Home Editor's Choice Buy foreclosed home: Tips for the first time home buyer

Buy foreclosed home: Tips for the first time home buyer


One of the only positive things about a devastated economy is the incredibly low, low housing prices. It’s only an advantage if you’re on the buying end, of course. This intense buyer’s market is mainly because of the massive job losses and under employment of North Americans at the present time. The widespread financial crisis, mortgage default and massive waves of foreclosures have brought home prices crashing down.

What is a foreclosed home

Basically, a real estate foreclosure is a home or property that has been “taken back” by the first priority lien holder. This entity is usually a major bank, loan company or mortgage company. The homeowners have defaulted on the payments and maybe unsuccessfully tried to sell the house as a short sale. The first priority lien holder will then start legal proceedings to “take back” or “repossess” the home. All subsequent lien holders like home equity line and second mortgage companies are usually out of luck with regards to debt recovery, plus the defaulting homeowners are out their initial down payment.

The home is cleared of the majority of outstanding debts like unpaid taxes, utilities and other loans through the foreclosure process. Then the bank or mortgage company lists the home with a real estate agent at a low price for a quick sale.

It is much better to have a buyer’s real estate agent on your side, instead of just using the listing agent. A buyer’s agent will search all local foreclosure listings and is usually unbiased, as the commissions are virtually the same on all of them. Then understand that the “best deals” are the homes in the best locations, in the best condition for the best price. Those listings clearly stand out as the “screaming deals” and may attract several buyers, resulting in multiple offers.

Tips and tricks to buying a home foreclosure

Here’s how to make small changes in an offer to win those homes. Have your financing all line up with a reputable bank, loan or mortgage company. Have a pre-approval letter ready and waiting to be submitted with the offer. If the offer will be all cash, have the proof of funds letter or statement ready.

The first thing the bank or mortgage company will ask the Realtor for is a “net sheet” with every offer submitted. This is a bottom line summary. So give the selling entity the highest “net” profit amount.

For example: an offer at $100,000 with no request for closing costs assistance, home warranty policy or repairs made will win over the offer at $110, 000 with a $500 dollar home warranty, 6,000 worth of closing costs assistance and a $5,000 termite repair request.

Home inspections

Have the desired pest (termite) and home inspectors lined up, know they’re schedules and be ready to go in a few days time. This is so an offer is able to have the shortest buyer inspection period possible. Try to get it done in 7 days, even though the industry standard is 15 days.

Highest and best

In a multiple offer situation, the banks will often ask each offering party for their “highest and best”. This is to create a bidding frenzy. Have your buyer’s agent ask how many offers are on the table, then re-run the neighborhood sales comparables again and raise your offer accordingly.

Low offer

If the offer to purchase is low because of the home condition, then state it in detail as an attachment to the offer. List each repair and why it needs to be repaired. Selling banks or loan companies usually won’t repair anything unless is it considered a material defect, inhibiting virtually any buyer from obtaining a loan against the property. So only ask for the material defects repaired and state them as such, including pictures and honest bids with dollar amounts. A good example is an FHA government backed loan requires a working range and all floor areas covered in flooring. An offer would re-state the type of loan the buyer is using and why there needs to be a range and flooring provided.

Termite or pest damage.

Again only material defect repairs are considered. So include the pest report, along with the dollar bids for repairs before or during the transaction for consideration.

The bottom line concept for a first time foreclosure buyer is this; win the great foreclosure deal first. Then some “fix up” is fine, knowing you paid substantially less for the home than the neighborhood comparables.