When a homeowner falls behind on his mortgage payments, the lender who carries the mortgage on the home will start foreclosure proceedings. Unless the homeowner is able to bring his loan to a current status the home will be put up for auction. At the auction, there will be a minimum bid or a reserve on the home. This minimum bid will include the amount that is left on the mortgage as well as interest fees and other expenses that the Bank has incurred bringing this loan to auction. Anyone can bid on the home, however, if the minimum amount is not reached the bank will take possession of the home and will turn around and put it on the market to be sold.
Most homes that go to auction are there because the amount that is owed on the mortgage is more than its market value. If there was any equity in the home, chances are the homeowner would have sold it to avoid foreclosure. Because of this, not many homes are actually sold at the auction, but most of them will be returned to the bank that carries the mortgage on the home, which will then be sold on the open market.
Once a property has been returned to the bank it becomes bank owned, or real estate owned (REO), and any offers made on the home will be made to the bank that carried the original mortgage. Because every lending institution has to answer to its investors, shareholders and auditors, the bank will list the home at the highest price possible in order to recoup their investment. Many times the banks will give a small discount on the asking price of the home in an effort to move the home off of their books as quickly as possible. But when the amount that is left on the loan when the homeowner is foreclosed on is close to, or above market value, it is not often that Buyer will get a really substantial discount on the home, but will more likely paid just under market value.
REO homes are sold as is. If damage has occurred to the home, which is not uncommon in a foreclosure situation, banks will generally not make repairs to the home. However, they will clear any liens that are on the home, including any tax liens, making sure that there is a clear title on the home. They will make sure that the homeowner has been removed from the home, and usually will have removed any personal items that may have been left in the home.
Even though the home will be sold as-is, a buyer should include in his purchase offer a contingency to have an inspection done on the home. Many times foreclosed homes have damage that has occurred either because the home has been sitting empty for a great deal of time, or because the homeowner, in a fit of frustration over losing the home to foreclosure, has gone through and caused damage themselves. If the home is obviously vacant, vandals may also break in and cause damage to the home.
Before home goes to the foreclosure auction it is not available for potential buyers to walk-through and inspect the condition of the home. However once the bank has seized the property and it legally owns the home, the bank will allow buyers to look at the inside and the outside of the home, the same as they would if they were buying a non-foreclosure home. This will give the potential buyer the opportunity of assessing the general condition of the home. If there is obvious damage that has been done to the home, it is a good idea for a buyer to bring someone along who can help them to determine how much it will likely to cost to bring it back to a comfortable and livable space. That way when they make their offer to the bank they can include these costs when they figure out what the maximum amount is that they are willing to pay for this home. When presenting an offer to the bank on one of these distressed homes, including written estimates on repair costs can help to support the offer that is made on the home.
Once the offer is made and accepted, if the buyer has included an inspection contingency in the offer, he can then have a home inspector go out and look at the home if problems are discovered in this inspection it is possible to go back to the bank with a new offer based on these findings. Sometimes the bank will renegotiate at that point because they would rather accept a lower price than to have to put the house back on the market. However, that is not a guarantee and it is possible that the bank will stick to its original agreed upon sales price.
Sometimes it may take a little bit longer than normal to receive an answer to an offer made on a foreclosed home. When the buyer purchases a home from a homeowner, his offer is usually sent directly to that homeowner who then may think about it for a couple of days and then get back to the buyer with either an acceptance or a counteroffer. However, when dealing with the bank you are usually dealing with several different departments, and the offer may have to cross the desk of several different bank employees before an answer is given. And while a homeowner who is selling his home will generally pick up the phone whenever his realtor calls, banks only operate during business hours. So an offer that is made after 5 oclock on Friday will not even get started on the process before Monday morning.
While it is possible to get a good deal on a foreclosed home, most of the time these homes sell for a near market price, unless the home is obviously a distressed home that will need a good deal of fixing up. But not all foreclosed homes our distressed, and so a buyer who is looking to purchase a new home should not skip over these listings.