done to make sure they’re getting the best deal possible.

This is where things can occasionally get dicey. If your lender’s appraisal varies too much from the seller’s, you might be stuck either having to pay the difference or watching the deal fall apart.

Collaboration

If you’re looking for ways to expedite the short sale buying process, one avenue you can consider is collaboration. By getting a loan from the current homeowner’s lender, you can help to move things along at a faster pace.

All of the required paperwork will be in a single place, thus reducing both back-and-forth time and the chances of important documentation being misplaced.

However, it is in your best interest that you shop around for the right lender. Choose a lender with the best rates and terms, as a mortgage is a years-long commitment with far-reaching financial ramifications.

Conditions

While a short sale home will usually be in far better condition than a foreclosure, it may still have problems. If you must acquire an FHA or VA loan for the short sale, be aware that the property must meet certain livability standards.

Cris Didonato, who worked as a home inspector for more than 30 years and is now a consultant for Accurate Home Inspections, says that “while it hasn’t happened often, there have been a few houses that were uninhabitable.”

He continues, “I’ve inspected homes that had serious issues, like structural problems, but buyers are usually renovators, not people looking for a turnkey home.”

For an FHA loan, there are minimum property standards. Some of these standards include:

• Safety: The home must be in a livable condition that can protect your health and safety. That means if black mold is growing rampant in the basement, the house may not qualify.
• Security: The property must be secure and provide safe access for pedestrians and vehicles.
• Soundness: If physical deficiencies or conditions affect the structural integrity, then the house will not be approved for an FHA loan. For example, if there’s extensive termite damage or the foundation is sinking, those are grounds for denial of an FHA loan.

Closing costs

The last and most costly hurdle you will need to clear is paying the closing costs. Mortgage closing costs average between 2% to 5% of the loan.

Sometimes, as the buyer of a short sale, you’ll have to pay more in closing costs. The lender could refuse to pay for the customary seller closing costs, like the transfer taxes. Also, if you want any specialized inspections done, you’ll likely need to cover all the costs yourself, as well.

These various obstacles serve to highlight the importance of working with a top real estate agent. An agent who’s experienced with short sales will work to protect your interests, will be able to provide advice on whether the short sale property is a good investment, and will fight to keep the terms and costs in your favor.

Follow these tips and you’ll soon be on your way to successfully securing a short sale mortgage loan.

Header Image Source: (Rob Tol / Unsplash)

There are pros and cons to consider when going this route, however, such as the fact that bank-owned properties often need more TLC than other homes on the market, and many are sold as-is. Let’s look at the ins and outs of bank-owned foreclosures and outline step-by-step how they work.

What’s a bank-owned foreclosure?

When a homeowner stops making mortgage payments, eventually the bank will foreclose on their house, and the property will become bank-owned. The steps in between the first missed mortgage payment and a bank-owned foreclosure follow a pattern like this:

• The homeowner fails to make at least three consecutive months of mortgage payments.
• The bank or lender files a notice of default, and the house is listed as a preforeclosure.
• A date for a foreclosure auction is announced.
• If the homeowner fails to catch up on their payments by the auction date, the home is auctioned for sale.
• If the home fails to sell at the auction, the bank or lender takes possession of the house.
• The home is now bank-owned (sometimes also called REO, or “real estate owned”).

Banks and lenders will often list these homes on their websites in the hopes of selling them. Often these properties are sold “as-is,” and they may be in a certain amount of disrepair, depending on how well the previous homeowner cared for the property and how long the property has been unoccupied.

If the former homeowner defaulted on an FHA loan, the home may become inventory for various HUD programs, including the Good Neighbor Next Door program.

The process of buying a bank-owned foreclosure

First, it’s worth noting that the term “bank-owned foreclosure” is a bit of a misnomer. According to top Florida Real Estate agent Troy Walseth, who has 27 years experience under his belt, “You really can’t buy a ‘foreclosure.’ You can buy a short sale, or you can buy a bank-owned property — but the foreclosure is just what’s happening in the process.”

Purchasing a bank-owned property is different than purchasing a home on the general real estate market. Usually when shopping for a home, you contact a real estate agent, they help you identify properties you might be interested in, you visit those properties, and then when you find one you like, you make an offer.

If your offer is accepted, you start the process of inspections, title checks, and negotiations while securing a mortgage loan and signing the papers when it’s all said and done. Bank-owned property sales work a little differently and can often take a bit longer. Here’s what you’ll be getting into.

Step 1: Find the right agent

A good real estate agent is your advisor and advocate in the homebuying process. You want to make sure to choose an agent who has experience with bank-owned property transactions. Not all agents do!

Consider using tools like HomeLight’s agent finder in order to find a qualified agent near you who understands these homes and this process.

Step 2: Consider dealbreakers

Bank-owned homes may not be the best-staged or the most recently renovated. In some ways, this can be good because it might make it easier to get a good deal, and it will also give you the freedom to make any updates or repairs to your specifications or preferences. But it’s important to know your tolerance level and how much might be too much to take on.

The bank may have made repairs to major issues that rendered the house uninhabitable, but they will likely have spent the bare minimum to make them. Take some time to think about what you want out of a house and what types of repairs or work you would be unwilling to take on, as well as what minimum condition you expect a potential home to be in.

This is important to do before shopping because it’s far too easy to get attached to a price point or superficial features of a home and become blind to its fundamental flaws. Making a list of deal breakers can help you filter out unacceptable properties before you can form an attachment.

Step 3: Find available homes near you

Now it’s time to begin your search. Ask your agent to find you bank-owned or REO homes on the MLS (multiple listing service) that meet your specifications.

Individual lenders may also have home listings on their websites. For example, Bank of America has a page where you can search for REO home listings by state and city.

Your agent is likely familiar with the best places to look for these types of homes in your area; after all, that’s why you went to them in the first place! If you feel like doing a little searching on your own, however, you can check out online listing portals, which will sometimes have REO homes listed.

Step 4: Narrow down your list of potential homes

Once you have cast a wide net, it’s time to start focusing your search. Make use of your agent’s insights as to which homes have the most potential. Things to consider during this part of the process include:

• What is the potential price of the house? Is it in your price range?
• Does it have the number of beds, bathrooms, and the square footage you want?
• Where is it located? What amenities are nearby, what is the neighborhood like, what would your commute be, and are the neighborhood schools good?
• How much does the house need in terms of repairs and updates, and how does this factor into your overall budget?
• Has the bank or lender attached any requirements or contingencies to the deal?

While you will likely have to purchase the house as-is, this is a good time to take a physical tour of your top choices in order to narrow your list even further.

Step 5: Determine the fair-market value of the homes on your shortlist

Each of the homes on your shortlist will already have a price assigned by the bank or lender. According to Walseth, “They’ve had two to three brokers and broker price opinions on these properties — what they should sell for as-is. So I think you’re most likely going to pay market value, whatever market value is at the time.”

That said, it’s worth asking your agent about doing your own assessment of the value, especially if the property has been on the market for some time. The agent may be able to run a CMA (comparative market analysis) for you, or you can spring for a full appraisal on your top choices.

Prices can be more difficult to negotiate on bank-owned properties for the reasons stated above, and also because any offers often have to be reviewed by several members of the bank, who all in turn have to answer to shareholders or investors. (This is one of the reasons why purchasing a bank-owned property can be a more time consuming process).

Your agent should be able to help you determine what offer to make initially, keeping in mind that if you come in under the asking price, it is much more likely to be countered than accepted. As you weigh your options, really take a close look at which of your top choices offers the best value overall and which one might allow for significant gains in sweat equity via easily implemented corrections.

Step 6: Start talking to lenders about preapproval

During a typical homebuying process, this step might come a lot earlier. But when searching for a bank-owned property, there’s a reason to wait. It’s often easier if you can work directly with the lender that currently owns the home you are interested in, so it makes the most sense to wait until you’ve identified your top choices first.

