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Real Estate 101: What is a Foreclosed Home?

“Foreclosures” refer to a process by which a bank (the lender) seizes control of a piece of property for which it held as security in exchange for a mortgage (to purchase said property). Yes, there are a lot of concepts in that one sentence. So, let’s break those concepts down.

Purchasing a Home: Getting a Mortgage

When you purchase a home, you most likely took out a mortgage. Mortgages are a loan for a lot of money, so the bank is unlikely to give it to you on the strength of your income, savings, and credit score alone. Usually, a bank will give you the mortgage subject to a security held against the home. The security allows the bank to initiate foreclosure proceedings against the home if you miss too many payments.

The Foreclosure Process

How and when a bank foreclosure is triggered is between you and your bank. But once it starts that means the bank is trying to take the property. Some people let their bank-owned property go into foreclosure voluntarily, some abandon the home, and some are simply unable to make the monthly payments.

During the foreclosure process, the bank takes control of the property and is permitted to sell it to satisfy the outstanding debt. However, banks do not like taking control of properties, so they usually try and sell them fast. This is where the popular assumption that foreclosure purchases are cheaper because the banks are trying to unload the property (to avoid having to maintain it, pay property taxes, utilities, and other upkeep costs).

Can You Buy a Foreclosed Home: Yes!

Yes, you can purchase a foreclosed home. There are many techniques you can use to accomplish this. Some buyers like to purchase from the seller directly (rather than the bank) because they avoid the auction process and the seller is likely in financial distress which gives buyers a strong negotiating position.

Pros and Cons of Buying a Foreclosed Home

Before you jump into the distressed property acquisition business, consider a few of these issues: These homes are usually not as well maintained because people who are losing their homes usually neglect maintenance and upkeep (especially if they think the bank is going to try and seize it).

Additionally, the foreclosure process can take months (during which time the buyer may have abandoned the property). Abandoned properties can degrade quickly and suffer from water damage, landscaping issues, mold, vermin or bug infestations, and even intentional destruction by an angry former homeowner. Moreover, while you can inspect beforehand, these homes are sold as-is; you cannot request repairs, remodels or anything else.

Here are some other issues to consider, including:

  • Tax debts
  • Liens
  • Equity lines of credit
  • Current residents who refuse to leave.

If you purchase a home with any of these problems, these issues must be dealt with. That means you are liable for unpaid tax debts, liens, and even evicting the squatting former homeowner.

Negotiating with the Seller

If you acquire a property before it is seized by the bank, by negotiating with the seller directly, you could avoid some of the above-stated problems. Working with a real estate agent to negotiate this purchase is a smart idea, as they are the local experts in regards to real estate.

  1. In California, some foreclosure proceedings can take up to a year which gives you plenty of time to reach out to the seller and negotiate directly.
  2. Additionally, the seller has a right to redeem (i.e. cure the default to regain control of the property). You can use the redemption right to clear foreclosure and quickly get the property owner out.
  3. Consider the impact of negotiating too harshly. You could end up taking someone’s home, it may sound like business on paper, but it is difficult in person. You need to be prepared because these types of contracts are not always easy.

Negotiating with the Bank

Banks lose money if they offload foreclosed properties one by one. Banks do not want the expense of setting up the infrastructure to sell individual foreclosed homes, so usually, you wouldn’t purchase from the bank – but from a bulk purchaser.

If the bank is willing to sell the home individually, it will use a real estate agent. Contact your agent for more information on who gets access to foreclosure sales.

Should you purchase a foreclosed home?

Foreclosed homes can offer you many advantages. You can acquire the property for cheaper. You can upgrade to a larger home in a foreclosure. You can also flip the property or retain it as a rental. There are many advantages, but you must be prepared for unexpected expenses and the prospect that it could take years to recoup your investment.

If you're looking for foreclosed homes for sale or thinking about bidding on a bank foreclosure, be sure to contact a real estate agent who can help you with the matter. The agents at Steele San Diego Homes the best way to handle a foreclosure auction or can help you find a simple single-family home you can afford. If you're interested, check out their latest listings.

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Buying or selling a home is among the largest financial decisions a person makes in their lifetime. We are here to ensure that you are confident in your decision. Reach out, and let us show you how we can help!

John and Melissa Steele, San Diego Real Estate Agents

John and Melissa Steele