Frisco Texas Residential

We've all seen the infomercials that promise you can buy foreclosure homes for just "pennies on the dollar" and you may know someone who "made a killing" buying foreclosed properties. With the current media hype, foreclosures are all the buzz and bargain hunters are on the prowl.

However, buying a foreclosure can be tricky, and realistically, not many foreclosures are the "amazing bargains" promoted at the real estate seminars and the late night infomercials. That's not to say that good foreclosure deals do not exist. Indeed, there are some deals out there if you are patient and flexible.

This article is intended to be a rudimentary rundown of what's really involved when buying a foreclosure.

Bank Owned, HUD Homes, and Foreclosure Auctions

A foreclosure is essentially the repossession and/or sale of a home by a bank or lein holder where the proceeds are used to satisfy an outstanding loan. A homeowner is in jeopardy of foreclosure after failing to make mortgage payments for 3-6 months and consequently default on their home loan. If the homeowner does not catch up or make arrangements with their mortgage company, they are issued a formal Notice of Foreclosure, which is recorded at the county in which they reside. The homeowner is again given a redemption or "grace period" (also known as pre-foreclosure), allowing them a little more time to get current on their payments or negotiate a short-sale. If the homeowner does not satisfy the bank during that period, the bank can either take back the property (with a special agreement from the homeowner), or instruct the county to sell the home at auction on the steps of the court house.

It's important to note that the mortgage company sets the opening bid amount for the home prior to auction. In fact, the mortgage bank often purchases these properties at the auction with an intent to resale the property. These homes are known as bank owned foreclosures or REO's. However, if the mortgage loan was guaranteed by the government, i.e., FHA and VA, then they are known as HUD homes or (Housing and Urban Development) or VA foreclosures and a government entity is responsible for selling the property.

Buying a Home at Auction

Purchasing a home at auction is, perhaps, unfairly glorified by popular real estate television shows. The truth is that getting a good deal at auction can be quite difficult and it's not nearly as glamorous as it appears.

First, homes bought at auction are most often required to be paid in cash that same day or a large deposit made and the balance paid within 24 hours. There are no refunds and all properties are sold AS-IS, WHEREIS. Obviously, not everyone has the financial clout to pay cash for the auctioned property.

Another challenge to buying a home at auction is the price. A number of auctioned homes are not even worth the opening bid price. Keep in mind that most foreclosures are the result of bad financing. Many were bought using 100% loans that included the purchase price, down payment, and closing costs all rolled into the loan. Others were purchased with ridiculous, fraudulant, or "creative" financing methods in which the homeowners were upside down from the moment they signed the papers. Any payments that were made most likely barely covered the interest (if that) and the loan balance remained at or above current market value (especially if the market goes down and values decline). Since the mortgage company sets the opening bid amount and need to recover as much money as possible, auction sales are not always a great deal.

Other difficulties include clouded titles (other leins may exist and leinholders need to be satisfied), bidding competition with big investors and large companies (deep pockets), and buying a property sight unseen or with limited access.

Buying a Foreclosure Listed in the MLS

If the home does not sale at auction, it reverts to the mortgage company or a representative thereof and they try to sell it on the open market. The bank hires a real estate agent to list the property in the MLS.

Once a home is listed in the MLS, it gets the same exposure as other homes on the market, thus, increasing it's likelyhood of being sold. Often the process of buying a foreclosure listed in the MLS is similar to buying a normal home with some exceptions. Usually more paperwork and some contract addendums are required. Sometimes the bank sets a period in which they collect offers from potential buyers and award the property to the best offer they receive. Every case is different, though, so it is necessary to speak with the listing agent and find out about any stipulations and additional requirements.

Tips for Buying a Foreclosure

Remember, foreclosure homes are sold AS-IS. No repairs will be done. This could have an affect on the process, especially if you plan to finance the purchase.

Some banks will allow an "option period" allowing time for a buyer to have the home inspected and still back out of the contract. Others will not. Once you agree to a price and sign the contract, you may not be able to back out.

Many foreclosued homes are in pretty bad shape and need a lot of work.

Some banks will set a specific period in which they will take bids and then award the home to the best offer. This has a similar affect as an auction, escalating near market value and the "great deal" turns out not to be so great.

Many listing agents have no say or ability to negotiate price. They are often just facilitators of the paperwork. Be prepared for slow responses from the bank.

If paying with cash, earnest money requirements can be as high as 10% of the purchase price.

So, if you are still interested in buying a foreclosure, simply contact Jeff using the form below, and let's discuss in more detail what your goals are.