Contact the banks or lenders which own the properties you are most interested in and see what they can offer in terms of preapproved mortgage amount and interest rates, as well as what they require for a down payment. If they know that you are interested in one of their properties in particular, they are more motivated to offer good loan terms.

If you’re hoping to get a government-backed loan (FHA, VA) for the house, bear in mind that the home will likely have to be in good (for a bank-owned property) condition. This may mean that it needs additional repairs or fixes beyond what the bank may already have done.

It’s worth noting, however, that banks tend to be less flexible about additional concessions than a typical home seller. That said, if the fixes are small enough and are absolutely required by the lender for approval, according to Walseth, the bank will often step up and take care of it.

Step 7: Select a home to make an offer on

Decision time has arrived. Weigh all of the information you’ve gathered, make a list of pros and cons, and consult your agent for additional advice if needed until your top choice emerges.

Note that it is not advisable to make an offer on more than one home. You may have to put down earnest money on each, and if both offers are accepted, you may find yourself in a binding contract on two homes instead of one.

Step 8: Make the offer

At this point you’ve likely got a good idea as to what you think a fair price is, and your agent can help you write the initial offer.

Make sure the offer includes any important contingencies, such as an inspection contingency. This is especially important for bank-owned properties because they don’t tend to be in the best condition in the first place, and you want to be able to get out of the sale if the inspector finds big problems.

Like a typical offer, you will probably need to put down earnest money so the bank knows you’re serious. Once the offer is submitted, it can sometimes take a while to hear back from the lender. This is because more than one employee may need to be involved in the decision, and many of them often work through a third party. If a week goes by, consider asking your real estate agent to check in for an update.

If the bank receives more than just your offer, you may be required to bid against other buyers. When this happens, banks will set a deadline for the “highest and best” offer from all interested parties, and you will need to submit a revised offer.

Beware, however, of offering too much. There are other homes on the market. It’s usually not worth overpaying for one.

If you fail to have your offer accepted, you will need to go back to the drawing board, determine your second-choice home, and repeat the process again. Once an accepted offer is in hand, then it’s time to move on to the next steps.

Step 9: Order an inspection

You’ll want to know exactly what you are getting into before the deal closes. As previously mentioned, your offer should contain an inspection contingency, meaning that the property needs to pass inspection in order for your offer to remain valid.

Even if the lender has an inspection report from when the house transferred ownership, depending on how long that’s been, it’s always a smart idea to get your own. In fact, if you are going through a lender other than the bank that owns it, this may be a requirement for the mortgage.

If problems are found during the inspection, your agent can help you negotiate who may be responsible for fixing them, or can determine that the problem is too large and the deal is off.

Bonus tip: Get a licensed contractor to give you a quote for any repair needed and include the cost as an addendum to the contract.

Step 10: Get a warranty

Since there are a lot of unknowns with a bank-owned property — and even after inspection, hidden problems may still exist — it is a good idea to get a warranty on the home. It is unlikely that your bank will offer you one, so you will need to seek a warranty through a third party, such as Home Warranty of America, or another similar home warranty provider.

It’s smart to protect yourself. The cost of a warranty is often minimal, and it’s certainly less than any costs you might incur if the plumbing system goes bust a month after you move in.

Step 11: Pay attention to the title review

While the lender should have cleared any liens before accepting your offer, it’s a really good idea to make sure! A title review will document who else (if anyone) has a legal claim to the property.

You should also purchase title insurance so that you are protected if someone later claims rights to the property or a defect is found in the title history. Because bank-owned properties are usually associated with a previous owner who defaulted on mortgage payments, this is especially important.

Step 12: Consider ordering a survey of the property

Depending on how long the house has been bank-owned or vacant, you might want to additionally check on any easement or usage restrictions, or other possible survey issues, just to be safe. A home purchase is a huge investment, and the more steps you take to protect yourself, the less likely you are to run into problems later.

Step 13: Negotiate any final issues

Have you found any snags yet? You’ll have to talk to the lender about how to move forward — and just like accepting the offer, you can expect that to take some time! Maybe on the final walkthrough, you discovered the air conditioning was broken, or perhaps your FHA loan is contingent on removing some unsafe trees near the house.

While banks may be less inclined to tackle any big fixes, if something is absolutely necessary for the deal to proceed, concessions can be made. Your agent is your biggest ally during this process.

Step 14: Closing time!

Make sure all of your financial ducks are in a row and you are cleared to close with your mortgage loan. Ownership cannot transfer and a closing date cannot be set until your financing has been secured.

Some banks will charge you for every day that an REO deal goes over deadline if you delay the process, so keep tabs on your timeline and make sure you’re not incurring any unnecessary fees!

Though it may have taken longer than you would have liked, the day finally arrives when you meet to sign the closing papers. Hopefully, you feel confident in having done your due diligence and are secure in the knowledge that you got the home you wanted at a good price.

And once all the papers are signed — it’s yours!

A final word on buying a bank-owned foreclosure

Make sure you investigate all options with your real estate agent when purchasing a home. While sometimes bank-owned and REO properties are the source of great deals, there are many times when they may not be. After all, just like any seller, the bank would like to get the best deal out of the transaction, also. This is why having a trusted professional on your side throughout the process is indispensable.

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Here we cover what you need to know about buying distressed homes, from start to finish. You will learn what each stage of the process looks like as we define the different terms clearly. By the end, you’ll have all the information you need to seek out these properties, determine if a deal is good or not, and make an offer.

Distressed or short sales

The path to foreclosure begins with a homeowner struggling to make their mortgage payments. When a homeowner can’t make their payments, they may either try to sell their home before they get too far behind on their mortgage, or they could simply let the loan go into default. If the home is sold before it’s foreclosed without working with the lender, then it’s known as a distressed sale.

A distressed home for sale probably doesn’t look any different than any other home on the market, though there is a possibility that it will be more run down. If the homeowner has had financial difficulties for several months or longer, they likely haven’t been able to afford maintenance. That said, such a home can likely be purchased for fair-market value. One thing to keep in mind, though, is that the seller probably isn’t going to have cash reserves available to fix any issues uncovered in the inspection before closing.

A distressed sale may be the best-case scenario for the seller. If they are unable to make payments, but they are able to sell the home for an amount equal to or greater than what they owe on it, then they leave with their credit score intact — and possibly some extra money in their pocket.

If, however, the homeowner is underwater on the loan, meaning that they owe more on the mortgage than the home is worth, they can appeal to their bank to allow a short sale (which is a specific type of distressed sale). This means the purchase price of the house will likely not be enough for the seller to fully pay off their mortgage.

According to Troy Walseth, a Florida real estate agent with over 27 years experience, banks don’t typically allow a homeowner to go straight to a short sale unless the amount still owed is more than the current market value of the home. “The banks will actually require it to physically be on the market for a certain amount of time with a contract through a real estate agent,” he explains. If the home fails to sell at market value, then the price may be lowered so that the homeowner can more quickly be free of their debt burden.

Short sales are typically listed on the market just like any other home; you might see terms like “subject to bank approval” that indicate you’re looking at a short sale. These deals also tend to take longer than a normal transaction, and there’s no guarantee the seller’s lender will accept the offer.

In order for the bank to agree to a short sale, the seller will often need to prove financial hardship in addition to attempting to sell the property at market value for a specified period of time.

Purchasing a home in a distressed or a short sale can net you a good deal, and the seller is often very motivated to get out from under their financial burden. In some cases, however, these homes may be fixer-uppers, so always be sure to get a full home inspection, and don’t take any shortcuts in the process.

More about the preforeclosure process

If a homeowner cannot pay their mortgage, but does not want to sell their home, then after three months of non-payment, the home may enter preforeclosure. The bank or lender will file a notice of default, and the homeowner will be notified that if they fail to catch up on missed payments in a specified amount of time (which varies by state), their home will revert to the bank’s ownership, and it will go to auction.

