How to buy a foreclosure

Buying a foreclosure can seem like an intimidating process and for many new investors, it is. Most do not understand how the process works so we broke it down to help you understand! The foreclosure process might differ slightly depending on what state you're in, but in this article we'll explain the steps of the foreclosure process and how people buy during each step.

PRE-FORECLOSURE

This is the first step of the foreclosure process. Unfortunately, if someone falls several months behind on their mortgage payments, the bank files a lis pendens with the property owner to sue and get the property back. 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". That means 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

Ok, 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. Great, the bank does not like to be a homeowner so they immediately put the property up for auction. This is where you see people bidding for properties on the court house steps or in an auction setting. A few things to know: 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 it sight unseen. I'd suggest driving by and peeking in the windows to get a decent look. Lastly, you will need to know if the property has 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! If you're unsure how to check for a clean title you can ask a title company to check for you but that can get expensive if you're considering a handful of houses to bid on.

At 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 an 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 a little better, you should be more confident to look for foreclosures if that is what you want to do. If you have further questions or need help with the process in NJ where I am, feel free to DM me.