Buying a Foreclosed Home

In a market where there are not a lot of homes for sale, I often get asked from my first time home buyers, “should I buy a foreclosed home?”    Well, it depends.    I’ve been selling foreclosures for over 10 years, representing the seller, and here is what I explain to my buyers, to help them make an educated decision.

What is a Foreclosure?

First, let’s look at what a foreclosure really is.  It is a home that the previous lost and it was taken over by their mortgage company or bank.  Sometimes the borrower (the homeowner) loses their homes through death, job loss, divorce, medical, abandonment, etc.  Whatever the reason, because there was an existing mortgage on the property when this change or loss occurs, the current homeowner lost the property, and their mortgage bank took over.  Foreclosures are also called REO’s (real estate owned) and are also known as a distressed property.  They may also be government owned and known as “HUD Homes”.

The Foreclosure Process

• Notice of Default

When a borrower starts to miss mortgage payments, whatever the reason, usually after 90-days (could be less), that triggers the bank to start sending default notices (Notice of Default) to the owner.   

• Lis Pendens

The owner’s property is then recorded and put on a legal list known as “lis-pendens”.   This becomes public information, so collections companies, investors, attorneys, are aware of this. 

• Sheriff Sale

If the borrower doesn’t respond then the mortgage company starts court proceedings, by filing a lawsuit, if the property is in a judicial state.  Both NJ and PA are judicial states, so all foreclosures go through the courts system.  This is a slow process and can take years.   Once it goes through the court system, then a Sheriff Sale is scheduled, as an auction.  If the property does not sell, then it goes back to the mortgage company using a Sheriff Deed.  All this is recorded in public records.   Eventually, the mortgage company puts the property on the market to recoup some of their losses, after the foreclosure process is complete, liens are cleared, and the title is clear, to the best of their knowledge. 

Other Types of Foreclosures

There are other types of foreclosures that do not involve mortgage.  So, that means that a home can be foreclosed on and not have a mortgage.    Here are some of those types of foreclosures:

• Tax Foreclosure – happens when a homeowner fails to pay taxes or the water/sewer bills.  Can you believe it?  You can lose your home if you do not pay your taxes or water/sewer bill – even if you do not have a mortgage.  The process is a little different than the mortgage foreclosure.  The lawsuit is filed by the municipality or tax lien holder with the court.  Both NJ and PA have tax foreclosures, but each state handles them differently.
• Homeowner Association (HOA) Foreclosure – if the property is a condominium or in a development, the HOA can initial a foreclosure due to non-payment of HOA dues.  This is rare but it can happen – even if the home does not have a mortgage.  In NJ and PA, this is done through the Sheriff Sale.
• Liens Foreclosures – there are types of liens that can file to foreclose on a home.  These include creditors, mechanics, judgements, etc.    Liens are created when a creditor files a claim against a property due to an unpaid dept.  For example, when a homeowner hires a contractor to install a new roof, and the homeowner doesn’t pay, then the contractor files a mechanics lien and starts the process to foreclose through a judgement.  The property can then be sold through a sheriff’s sale to pay off the debt.    This is very rare, but it can happen. 

Buying a Foreclosed Home

So, now that you have some understanding of how a home is foreclosed on here is what you need to know if you are considering buying one.    By the time you see a foreclosure on the market, that means that it has gone through the courts system, the sheriff sale and the bank (or mortgage company) has taken ownership of the home.   Here are some items for you to be aware of when considering buying a foreclosure as a first-time homebuyer.

• When You See A Foreclosed Property For Sale

The bank hires a local real estate agent (might even be me!)  to market and sell the property.    From the time the bank takes ownership to the completion of the sale, they are responsible to maintain the property, secure the property, winterize the property to protect it from damage, pay taxes and water/sewer bills, etc. 

• Financing For a Foreclosure Purchase

Most of the foreclosures that you will see on the market will most likely need some form of renovation, sometimes, they may need a complete rehab!  This is usually because these homes have been vacant for a very long time also known as “zombie foreclosures”.   When the home needs a lot of renovation before anyone can live in it, then it may not be financeable through traditional mortgages.  The buyer will either have to pay cash for it or get a private or renovation loan.  The fees and interest rates for those types of loans may be higher than traditional mortgage.  After the home is purchased and renovations are complete, then the buyer can refinance into a traditional mortgage and have more manageable monthly payments. 

• Condition of the Home

The bank is not going to know the condition of the property.  Most buyers are going to be experienced investors that will have the knowledge and experience to do the rehab / renovation, so they will be your competition.  As a first-time home buyer, I will recommend that you plan to do an inspection done for your information, so you will have an idea of the amount of work that will be needed before you can move into the property.  Also, keep in mind that the utilities may not be turned on for safety reasons and that the home may be winterized to protect it from damage.  If you want to do a full inspection, the you as the buyer may need to pay to turn on the utilities then re-winterize the property at their own expense, depending on the seller.

The Purchasing Process of A Foreclosed Home

• Contract Documents

The purchasing process for a foreclosure home is similar to the purchase of a “regular” home.  The only things that are different is in addition to the standard NJ or PA standard contract, the bank will generate addenda that will be included in the documents contract package.  The addenda items will supersede similar items that are in the standard contract.  Also, the addenda will stipulate which title company the buyer elects to use – the seller’s title or the buyer’s title.  If buyer elects seller’s title,  may be some savings on the closing costs.  

• Inspections and Contingencies

Another item that differs slightly from the regular transaction are the inspections and contingencies.  Typically, these are cash or private financing transactions, so usually the buyer will waive inspections or just do an inspection for informational purposes.  Since the typical buyer is an experienced investor, they already know the type of renovation work they will have to do.  But for a first-time buyer, I always recommend you do an inspection.  Also, there are no appraisal or other type of contingencies, since there is no traditional financing.

• As-Is Purchase

The buyer will be buying the home “as-is”.  That means the seller will not make any repairs to the property.  I’ve even sold a foreclosure with a leaking underground oil tank – so buyer beware!   The buyer will also be responsible for the township certificate of occupancy (CO) certificate.  This is a township inspection that is usually provided by the seller in a traditional transaction.   Again, I want to remind you that the seller has no knowledge of the existing condition of the property.

• Closing

Closings are typically remote.  That means the title company will prepare all the closing documents and email them to the buyer to sign them electronically.  The buyer will then be instructed to wire the funds to purchase the home directly to the title company.  Once the closing documents have been signed by all parties and the funds are wired, then the transaction is officially closed.  Buyer will get the keys and start the renovation work! 

That’s about it.  I hope this has helped you get a little more understanding of foreclosures.  To see some of the recent foreclosures I have sold, take a look at them on my property site (Click Here).

If you want to find out more about buying a foreclosure property and want to get started, Click Here.   Let’s explore this option and see if it is right for you!  😉