Sometimes this legal action will motivate a homeowner to sell, and they will list the home on the market. This could end up being either a distressed or short sale, as described above. In other circumstances, however, the homeowner does not want to leave the home and may choose to stay through the process of eviction and foreclosure.

A savvy buyer may decide to look at preforeclosure listings either themselves or with the aid of a real estate agent. When a home is on the market, you may have to compete with other potential buyers. But by seeking out a preforeclosure, you may not only forego the competition, but it’s also sometimes possible to negotiate a good deal if the homeowner is anxious to resolve their financial difficulties.

Keep in mind, however, that some homeowners might not be happy to hear from you. It’s worth noting that when a home is in preforeclosure, you cannot bypass the homeowner and attempt to negotiate a sale through their bank. The homeowner must agree to sell.

You may choose to reach out to a homeowner yourself, but it’s usually best to have a real estate agent with experience make contact for you. With regards to the homeowner, according to Walseth, “About 30% of the time, they are open to a discussion about it, and about 70% of the time, they say, ‘No, we have that covered.’”

An ethical real estate agent may also let the homeowner know that forbearance and refinancing may be options to help them out of their situation, and that they don’t necessarily have to sell.

Foreclosure and auction

Further along the path of mortgage non-payment is the eventual foreclosure itself. When this occurs, the home goes up for auction, and the homeowners are legally evicted.

Auction notices are listed publicly and can be found online or in the newspaper. They often occur at courthouse steps with the local sheriff as the auctioneer. The lender will set the opening bid, and then interested buyers can bid from there.

How a home is purchased at an auction is very different from a traditional home purchase. You are typically required to have cash in hand (a cashier’s check and/or proof of funds) for the purchase price of the house and usually cannot get a mortgage loan for the property. You aren’t able to inspect the property beforehand, either.

As such, purchasing a home at auction almost always requires that you have enough money in the bank to purchase it outright — and that you are willing to take on the risk that comes with a lot of unknowns about the property. Most people who attend these auctions are home flippers: people who purchase homes, fix them up, then sell them at a profit.

Every state has slightly different foreclosure rules. In some states, you might have a couple of extra days to pay for the full amount that you bid, but you’ll need to provide at least the earnest money or down payment immediately, and you’ll have to secure any remaining funds within 48 hours.

It’s also possible that the former owner is still occupying the house when it goes to auction, and if they don’t leave, you may have to work directly with the former owner or go through the formal eviction process to get them out of the house.

How a house becomes bank-owned

Sometimes the lender won’t get the minimum amount they want for the house at the auction — or nobody will bid on the house at all. If the house doesn’t have a new owner by the end of the auction, then the bank or lender takes possession of the property. At this point it is now called a bank-owned or real estate-owned (REO) property. For all practical purposes, the home can be thought of as being “back on the market” and available for purchase.

The big difference between purchasing an REO property and a standard home purchase is that finding high-quality homes or homes that are right for you isn’t always easy; supply might be limited in your area. Plus, instead of dealing with a human seller, you’ll be making your offer to and negotiating with a bank, which can be cumbersome. You may be able to streamline the process a bit if you can get preapproved by the same lender that currently owns the house.

That said, if you do find an REO property that suits your needs, you can usually get a pretty good deal, price-wise. The bank is often a motivated seller, and working with a motivated seller gives you more negotiating power as a buyer. You could even end up being able to afford a bigger house, or a house in a nicer neighborhood, than you otherwise would.

However, REO properties may be distressed and in need of repair, and while the bank may be willing to make small concessions or fixes to items discovered during an inspection, they are often less flexible than a regular seller. These sales can sometimes take much longer than a standard real estate transaction as well.

Where HUD Homes come from

If a homeowner with a government-backed loan defaults on their mortgage, resulting in foreclosure, it’s possible that the U.S. Department of Housing and Urban Development (HUD) will take possession of the property.

HUD’s Good Neighbor Next Door program may offer these repossessed homes for sale at a 50% discount from list price to law enforcement officers, teachers, firefighters, and emergency medical technicians provided they agree to live in the property for at least 36 months (three years).

Good Neighbor Next Door homes are those located in so-called revitalization areas. The idea behind this program is to offer incentives for “good neighbors” to move into areas and contribute to community revitalization.

If you want to purchase a HUD home either through an incentive program, or just in general, you can find listings online at the HUD Homes store.

From first missed payment to REO: A summary

Hopefully at this point, the terminology has become clearer, but here’s a quick refresher if you need it:

• Distressed sale: When a homeowner needs to sell quickly, and potentially (but not always) at a loss.
• Short sale: A type of distressed sale in which the sales price is less than what the homeowner owes on the property.
• Preforeclosure: When the homeowner has missed three consecutive payments, the bank or lender files a notice of default. Homes in preforeclosure are publicly listed. In order to purchase a home in preforeclosure, you must contact the homeowner; however, they are not required to sell the home.
• Foreclosure: Process by which the bank or lender forces the sale of the property at an auction after the owner has not made payments for a specified period of time.
• Foreclosure auction: A public event in which investors or buyers may bid on a foreclosed home. You will not likely be able to inspect or see the home prior to the auction. You typically cannot get a mortgage loan for a home purchased at a foreclosure auction.
• Bank-owned: Homes that do not sell at auction become owned by the bank. These homes are generally listed for sale, often as-is, on the bank’s website.
• REO: Stands for real estate owned; this is the same thing as bank owned.

Drawbacks to buying a short sale vs. foreclosure vs. REO home

If you want to purchase a home during any part of the foreclosure process, it may be possible to get a good deal, but it’s also quite possible that you don’t end up with that great of a deal at all.

Keep in mind that the bank, who holds the mortgage, wants to get their money on the house. They want the homeowner to sell it at fair-market value, if at all possible, and they won’t want to go much lower. And after the property becomes bank-owned, they are still hoping to get the home’s market value from you as the buyer.

Remember that homes at different stages of the foreclosure process might be in disrepair. A homeowner who can’t pay their mortgage often can’t pay for upkeep, either. So when purchasing such a home, you may need to account for this and set funds aside for necessary repairs.

Depending upon where the home is in the foreclosure process, purchasing it may require additional paperwork or a longer time frame. You may also be limited in what you can request from the seller or bank, or in your ability to inspect the home fully.

Partner with a top agent

In order to make sure you don’t end up on the wrong end of a distressed sale or purchase of a bank-owned property, it is best to partner with a real estate agent. You want someone with the experience and the connections to both offer you advice and keep your best interests in mind. Find a top agent near you today using our agent finder.

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The reality is, there are a variety of substantial pros and cons that any would-be buyer should weigh seriously before purchasing a bank-owned property.

Yes, you may indeed (but not necessarily) get a great deal. You will also have to expect a drawn-out process and condition issues, and you’ll have to button up your insurance and inspection processes. Here, we break down the major pros and cons of buying a bank-owned property to demystify the process and prepare potential buyers.

What is a bank-owned home?

Let’s start with the basics. A bank-owned home, also known as “real estate owned” (or REO for short), refers to properties that have been foreclosed with the ownership transferring to the bank or lender.

It gets to that phase after the borrower defaults on mortgage payments for a period of time. The property is then foreclosed, and the house goes up for auction and sold to the highest bidder.

If it does sell, the lender gets back some of the outstanding loan amount through the sale. If it doesn’t sell, ownership then passes to the lender and the house becomes an REO property.

The lender then attempts to sell it, a process which might include removing liens on the property and evicting its occupants. The lender may also make any repairs needed to ensure the house is livable before listing it for sale.

Why would I consider buying a bank-owned home?

Generally, people consider buying bank-owned homes with the hope of getting a good deal.

