The thought of buying a foreclosure appeals to many for the chance to pick up a decent property at a deep discount. A common misconception is that consumers (or agents) can approach a lender who has foreclosed on a property with an offer to buy it directly from the bank or servicer. Tax records or real estate websites may reflect that a foreclosure has taken place, but properties may sit vacant for months before a foreclosure is made available for purchase.
What is the process on a foreclosure sale?
The first thing to understand is that the lender must complete all of the paperwork required on their end to finalize the process and properly file all of the required legal documents. The process is much tighter than it used to be, due to prior historical blunders (robo-signing) where improper proceedings tainted market inventory.
When due process is completed, an asset manager will then be assigned to evaluate liquidation options for the highest and best use of the property. Unless it is a very small local bank, there is virtually no chance of going direct with any offer to cherry pick a purchase or preempt future marketing.
But doesn’t the bank just want to get it off the books?
Bank-owned (aka, “Real Estate Owned” or “REO”) properties are not all treated equally by asset managers.
Some properties are ‘held’ in the bank’s portfolio, and put into service as leases until the asset manager deems the timing ripe for sale. Market conditions, inventory levels, property condition and ease of financing play into this equation for REOs just as much as they do for traditional home sellers.
Mention the word “foreclosure” and most people imagine a property that is in poor condition (“distressed”). Although many foreclosure properties do need work, banks will also invest in select properties to bring them up to fair market value as well.
Properties slated for sale either get auctioned off to the highest bidder on the courthouse steps, or they are listed with a local area broker for a more conventional resale approach.
A note about courthouse step auctions… there are risks with this purchase method that are better tolerated by investors than average consumers. These include
- Properties are sold to the highest bidder – cash terms only
- Purchases are generally sight unseen – there are no open houses or showings for these properties prior to auction
- Buyers may need to bring a cashiers check payable to themselves to sign over if they win the bid
- Buyers assume responsibility for all liens and encumbrances attached to the property. The auction process does not promise to clear second, HOA, POA, or vendors liens — and does not guarantee possession. Any tenants or squatters are an inherited risk of the buyer.
- It is possible that the property will be ‘pulled’ from auction prior to the auction date, and there is no public notice of this. Wasted time is a risk.
Properties liquidated through a listing broker may also have different treatment throughout the course of the listing. While some listings are marketed through a conventional approach (listed in the MLS and closed at a title company), others may be selected for distribution through online auction channels. We have also seen hybrids of these treatments, where a property is first listed via MLS, and then removed from MLS for online auction. Properties that fail to sell through an online auction channel may then revert to a traditional MLS venue again.
Several popular REO sellers (typically listed via MLS) offer specialized financing options to consumers for purchasing these properties. Here is a quick summary of options Buyers can consider:
|FNMA||Fannie Mae||Homepath and Homepath Renovation|
|HUD||Housing and Urban Development||FHA 203(k) Rehabilitation Loan|
|VA||US Department of Veterans Affairs||VA Vendee Financing|
|Banks||Ocwen, JP Morgan Chase, BNY Mellon, Bank of America, Wells Fargo, etc…||FHA 203(k) Rehabilitation Loan|
As a bonus, buyers may also qualify for down payment assistance through local, state or other special programs. If you are interested in learning more about how to buy a foreclosure property in DFW Metroplex and surrounding communities, please call us at 469.645.6363, or send email us at firstname.lastname@example.org.
We can connect you with lenders who specialize in the loan types listed above, as well as provide you with free access to available foreclosure listings in your area of interest.