The Three Ways to Buy a Foreclosed Home

Published by julia | Filed under Buyer / Seller Tips, Miscellaneous, Real Estate, Shout Outs

Did you know there is more than one way to buy a foreclosed home? In fact, there are three. The Short Sale, The Auction and the REO.

The Short Sale Foreclosure

If a homeowner is trying to sell a home and the market value for that home is less than the mortgage amount, there is no way to recover the amount owed on the home at sale. This is the perfect time to try the Short Sale process. The lender will be approached by the homeowner asking if they will consider a Short Sale on the property. Essentially, this means the homeowner cannot pay for the home and they want the lender to agree to sell the home for less than the home is worth.

The Short Sale is good for the buyer because the home can be purchased for less than is owed, but that does not mean it is a great bargain. The lender will try to recover the market value for the home and that means no savings at all.

The homeowner, on the other hand, will need to declare the difference between the amount owed and the amount the home sells for as income on their taxes which can really be a hard hit at the end of the year if the home sells for far less than the mortgage amount.

The Auction Foreclosure

If the bank takes the home from the homeowner, the first trial at selling the home will be the auction. Auction sales can mean a great deal, but the buyer needs to remember that these homes are often sold As Is. That means if the home is in need of repair, the new homeowner will have to pay 100% of the costs of those repairs.

The buyer also needs to pay the full amount of the home purchase price within a short amount of time which can be difficult in a market where money is tight. The bank also has the option to not accept the price at auction if it is far less than the market value on the home.

The REO Foreclosure

The REO home sale is a widely varying market. The lender, in a market where homes are selling at a good pace, will often sell the home for full market value. If the home sales market is slow, as is the case right now, the bank may reduce the price below market value and take the loss in order to move the property as banks are not the best homeowners and will need to pay upkeep costs on the home until the home sells.

The REO discount may not seem like much, but a price reduction of 10% can mean a huge difference in the monthly payment on the home. A $450,000 home, at current interest levels will have a 30 year fixed mortgage amount of $2626 per month. If the bank reduces the price by 10%, that monthly payment is reduced by nearly $300.00. That means a savings of $108,000 over the life of the loan