Like other sellers, banks are motivated: It costs the institution money to carry this property on their books. Plus, there is cost and effort associated with maintaining it.

So you may indeed score the home at a discount — but you’ll likely be buying it as-is, you probably won’t be able to negotiate much on the price the bank sets, and there are other potential pitfalls to weigh.

Consider the personal experience of top-selling Texas-based agent Mary Stewart. “Back in the ’80s, I bought a foreclosure and I stole it — I really got a good deal,” she explains.

“Of course, the condition was horrible. It had snakes. It had fleas. We had bees, and we probably had three gallons of honey come out of the ceiling. But it was well worth it, because we bought it for $250,000, and we sold it for $650,000.”

Her experience was with a foreclosure instead of a bank-owned property, but it illustrates the kind of things that can happen to a property when people are evicted — and also the pros and cons of signing onto this kind of deal.

What are the pros of buying a bank-owned home?

Let’s start with the major pros.

Getting a good deal on a home potentially means that you might be able to buy in an aspirational neighborhood that’s otherwise out of your reach, or buy a bigger house than you could have otherwise afforded.

You can also be assured that the bank will have the house inspected before it’s available for sale, so you’ll at least know what condition it’s in before you buy it.

“When the bank gets the property back, sometimes they do want to do some fix-up and make it safe,” Stewart says.

“For instance, if there’s a swimming pool, that’s really an issue, because the pool turns black. They have to either cover the pool, drain the pool, or fence it, because what if a child falls in it while Realtors show it?”

Unlike with a foreclosure auction, you can walk through an REO home before you decide to make an offer — so you won’t be flying totally blind when making this substantial purchase.

With an REO, you can also get the house inspected yourself after committing to buy it. And you should consider getting some specialty inspections to make extra sure you aren’t buying a money pit, especially with this kind of sale.

As well, there isn’t as much competition from traditional buyers for these homes, and investors may be looking for something different — so you might be in a pool of few interested buyers for the opportunity.

An REO should be free of liens or other title issues. And there won’t be any legal occupants in the house who have to move out before you can move in, because the lender will have already evicted the previous occupants.

What are the cons of buying a bank-owned home?

While there are potential advantages to buying this kind of property, there are also pitfalls to be aware of and avoid.

Although you might hope to get a bargain in an REO sale, there’s no guarantee that you’re going to get a great deal. So you’ll want to confirm that the price is fair. Order your own appraisal or at least get your agent to run a comparative market analysis for you. (You will have to do this anyway if you’re not going through the bank that owns the house to get your mortgage loan.)

The bank isn’t going to repair very much (if anything) before it sells. The property will be sold in “livable” condition — but of course what makes a house “unlivable” is pretty extreme, so “livable” is merely a relative term that may still translate to a ton of work for the buyer (potentially too much to want to take on and pay for).

Remember that the REO house will be sold in as-is condition; you won’t be able to request repairs. Get an inspection contingency so you can get out of the deal if there are serious issues that the bank missed. And you’ll want to do title research and get title insurance to protect yourself.

“You do want to get a good inspector, and of course, the title insurance will make sure all the taxes are paid up and current and there are no liens on the property,” Stewart says.

“It gets a little tricky,” she adds, in reference to another bank-owned property that interested her. “On this particular house, there was a first lien and a second lien. The second lien-holder was originally going to be the one to foreclose.

“Well, if the second lien-holder forecloses and you buy it, you have to pay off the first lien — and a lot of people don’t know that.”

The house might have been vacant for a while, and that can lead to issues. These can include pests — as in Stewart’s experience — leaks that went unnoticed, or even break-ins. You should expect to have to spend some money on repairs and maintenance, and include those in your budget.

Major issues unaddressed by the bank may reveal themselves. “The condition can be really bad because people are mad because they’re getting foreclosed on,” Stewart sasy.

“I have seen foreclosures where people have shoved their fist through one or two walls in every room. They will steal appliances, or maybe the house was left unlocked after they vacated, and appliances will be gone. I have also seen air conditioning units gone.”

Your correspondence will be with a banking institution versus a more accessible human-to-human experience. If you’re a novice, you might end up overwhelmed in an REO sale; these sales can test even seasoned investors’ patience. “The protocol for a foreclosure is such a long process,” Stewart says. “It takes a while.”

How do I get started if I want to consider a bank-owned home purchase?

There are online tips and tools available to help you find bank-owned homes. But the best way to get started is to talk to a real estate agent in your area who has helped other buyers in your shoes.

Sometimes if a bargain seems too good to be true, then it may very well be, Stewart says. “But if buyers have a decent Realtor, they should be protected.”

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As a buyer, this means you’ll have to work with the seller and the seller’s lenders to negotiate the sale, which will take time (imagine trying to get children at a party to agree on how to fairly split a small cake which, no matter how it’s split, will leave them all unsatisfied). Additionally, the property itself will come ‘as is,’ meaning you will most likely need to spend time and money on renovations and repairs after the purchase before moving in. For sellers, this highlights the appeal of selling a home as is to buyers who are willing to take on the necessary updates.

Patience and persistence in a short sale have their rewards and can save you money in the long run — the process is simply more of a marathon than a sprint. To make sure you know what you’re getting in for, and to help guide you along your way, we’ve compiled a list of 13 essential steps in the short sale buying process.

1. Hire an agent who knows what they are doing

When you know you are going to start looking seriously at short sales, it is paramount, as ever, to find the right agent.

Glen Henderson, one of the top agents in San Diego, California, ran one of the top three short-sale negotiation groups in San Diego during the last financial crisis. Henderson explains that while there is special training for agents interested in working with short sales (the National Association of Realtors offers a short sale certification), the most important qualification an agent can have is a proven track record in the often complex and time-sucking process of short sales.

Finding the right short-sale agent will save you lots of headaches down the road and help you avoid things like undisclosed liens (yikes!) and inflexible purchase agreements.

2. Get preapproved

Getting preapproved (different than pre-qualification!) for a mortgage can be one of those checklist items that falls to the wayside, but don’t allow yourself to forget about it — especially when you’re pursuing a short sale.

Make sure to communicate with your lender about the fact that you are looking into a short sale. Because short sales often occur on a lengthy timeline, you’ll want to find a lender who is flexible with how long your mortgage application is valid.

It is possible that you will be able secure a mortgage through the current homeowner’s lender or bank (and you’ll be working with them, anyway, to negotiate the sale) — but you’ll be wise to do some comparison shopping for a mortgage! Luckily, preapproval can happen very quickly if you follow some basic steps.

3. Find a short sale house for sale

OK, you know you want one — now, how do you find them?

To start with, some homes are simply listed as “short sale,” in which case your job as a housing sleuth is easy! In other cases, listings might have language that tips you off to the fact that this is a short sale. Keep an eye out for phrases like “subject to bank approval” or “give the bank time to respond.”

You can also look for homes that are in default or pre-foreclosure; these can be listed online or in legal ads. Your real estate agent will be able to search the multiple listing service or MLS (only available to real estate agents) to help you find homes that are in pre-foreclosure. Agents can also help you identify homes where the current owner doesn’t have much equity in the house — the less equity the owner has, the more likely their lenders are to be interested in a short sale.

4. Contextualize the neighborhood

Context, context, context! Although it’s great to get a house for a lower price (especially if price is one of your main deciding factors), it’s equally important to know the context of your home in the greater neighborhood. This will help you to make educated decisions about its likely appreciation or depreciation over time.

What are the home price trends in the neighborhood? Has the neighborhood weathered previous economic storms? If yes, then it’s more likely to do so again, making the home a safer investment. If you are planning on renovating and reselling the property, it can also be beneficial to think about what month is the best for re-selling the home.

