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The process for buying a foreclosed home varies depending on the current owner and how the house is being sold. These variables can also impact the price you pay when buying a foreclosed home.
If a home is in pre-foreclosure, the homeowner may try for a short sale. Properties that have been foreclosed on generally first go to a municipal auction sometimes known as a sheriff's sale.
If a home doesn't sell at auction, it becomes a real-estate owned, or REO, property. These are homes that have been repossessed by banks and mortgage servicers, who sometimes put them on the Multiple Listing Service or offer them for sale on auction websites.
Here are the basic steps of how to buy a foreclosed house.
1. Get preapproved for a home loan
A mortgage preapproval is vital to show that you're a serious buyer. Foreclosures are often purchased by real estate investors, who tend to pay cash. If you need to compete with cash offers, you want to be able to show that you'll close the deal. A preapproval lets the seller know that you'll be able to get the funds to buy the property.
2. Team up with a buyer's agent who understands how to buy a foreclosure
Buying a foreclosure that's on the MLS is similar to the traditional process of buying a house. However, dealing with an auction, figuring out how to make an offer on a home that's in pre-foreclosure or navigating a short sale can feel disorienting even if it's not your first time buying a home. A buyer's real estate agent who has experience helping buyers purchase foreclosures can be a major asset.
3. Search for foreclosed homes near you
You'll see properties that are marked as foreclosures or pre-foreclosure on the MLS and on real estate listing websites that pull from the MLS. But that's not the only place to find foreclosures.
Auctioneers are legally required to post notices of sheriff's auctions prior to the sale. This means there's a sign on the property and, perhaps more easily found, a notice in the local newspaper, which includes on the paper's website. Some cities and counties host larger auctions, which may include empty building lots or former municipal buildings.
Government agencies and government-sponsored enterprises sell foreclosed homes. This includes Fannie Mae, Freddie Mac and the Department of Housing and Urban Development. Their sales tend to be geared toward first-time home buyers who intend to be owner-occupants rather than real estate investors.
Websites that specialize in home auctions, like Hubzu and Auction.com, feature foreclosed properties. Watch out for "convenience" charges, which usually have to be paid directly to the auction site.
Due to the pandemic, the government-sponsored enterprises and agencies that back home loans (like Fannie Mae and Freddie Mac) have halted foreclosures. Some local governments have also paused tax auctions. Combined with the large number of people looking to buy homes, struggling homeowners may be able to sell rather than face foreclosure. On the whole, this means that there may be fewer foreclosed homes on the market than usual.
4. Make a competitive offer
Work with your agent to get an idea of comparable home prices so you can make a smart offer that fits your budget. After all, in a live auction situation, you definitely want to know your limit! But even if you're buying a home that's been bank-owned for some time, you'll want to be strategic.
In a hot real estate market, you may need to offer the full asking price. But even in a more balanced market, a low-ball offer may not fly. The bank may already be asking what it considers to be fair market value and be unwilling to go lower. With an auction site, you may need to meet a reserve price for your offer to be considered.
» MORE: How to make an offer on a house
5. Prepare for potential difficulties
As with any home sale, it's in all parties' interests to keep things moving smoothly, but buying a foreclosure can be a bumpy road. For example, short sales require the lender's approval, which can take extra time.
Many foreclosed homes are sold "as is," meaning you can't request repairs. That's OK if you can get a home inspection, but in some situations — like a sheriff's sale — you may not have that option. You also won't have the previous homeowner's disclosures to rely on. If there's a listing agent, they may have limited information to answer any questions.
A house with a low upfront price may cost you dearly once you move in, especially if it hasn’t been occupied in a while, and it can be difficult to finance extensive home repairs with limited equity. If you're considering buying a foreclosed home that's a fixer-upper, you may want to get a renovation loan like a 203(k) loan to finance your repair costs.