This is probably the #1 question I get asked…right after “How Do I Get Started House Flipping?” (Maybe I need to do a post on that too!). If you’ve followed me for long, you know Flip #1 was a foreclosure, as well as Flip #2. You don’t have to be a Realtor like me to know how to buy a foreclosure.
The first thing to understand is What IS a foreclosure?
A foreclosure is a home that the previous owners were unable to meet their financial obligation. Most times, the financial obligation is the mortgage loan. We saw in the housing crash numerous foreclosures. Ironically, and naively, I entered the house-flipping world in the peak of the housing crisis, so it actually worked in my behalf. When life happens and people can no longer make their mortgage payments to the bank/lender, the lender will eventually foreclose on the property…essentially, evict the people living there and take possession of the house. The lender obviously has one goal in this process: get money from the house. The best way to do that is sell it.
The next thing to understand is Why are foreclosures cheap?
While this is not a hard and fast rule, but most foreclosures are cheaper than their comps. Sometimes, the lender is seeking to solely recoup the costs they are out. Another reason is because sometimes when someone knows they are losing their house, they destroy it. I have seen this so many times. They’re angry, and they don’t want to turn over a pristine house to the bank. I’ve seen foreclosures where the homeowner took all of the mirrors, toilets, sinks, switchplates, etc….either out of spite or to sell. Pricing a foreclosure cheaply insures it’ll sell faster (lender gets their money faster!), and it usually takes into account the condition of the property. Rarely, but not always, is the condition of a foreclosure pristine.
The next thing to know is Where Do You Find Foreclosures?
Obviously, using a licensed Realtor in your state will tremendously help in this process. However, you can view foreclosures in a variety of places. There are the Big Three websites that make the online searching easier.
- HUD (Housing & Urban Development): These are government owned.There are even special government programs that help people get into these homes. Not all HUD listings are available for investors, so that really helps people that want to actually own a home.
- Fannie Mae:Owns several foreclosures nationally. Sometimes Fannie Mae will do necessary repairs prior to listing (not all foreclosures will).
- Freddie Mac: Similar to Fannie Mae. Sometimes with Fannie Mae or Freddie Mac they will include a home warranty.
- Local banks: Your local banks can even have foreclosures. You will see their listings either on their website, printed in the paper, or even on Realtor.com
So What’s the Catch?
A house cheaper than the house down the street? There HAS to be a catch…and you’re right (most of the time). The biggest catch is the condition. Flip #1 had massive burn marks in the carpet, & it was filthy. But it was actually in excellent shape for a foreclosure.
When Dad was house-flipping, he bought a house that had been GUTTED by the previous homeowner prior to their eviction. You have to be willing to tackle that huge task…it can be expensive, so knowing the costs of those repairs plus the cost of the home will determine if it’s a worthwhile financial endeavor.
Another catch is that most times the house is sold as is-where is and no disclosure. That means you can expect that they won’t fix anything prior to closing (except what’s required by 3rd party). Also, since the bank doesn’t know the history of the house, there is rarely a disclosure form. The disclosure helps buyers to make a well-informed, eyes-wide-open decision. When you don’t have a disclosure, you’re making a partially blind leap of faith. This is why getting a professional home inspection is essential.
Another catch is that many foreclosures are actually auction-style. You place your bid (offer) online (some bids are over 20 pages long!). You have no way of knowing how many other people are also bidding, nor do you know how much they’re bidding. So you’re competing against a ghost.
Even with the hurdles of foreclosures, they are a great path to home ownership! When I first started home-shopping (with NO plan of house flipping), I could not afford much. I was scraping together very little money to actually own a home, so all I could afford was a foreclosure. Ripping out carpet, scraping popcorn ceilings, laying tile, adding countertops, sinks, backsplashes, new fixtures, laying wood floors, and painting (all for $10,000!), I had a turn-key home….so I promptly sold it and discovered how much money I could make if I continued doing this.
Whether you’re looking to invest or looking to own a home, tackling the world of foreclosures does not have to be daunting. By flipping or remodeling a foreclosure, you’re improving your community, your neighborhood, and you’re adding sweat equity into a home at a cheaper mortgage amount which helps tremendously! If you’re looking for a neat article about house flipping, check this one out.