5. Take a tour with an eye on the bones

Touring a short-sale property is simply not going to be as aesthetically pleasing or soothing as a house tour on the regular market. It is unlikely that the seller will stage the house, so there will likely be cosmetic issues… and, ahem, “personal” decor choices — not to mention clutter.

While touring, try to focus on issues that would require major structural repair, like pests, obvious moisture or dampness, and faulty electrical connections. Remember, you’re trying to get a feel for how much of a construction project the house will be — walk in the door knowing that you are not touring a perfectly lit and landscaped dream home.

6. How much is the house worth?

Before putting an offer on the house, you’ll need to determine how much it is worth — and how much the current homeowner still owes on it.

The best way to determine the market value of the house is to pay for a professional appraisal. You can ask the current owner directly, or use tax records or other publicly available records to find out how much the seller owes.

7. Contact the lender

Again, because this is a short sale, you not only have to work with the seller, but with the seller’s lenders, as well! Your agent should guide you in getting an authorization letter from the homeowner that will legally allow for the lender to talk with you and your agent about the property. You will need to get this letter notarized before approaching the lender.

It is also advised that you and your agent get the name and phone number of someone in the lender’s loss mitigation or resource recovery department — both to get a feeling for what the lender’s requirements are for a successful short sale, and so you have a personal contact to follow up with throughout the approval process.

8. Get an inspection

In a short sale, you’re getting exactly what you see, which means in most cases, you won’t be able to ask the seller for additional fixes or updates to the property before you buy.

Getting a thorough and clear home inspection is really important — it will tell you what major and minor repairs are in store so that you can accurately calculate whether owning and updating the house to a safe living standard are within your budget. Get a home inspection, and make sure you do it right.

9. Do the title research (and get title insurance)

Once the purchase of the property is completed, you will be responsible for any liens on the house. This is fine if you know about all the liens and can figure them into your financial plan for the property. This is less fine if there are any undisclosed liens on the house that come to light after the sale.

A title search will ensure that you know about all liens, plan for them, and don’t get surprised after closing. Remember: Even if you don’t know a lien exists, you will be legally responsible for it once you own the property. Even if they’re not trying to trick you, sellers might not fully understand what liens are active on the house, or that they are withholding information that they should disclose.

Getting title insurance is a great way to protect yourself against undisclosed liens and other nasty surprises. Title insurance will cover any legal costs to protect your home and your investment against undisclosed liens.

10. Get your application together

It’s finally time to get your application together! While the right agent should take the lead on this process, it’s good to be prepared by knowing what will be in the application.

Some things on this list are pretty straightforward: you’ll need to provide an appraisal, a list of any liens on the property, and a copy of an earnest money cashier’s check. You will need to provide a package from the seller, too, which includes a hardship letter and financial information. If the house was listed on the market, you will also need to include a listing agreement.

Finally, you will need to provide a purchase offer written by your agent. This should include language that allows you to get out of the sale if you find another, better deal while you are waiting to hear back on your offer.

If you are submitting the offer before getting a full home inspection (which is common), make sure your agent includes a contingency that will let you out of the agreement if serious issues are found during the home inspection.

11. Don’t sign anything you don’t understand!

Like cautionary tales of fine-print-skimming everywhere, signing a short sale agreement without reading and understanding it fully won’t end well for you — make sure you understand what you’re signing on to.

A good agent will be able to walk you through the process and the contract, but don’t be afraid to ask what might seem like stupid questions along the way. Better “stupid” questions now then surpise pitfalls later!

12. Accept, reject, or counter-offer — or, worse, silence!

Now that you’ve submitted your offer it’s time to hurry up and… wait.

Waiting can end in hearing back from the bank that they will be accepting, rejecting, or making a counter-offer. However, waiting could also end in more waiting and, ultimately — silence.

Banks reject short sale applications for a number of reasons. Even if you and your agent are checking in regularly with the bank, it can be hard to tell when to keep waiting. The best advice is to be prepared in the case of silence or rejection without losing hope entirely.

13. KEEP LOOKING

A watched pot never boils, and a short sale house application may be met with unresolved silence — hopefully this isn’t the case and you are able to get the keys, pop the champagne, and get to work on those home repairs!

But either way, some of the best advice we can give you is simply this: Keep looking! The more homes you have in play — the better chance you have of making an offer on a short sale property that is accepted.

Header Image Source: (Andy Dean Photography / Shutterstock.com)

You’ve probably heard that buying a house at auction can get you a really good deal, but if you’ve never attended a foreclosure auction before, then you might not know the first thing about how to bid! Here’s how to get your bid in order and how to bid on a house at auction so you can walk away as a homeowner.

Understanding auctions

Retail auctions

“There are a lot of different types of auctions,” says Erick Monzo, a top-selling real estate agent in Detroit. “First, there’s your retail auction company, like Auction.com and ServiceLink Auction.” These were brought to life during the housing market crash, Monzo explains, because banks were looking for a quicker way to dispose of their assets.

When you participate in these types of auctions, the bidding is web-based, Monzo says. “They require your typical earnest money deposit, which is normally done through credit cards, and contrary to what you might hear, the majority of these auctions do still pay a buyer’s agent commission.”

Monzo says that every real estate auction house has a different platform when it comes to bidding. “If you’ve done 100 deals through Auction.com and you go over to Hudson and Marshall, it’s not the same,” he says. So even if you’re not new to real estate bidding but are new to a specific platform, you’ll want to do your research, so you can come to the table prepared.

HUD auctions

A HUD auction is a foreclosure auction on homes that were financed by the Department of Housing and Urban Development (HUD), a federal agency instead of a private mortgage lender. “These auctions aren’t your eBay-type auctions,” says Monzo, “they are closed auctions.” That means that everyone who wants to bid can do so, but they bid without having any idea what the others are bidding. “Not even the listing agent knows,” Monzo says.

The bids are then sent to the asset manager via HUDhomestore.com, a secure website, and opened the next day in privacy. The auctioned home is awarded to the highest bidder.

Courthouse auctions

Courthouse auctions take place at — you guessed it — the county courthouse “on a specific day of the week and at a specific time, every single month,” explains Monzo. “These are all homes that are being foreclosed on by a bank or whoever the note holder is,” he says.

Unlike retail and HUD auctions, if you want to bid at a courthouse auction, you must be physically present. If the auction is a large tax lien auction, each bidder will receive a paddle to raise when they want to bid, Monzo explains. If it’s a sheriff’s sale auction, all bidders gather in a room together and simply raise their hands when they want to place a bid.

Bidding at an auction

Step 1: Get your bid together

Most home auctions operate in cash, meaning you can’t buy a house with a mortgage, though one exception to that rule is a HUD auction. “Remember, though,” says Monzo, “These are typically distressed homes that don’t have utilities turned on, so even if the auction allows mortgages, a lot of the time the mortgages can’t close because of the condition of the home.”

So, in nearly all cases, you’ll need to get your cash in order before the auction takes place. It’s also not usually enough just to have the funds available; you often have to prove that you have the financial means to bid on a house before you can register for an auction, so make sure you have proof of funds or some other documentation.

At a courthouse auction, for example, Monzo says you must have a cashier’s check for the full asking price of the home. If you end up bidding over the asking price, the additional funds are due almost immediately, normally by the end of the day.

You’ll also need your earnest money available (usually 5% of the purchase price) after the auction, should you be lucky enough to be the highest bidder.

Step 2: Find your auction

Real estate auctions can happen at the county courthouse, at the property itself, or online. Monzo says that to find an upcoming auction, just check out some of the major traditional residential real estate websites, like Zillow or Realtor.com. “The auctions are all published there now,” he says.

After you’ve identified an auction that you are interested in, you’ll want to check to see whether it’s an absolute auction, meaning the holder of the note will accept any price; a minimum-bid auction, meaning you have to bid at least the minimum amount; or a reserve auction, where the winning bid is essentially an offer to the seller, who can decide to reject the offer if they think it’s too low. Knowing the type of auction you’ll be participating in will help you have a better idea of how much you might spend.

