Why Are Foreclosure Homes Cheaper and How Much Less Can You Offer?
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In this article, we are going to be guiding you through the fun topic of why foreclosures are so cheap, how much less you can actually offer on those properties, where to find them, and of course, how to buy them either at the foreclosure auction or if it’s considered REO.
My name is Erin Hybart, and I’ve been a licensed real estate agent in the Baton Rouge, Louisiana market since 2017.
I’ve worked with a lot of investors, and we have looked at hundreds of properties that they could flip that have been foreclosures or even bank-owned homes.
So, let’s dive into the information.
Are Foreclosed Homes Cheaper to Buy?
The short answer is yes, it is cheaper to buy a foreclosed home. You can get a foreclosure for cheaper than it would be if it was on the market as a traditional sale.
Foreclosure properties are sold by the lender, so foreclosed houses are cheaper because that lender is paying money each day to hold on to the property.
So, selling it off and getting it off their books is a priority. These properties are going to be in various conditions and it could cost a lot of money to bring them up to livable conditions or even up to date.
There’s likely going to be some deferred maintenance or the property could even be really torn up or damaged. It takes a lot of money to really repair them. They typically sell a house in bad condition as is.
Sometimes you don’t even get a chance to get into the property to walk through, do a visual inspection, or even kind of put eyes on what the property needs, so sometimes you go in blindly.
Why Are Foreclosures Listed So Cheap?
Why are foreclosure houses listed so cheap? For a lender, it’s a business. A cheaper house is going to attract a cash buyer that can close quickly because time is money.
The lender is just trying to get out of the property without losing money. They’re not there to make money. Because, again, it’s costing them each day they have this property on their books.
How Much Less Can You Offer on a Foreclosure Home?
It’s already priced pretty cheap. The lender prices it strategically. They like to get about what they have it listed for out of the property.
Getting foreclosed homes that sell for less is going to be a lot easier if the property or the home is in a really rough condition, maybe unlivable.
So, if you do want to get foreclosures even cheaper, you are going to have to come in with a couple of things. The first is cash. You need to come in with cash.
You need to have a strong, clean offer and have a quick closing. It’s almost like you want to say, “Hey, Mr. Lender, how fast can you close?”
And then, what’s a clean offer? No contingencies, except clean title? No inspections, appraisals, nothing like that. Just a clean offer.
How to Find Cheap Foreclosed Homes?
You’re going to find them in a couple of different ways.
You could be finding them on the MLS (Multiple Listing Service). You may find them on a third-party website that manages auctions, but it shouldn’t cost you anything to find these properties.
There are some sites that will go out and gather just homes from all these third-party sites and put them at a central location to make it easier for you, and then sell you a subscription or charge you a monthly fee so that you can access that in one central spot.
They are likely going to know where to find foreclosed investment properties for sale, possibly provide some background information on the property to help you run your numbers, and then probably have some really good connections to assist you through the process.
There are certainly more ways to find foreclosures, free and paid. If you’re interested to learn more about all the available options, check out this comprehensive guide on how to find foreclosed homes.
How to Buy Foreclosed Homes for Cheap?
How to Buy at a Foreclosure Auction
So, once you found the property, how are you going to buy it? How do real estate investors buy these properties for cheap?
So, if you’re buying it at a foreclosure auction, know that every auction works a little bit differently. They are typically online and do require some type of account to make a bid.
Some require you to have an agent represent you and have that agent bid on your behalf and others; it’s just open for anybody to make their bid.
Depending on the property’s condition and the lender’s preference, if the property is going to accept anything other than cash offers, you’ll have to prove that you have the cash to win the property.
But they are set up to capture the bid much like eBay, if you’re familiar with that. They just capture bids until a certain deadline.
Sometimes you can see the max bid, and then at the end of the bid time, the auction time, the highest bidder wins, then they process the paperwork.
But there are plenty of times where the buyer or the highest bidder doesn’t turn in paperwork timely and that property is right back on the auction site in a few days.
There are also types of auctions where they give you a deadline to submit your bid and then after that time period will announce who wins the property, whose offer they have selected.
And it’s not always the highest bid or highest offer, or highest purchase price even. It could be what’s the best offer for the lender’s goals.
They do tend to like selling a house to a real estate investor, favoring real estate cash buyers. That’s typically because cash house buyers come with those clean offers, they can close quickly. It’s just one and done and let’s get it off the books.
How to Buy Bank-Owned Property After Repossession
What happens if those foreclosure properties don’t sell, for some reason, at these auctions?
They are flipped over into REO — Real Estate Owned. Then the lender, the bank, the person that owns the property, now they are selling it.
And sometimes these foreclosed bank-owned properties will be priced cheaper than when it was at the auction, just because they know that that auction price didn’t get any buyers. And I’ve seen this a lot with government loans.
They are transferred to the REO department and they pop up on the market a couple months after the auction ends at a typically lower price.
The process is not really different from a traditional sale. You’ll likely get to tour the property, do a visual inspection, stuff like that. So, you can run your numbers.
But while they are selling these repossessed houses a lot cheaper, they are going to really prefer or give preference to those cash buyers with clean offers: no contingencies and somebody who can close quickly.
As you know, time is money for them. These properties are probably costing them money maybe at this point.
And so, all those things are still going to hold true because it’s a business. They own the property and are selling it.
I do hope that the information I have shared with you, which I’ve learned over the past few years of my career, such as the foreclosure process, why they’re so cheap, how to find them, and how you can buy foreclosed homes for cheap, actually helps you with whatever you’re working with.
I do wish you best of luck in those house-hunting adventures.