Buying a foreclosure can seem like an intimidating process and for many new investors, it is. Most people do not understand how the process works, so our realtors in New Jersey are here to help. Note: the foreclosure process may differ slightly, depending on what state you’re in.
Pre-Foreclosure
The first step of the foreclosure process is the pre-foreclosure. Unfortunately, if someone falls several months behind on their mortgage payments, the bank files a lis pendens with the property owner, which is an official notice to the public that a lawsuit involving a claim on a property has been filed.[1] Let’s say there is a $400,000 mortgage owed on the home. In some cases, the bank and the owner might settle on an amount the bank would accept to remove the lis pendens, say $360,000. This is otherwise known as a short sale. You might see short sale listings browsing for houses online where it says bank approved short sale. This means that the current owner is in pre-foreclosure but the bank is willing to accept the approved amount to avoid foreclosing on the home.
Short sales are a great way to get properties at a discount, but buyer beware. After you submit your offer, the bank can sometimes take months just to respond to you.
Foreclosure
The lis pendens process (which can take 1-2 years in places like New Jersey) has finally come to an end and the bank is now foreclosing on the home. Because the bank does not like to be a homeowner, they immediately put the property up for auction. This is where you see people bidding for properties on the courthouse steps or in an auction setting.
Things to Know About Buying a Foreclosure:
In most states, you will need cashiers checks to bid
The town will want anywhere from 10-20% of the purchase price right then and there
You are not allowed to view the property
You are buying a foreclosure property sight unseen (we suggest driving by and peeking in the windows to get a decent look).
You will need to know if the property has a clean title, or if you’re bidding on the correct lien (there are first and second mortgages that go into foreclosure sometimes!).
Make sure you’re buying to get the house back, and not for a lien on the pool the owner installed and couldn’t pay back. This happens sometimes! If you’re unsure how to check for a clean title, you can ask a title company to check for you (this can get expensive if you’re considering a handful of houses to bid on).
At an auction, the bank is going to bid up to the amount they’re owed. Using the above example, they’ll start the bidding at $400,000 (what the previous owner owed on the property). If the house is worth more than that, people will obviously start bidding to buy it. If the house is worth less than that, this is where the next step of the foreclosure process comes in.
REO (Real Estate Owned)
If the bank buys back the property at auction, it now becomes real estate owned or REO. Banks will list REOs on the MLS, and like most bank-owned homes, they need work. However, these can be a great option for first time home buyers and investors alike. The process to buy an REO might work a little slower because you’re dealing with a bank, but it can be a great way to get a deal on a home.
Now that you understand the process on how to buy a foreclosure a little better, you should be more confident to look for foreclosures if that is what you want to do. Our real estate team in New Jersey helps investors buy foreclosures and short sales, and we ourselves have also bid on properties at auction before, so we know the game! If you need a realtor in New Jersey to help you with buying a foreclosure, feel free to contact us at Tverdov Housing today!
Sources:
[1] Investopedia – Lis Pendens