You can bid anytime before the bid closes in an online auction, but if you want to purchase an auction at the county courthouse, you’ll have to attend the auction in person and bid when the home you’re interested in comes up for sale.

Step 3: Register to bid

After you’ve identified the auction that you want to bid in, the next step is to register to bid at that auction. If you’re bidding at an in-person auction, bring your proof of funds with you so that you can register. If you’re bidding online, you may have to pay a deposit in order to be able to bid on homes.

As Monzo mentions above, at a courthouse or sheriff’s sale in-person auction, you’ll be given a bidder paddle to raise when the auctioneer reaches your desired price — or, it could be a silent auction, where everyone submits a bid separately and the home goes to the highest bidder. If you’re participating in a silent auction, make sure you bid your very best price, since you won’t have the opportunity to know what others are bidding.

Step 4: Listen!

This is the part of auction bidding where your listening skills come in. If you’re participating in an in-person auction, you don’t want to raise your paddle at the wrong time (or, heaven forbid, for the wrong house), so listen carefully and stay alert as the auction progresses.

When the auctioneer recites your price for the house you want to buy, raise your paddle, and stay alert so you don’t miss out on a chance to outbid a competitor. If there are multiple people bidding on the home you want, you’ll likely have to raise your paddle more than once to stay in the auction, but know what your top price is before you begin bidding so that you don’t get swept up in the moment and pay more than you want to during the auction.

Step 5: Fork over your earnest money

Congratulations, you got the house! Now it’s time to pay the earnest money. Earnest money is often due the same day or 24 hours after you bid, which is why you had to have it ready.

After paying your earnest money, a variety of things will happen depending on the type of auction you participated in.

For a retail auction (like Auction.com), the auction house will start preparing your title right away. “Closings are typically 30 to 60 days later,” Monzo says.

During a HUD auction, buyers paying in cash can close the deal in just a couple of weeks. If you’re mortgaging your HUD auction home, it will take about 30 to 45 days for the home to close.

At courthouse or sheriff’s sale auctions, the buyer cannot take possession of the home for six months, says Monzo. That’s because the homeowner may still be able to reclaim the property by paying the money owed on it. Should that happen, the homeowner must pay you back — with interest.

General tips for bidding on a house at auction

Before you bid on a house at auction, keep these tips in mind:

1. Try it out first

Attend a few auctions without intending to bid on anything; this will give you a sense of the cadence of these events.

2. Get there early

Auctions don’t often last a very long time! If you show up on time, you might miss it, so come early.

3. Check to see if you can view the home ahead of time

If you’re bidding with an auction company, Monzo says you’ll be able to see the home beforehand about half of the time, unless the home is owner-occupied and still in the redemption period.

If you’re bidding on a HUD home, you can walk through the home before the auction with a real estate agent, he says.

If you’re bidding on a courthouse or sheriff’s sale home, however, you won’t be able to see the home you’re bidding on — so do your due diligence to ensure you really want it.

Now that you’re prepared to bid on a house at auction, get out there and find your dream home!

Header Image Source: (Curtis Adams / Pexels)

But, is it a good idea to buy a house in foreclosure? The answer to that question will depend on a variety of factors. As with most things in life, there are pros and cons to buying a home in foreclosure.

We’ve spoken with top experts and researched the different advantages and drawbacks to buying a house in foreclosure so you don’t have to. Keep reading to find the answers to your foreclosure questions.

What’s a foreclosure?

A foreclosure is a home that has been put up for auction by a bank. Foreclosures happen when the owners stop making mortgage payments. As a result, the bank repossesses the house and puts it up for sale at a foreclosure auction. In 2019, foreclosure sales accounted for 11.5% of all real estate transactions.

Foreclosure auction

Foreclosure auctions are competitive, according to Dawn Dause, a top-selling real estate agent in Will County, Illinois, who has more than 18 years of experience. “Investors are out there in full force. You have to be a cash buyer to compete.” Lenders will not finance a foreclosure purchase, so you won’t be able to get a mortgage.

Part of the reason foreclosed homes sell so fast is because there are fewer on the market, and their prices also usually aren’t as low as they were after the Great Recession. Forty percent of top agents agree that the No. 1 factor impacting real estate markets is an inventory shortage.

REO property

If the foreclosed house fails to sell at auction, it then becomes an REO property. REO means “real estate owned” and is another way of saying it’s owned by the bank. There are REO agents you can find who specialize in foreclosure listings.

Short sale

Another option for you to check out is a short sale. A short sale is a home that’s about to go into foreclosure but is still owned by the homeowner.

When you buy a home in a short sale, you might be able to buy the house for the amount of the remaining mortgage balance, or just above it. This means sometimes you can buy a house for far below its estimated value!

The pros

There are a number of advantages when it comes to buying a house in foreclosure.

“If you can get it for the right price and stay on budget, it’s instant equity,” says Dause. “You just need to run your numbers and be smart. Keep in mind that, on average, you can spend over 20% of what you planned when it comes to repairs and upgrades.”

You may save big

Some foreclosed homes sell for less than what they’re worth. It’s possible you could save up to 15%!

This might even present you with the opportunity of moving into a specific neighborhood you might have otherwise been unable to afford. However, such a big savings isn’t a guarantee with every foreclosed property.

More room for negotiations

When it comes to REO properties and short sales, you’ll have more leeway to negotiate.

In these instances, you can have a home inspection or appraisal done. This will ensure you know what you’re getting before you buy it.

Getting a mortgage for an REO property is also possible. In fact, many banks will invest in renovating the home before putting it on the market.

Less competition from traditional buyers

When you’re looking to buy a foreclosed property, there won’t be as many traditional buyers to compete with. Forty-eight percent of first-time homebuyers want a turnkey home, meaning they aren’t looking for the work associated with most foreclosed properties.

Huge potential for a return on investment

If you’re able to buy a house for far below its estimated value, you’ll pull in a massive return on your investment. Buying a house at a foreclosure auction can be a gamble because you won’t know what you’re getting. If you want a safer bet for your investment, look for REO or short sale properties, which you can usually tour or inspect before you make an offer.

The cons

When it comes to drawbacks to buying a foreclosed house, there are a few. One of the biggest ones is that when dealing with a foreclosure auction, you aren’t allowed to tour the inside of the house, so there are a lot of unknowns.

You’re buying the house as-is

As Dause warns, you aren’t allowed to inspect a foreclosed property beforehand, and when you buy it, it’s as-is.

“You don’t know for sure what’s behind the walls. Sometimes the previous owners damage the home on purpose.”

Damage could be extreme

While a foreclosed property might be your gain, for the previous owner, it’s often a traumatic loss. Prior homeowners often fall behind on mortgage payments because of unemployment or health problems. With emotions running high, it’s not unheard of for foreclosed homeowners to destroy a home before their eviction.

“I’ve seen cement poured down water lines,” Dause says. “I’ve even once arrived to inspect a foreclosed house and found water flooding out the front door. The previous owner had broken the water pipe in the basement and left it to flood.”

Repair costs might stack fast

With so many unknown factors, you might end up having to spend quite a bit of money to make the house livable.

Jeff Barnes, owner of Benchmark Property Inspections, says the likelihood for costly repairs that aren’t disclosed is high. He’s a certified ASHI inspector who’s been in business for over 31 years.

“Foreclosed homes can sometimes be in bad shape,” he says. “While it depends on the age of the house, some of the most common issues tend to be plumbing and structural problems.”

Watch out for liens

When you’re buying a home “as is,” that means you get not only the house in the shape it’s currently in, but also the title — including any liens placed on the property.

Some of the most common liens you might run into are contractor liens or divorce decrees. Contractor liens happen when general contractors or subcontractors who did home renovations or repair work are still owed money. A lien placed because of a divorce decree is often the result of past-due child support or spousal support.

The house might be occupied

If a home has been vacant for several months to years, there might be unwelcome inhabitants.

It doesn’t take long for critters, like insects and worse, to figure out a home is empty. Mice will find the tiniest cracks and squeeze through to take shelter from the cold inside foreclosed homes.

There’s also the possibility of human inhabitants, according to Barnes. He’s come across runaways, squatters, and drug addicts. “It can sometimes be dangerous, so don’t go in alone when inspecting the property for the first time.”

Foreclosures can’t be inspected

If you buy a house at a foreclosure auction, you have to take it as-is. That means you aren’t able to tour the property beforehand to know whether it has some serious problems going on inside or not.

That’s why many buyers prefer to instead go with REO homes. You can make an offer on an REO property with the contingency that it passes an inspection. A home inspector will be able to find hidden problems.

When you’re looking for a home inspector, Barnes notes you should make certain they have an ASHI designation. This will tell you that the inspector is certified and reliable.

Possession can be delayed

Occasionally, the bank delays when it comes to processing a sale. Banks have been known to take forever to consider an offer, or can simply be slow to process paperwork during the escrow process.

You’ll also sometimes be forced to contend with the former owner if they haven’t been fully evicted. Even if you own the home, you’ll still have to wait for the current occupants to move out.

Also, know that if you’ve made an offer but not yet secured the deal, you still stand the chance of losing the house at the last second. If the original owner is able to pay off their loan, you can say goodbye to the house. Some states give the former homeowner the right to redeem their home after a foreclosure sale.

Competition from investors

While you won’t have to deal with traditional homebuyers, you will be up against investors.

A foreclosed property is an attractive deal to an investor who’s looking to flip the property or turn it into a rental. Most investors make all-cash offers with few to no contingencies, so their bids are often more attractive to banks.

If you don’t bring an all-cash offer to the table, you’ll have little chance of securing a mortgage. Also, be aware that you can’t get a foreclosed home financed. With a short sale or REO home, you can.

So, is it a good idea to buy a house in foreclosure?

Each foreclosed house is going to be unique, and every buyer will have their own personal expectations.

Buying a foreclosed home can be a good idea if you have the financial cushion to absorb any potential problems. If you aren’t worried about there being potential issues or the cost to repair them, then buying a foreclosed property is likely a worthwhile investment for you. Depending on the age of the property, you should set aside anywhere between 1% to 4% of the purchase price.

Similarly, if you aren’t in a rush to move into the property, it can be a great idea. Having to repair a house to make it livable can take time. If you don’t have any time constraints holding you back, then move ahead with looking for a foreclosed property.

However, if you have tight financial limits and are hoping to move into a home soon, a foreclosure property could turn into your biggest nightmare.

You don’t want to use up your entire savings to simply buy the house, then be stuck with broken water lines or no power supply. Be sure to give proper caution to knowing how much money you’re working with to handle unforeseen problems, and be aware that certain repairs can take weeks to months to be completed.

Buying a home is a huge deal, and you don’t want to rush into it simply because you can get a good deal on the price. Make sure to work with a top real estate agent who can walk you through the process and help you avoid any complications.

Header Image Source: (Steve Heap / Shutterstock) 

But let’s be clear: This isn’t the time to host a housewarming party and get preoccupied with selfies. The final walkthrough is a serious and important event, which you’ll want to undertake carefully, calmly, and with as few distractions as possible.

In short, it’s your last chance to resolve matters that could only become more complicated after closing if not addressed at the final walkthrough. “It becomes much more difficult to get resolution once you’ve closed,” notes Kendall Gigax, a top-selling agent in the Toledo, Ohio, area. “Because then it’s going to involve an attorney.” (And nobody wants that.)

So make sure you’re ready for a smooth and thorough process with this expert-sourced guide to what to look for at the final walkthrough — plus, who should be there and who definitely should not.

What’s the point of a final walkthrough?

The final walkthrough is your last opportunity to take a look at what you’re buying before it’s officially yours — and to raise any objections about what you find in the process. So make sure you use the final walkthrough to perform a series of basic tests and observations of various facets of the home.

What you note in the final walkthrough should be a home in the exact same condition as it was in when you originally made the offer. You need to check the floors, ceilings, and walls for any damage — in particular, any new cosmetic damage since you made the offer. Note whether the floors are “broom clean” — that is to say, cleared of all personal items and swept clean.

As well, you’ll want to check the appliances. Do these all work? How about the outlets? Turn the lights on and off, to make sure those all work, too.

In the bathrooms, check whether all the toilets flush. And in all plumbed areas, make sure all the sinks drain; run water in each one to do a test. Note where there may be any signs of recent or old water damage that was missed somehow.

Open all the doors and windows to test their condition. Test the fireplace, and check the air conditioner and the furnace in your final walkthrough, as well.

The good news is, you’re likely to find the house as you expect it. “We have not had any major issues with possession transfer,” Gigax says. “I do not expect to learn the house is not in the shape it should be. It’s unusual for that to happen.”

Who should be present at the final walkthrough?

Well, of course, you should be present as the buyer! Experts warn strongly against skipping this step, even if you’re busy. Do plan to go yourself, rather than send a proxy for something this important, if you can avoid it.

Your agent should also be present, and should bring the seller’s disclosure form and the inspection report (along with any repair amendments that might also exist) to confirm the house is in the condition outlined in the purchase agreement.

And that’s usually about it!

“At the final walkthrough, it’s usually just me and the buyers,” Gigax says. “We’ll just walk through and make sure that they’re satisfied. Usually it takes 5 to 10 minutes because usually the house looks exactly the same as when we saw it last.” (And while it can be that short, don’t feel the need to rush through it — take a half an hour or more if you need to feel you’ve thoroughly checked out the space.)

But consider this scenario, which underscores the importance of that final walkthrough.

“I had an investor who was buying a home this family was selling of a deceased relative. The house was supposed to be cleaned out on the day of closing, because possession was given at closing,” Gigax recalls. “We walk in and the house was filled with stuff. Furniture, boxes, garbage — it was just a mess.”

Of course, Gigax called the sellers and all parties met at the title company to discuss how to resolve the matter. “How we handled it is the sellers gave my buyers a couple thousand dollars to hire people to come in and clean it out,” Gigax says. “The sellers didn’t want to delay closing by waiting so they could get somebody out there, and obviously, my buyers didn’t want to take on the huge expense and effort that would have been involved with clearing the house. So that’s how we rectified that.”

Gigax notes that you can address issues noted at the final walkthrough “any way you want as long as everyone’s in agreement and happy.”

But she warns, “Had we not done that final walkthrough, the buyers’ only recourse would have been to go through an attorney — and who knows how long that could have taken. That’s why that final walkthrough is important.”

If your home is new construction, you might want to arrange for a builder’s representative to also be at the walkthrough, because you’ll expect everything to be in brand-new condition without any defects — that’s what you signed up for after all.

And if there’s some other unique circumstance to your specific home purchase, it might be appropriate for the seller to be there as well — but that’s a rarer circumstance that should be determined case by case.

Who should not be at the final walkthrough?

In most cases, the seller should not be in the building for the final walkthrough, nor should the seller’s agent. The buyer shouldn’t have to feel any pressure coming from that camp.

To keep you focused and distraction-free, avoid bringing your kids. The same goes for your parents, friends, or your interior decorator. The goal is to clearly uninvite from the final walkthrough anybody whose purpose distracts from your essential goal: to confirm that the house is in the condition it needs to be before you take possession.

And if it isn’t? Well, you’ve caught it in time to act — and typically, issues can be resolved without too much difficulty at the final walkthrough stage.

“Most people don’t want to be sued,” Gigax says. “So if we point out what the seller’s responsibility was and what’s in the contract, they’ll often do the right thing.”

No fuss, no mess.

Header Image Source: (Curtis Adams / Pexels)

We spoke with top real estate agents and an expert auctioneer in an effort to not only clear up the questions surrounding foreclosure auctions but also see if there’s a way to capitalize on the process. Buying a foreclosed home at auction can be a great way to get an excellent deal on a house, but foreclosures can also be riddled with hassles and problems. That’s why it’s important to get a full picture of what’s involved in a foreclosure auction before moving forward.

Understanding the foreclosure auction process

What is a foreclosed home?

A foreclosed home is a property that has been seized by the bank because the owner failed to make their mortgage payments. Homes go into foreclosure for a variety of reasons, including job loss, medical issues, or divorce. When a homeowner fails to pay for several months, the bank will serve a notice of default and enter into foreclosure proceedings.

The foreclosure process varies from state to state, but there is always a redemption period in which homeowners have the right to retain ownership by satisfying all payments and interest. If they do not, the property moves into the hands of a bank-appointed trustee and may then move onto the auction block.

What is a foreclosure auction?

Approximately 40% of foreclosed properties go up for auction. Much like a traditional auction, a foreclosure auction allows potential buyers to bid on the bank-seized property. These auctions can be conducted in person (either at the actual site or in a public building) or online. There may or may not be a minimum bid or reserve (more on this to follow).

How are foreclosure auctions advertised?

You can find out about real estate foreclosure auctions through a number of sources, including:

• Auctioneer’s websites (this is your best source!)
• Newspapers
• Real estate brokers
• Real estate lawyers

What it takes to succeed in the foreclosure auction market, step by step

Get a feel for how real estate auctions work in your area

Laws and regulations governing auctions vary state by state. For that reason, auction-goers should look up the auctioning entity — whether it’s an auction house or real estate brokerage firm — on that state’s department of licensing website. Each state’s department name is slightly different, but a quick search of “auctioneer licensing in [state]” will bring up the governing body in your state.

Bottom line: you’re looking for verification that the auctioneer is qualified, licensed, and has no outstanding complaints. This is especially important when focusing on foreclosure auctions, due to the extra level of care needed when dealing with the state regulations of redemption periods.

Debbie Shuler, an expert real estate auctioneer at Cliff Shuler Auctioneers & Liquidators with more than forty years of experience in Florida, cautions bidders to do their due diligence in terms of research. She says, “Under the laws of real estate, auction is one of the services that can be performed by a real estate brokerage firm. However, that doesn’t mean they know what they are doing — so check them out.”

Understand the requirements before getting involved

Each auctioneer has a different set of rules, and you’ll need to read them carefully. Look for the following:

• Deposit fee. This refundable fee is required to register and will go toward your earnest money if you win. It proves you are serious about the bidding process.
• Payment timing. Check when earnest money and full payment will be due.
• Auctioneer’s fee. Often auction houses charge a percentage of the final sale prices (around 5%). For foreclosures, the bank may pay this fee.

Research your options

First you’ll need to know what auctions are coming up, so watch those auction advertising outlets mentioned above. By looking ahead, you’ll be able to have adequate time to research the home before it’s time to bid.

Shuler says, “Do your research on the property. Talk to the building department, zoning officials, tax assessor, etc. from the county. Know and understand what you are buying, what’s included, and what the subdivision may require, along with the county and the city.” Some things that you may want to ask include:

• Have improvements been properly permitted? If not, how can that be rectified?
• Are there any back taxes or tax liens on the property?
• Are there any HOA fees or assessments due?
• What are the HOA bylaws and CC&Rs?
• What are the zoning laws? (This is important if you plan to make additions to the property)

You may or may not be able to walk through the foreclosed home before bidding, and online pictures can be sparse or nonexistent. In addition, there’s no guarantee that you’ll be able to have a home inspection done on a foreclosure auction property. For that reason, you’ll want to prepare financially for probable repairs and updates. Maureen Connolly, a real estate agent in New York with 17 years experience, says that it’s best to bid locally when possible, so that you can at least do a drive-by of the property to visually assess it from the road. Keep in mind that (despite what reality TV may lead you to believe) walking onto the property and peering into windows is not legal unless otherwise specified on the listing.

A title search is also a good idea. A home may move into foreclosure due to failure to pay tax assessments in addition to mortgage payments. In that case, there will be a tax lien placed on the property until the debt is settled. To conduct a title search, you can either visit the county courthouse in person or search the local county assessor website.

Figure out your budget

Before you go into an auction, you’ll need to know how much you can and should bid. Many times the opening bid represents the amount owed on the property (a minimum bid auction); other times, it’s set much lower in an effort to attract bidders (an absolute auction). Either way, there are three things to keep in mind.

• A bank is not allowed to make money on a foreclosure auction. Anything gained on the auction after tax liens are satisfied will revert to the previous homeowner.
• An auctioneer may set a hidden reserve if a bank has a minimum that they will accept for the property. If the reserve is not met, the seller (bank trustee) has no obligation to sell the property — even to the highest bidder.
• Good deals have limits. Research recently sold comparable homes in the area to know what constitutes a wise purchase in the property’s neighborhood and set a threshold for your top bid. A top-performing real estate agent can help.

You’ll also want to give yourself a generous budget to account for probable repairs and updates. If someone hasn’t been able to make their mortgage payments, there are probably other home maintenance tasks that have fallen by the wayside.

Connolly says that her buyers have seen major repairs come up after foreclosure auctions, such as the need to replace plumbing and electrical systems. Since you may not be able to get an inspection, give yourself a buffer for the following items, making your best estimate based on your locale and the size of the home:

• Foundation: $1,800 – $6,500
• Roof: $4,000 – $25,000
• Plumbing: $2,000 – $15,000
• Electrical: $7.79 per foot to rewire + $1,200 – $2,500 for panel
• Cosmetic: $18,000 – $75,000 (varies widely based on size and finishes)

Bid like an auction pro

In a foreclosure auction, you may end up bidding against established real estate investors. They have a strategy for getting a profitable deal at auction, and so should you!

• Sign up for email alerts. Time is your friend when it comes to foreclosure property research, so make sure you hear about potential auctions as early as possible.
• Get your financing in order. If you’re getting a mortgage, be sure to go through the pre-approval process. If you’re paying cash, have your proof of funds ready. (Note: many in-person auctions require a cash purchase. Check the rules.)
• Register early. Yes, you’ll need to pay your deposit at this time, but the deposit is refundable. You’ll want access to any and all updates that registered bidders get.
• Develop a formula. A suggested rule of thumb is market value, times percentage of marketability, minus cost of repairs. Meaning, if comparable sales of a well-kept house in the neighborhood go for $100,000, but this property is only worth 80% of that price in its present condition, and it will take $20,000 to make repairs, then your maximum bid should be $60,000.
• Keep emotions in check. Don’t let the excitement of the auction pressure you to go above your maximum bid. Start low and be savvy.
• Purchase title insurance. Yes, you’ve done your research, but title insurance protects you just in case there were hidden liens on the property.
• Wait for the certificate of title. If you win an auction, do not make any improvements until you have the title in hand. The prior owners may contest the sale, so you don’t want to invest money until the title is in your name.
• Bid again. If you lose your first auction — or your first couple auctions — don’t be disheartened. Chalk each experience up to the learning process and jump back in when you’re ready.

Buying a foreclosed home at auction can be risky, but it can also present an opportunity to get a good deal. Do your homework, and enlist the help of professionals when necessary. A real estate lawyer is an excellent resource, as is an expert real estate agent in your area.

Because of the nuances in auction regulations, local knowledge of real estate auction procedures is imperative when embarking on this kind of adventure, especially for the first time, so don’t hesitate to consult a local expert. Happy bidding!

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