With the cost of housing skyrocketing, it can be tempting to many people to consider foreclosure purchases and auctions as the ideal way to get into a great home for a great price. This can be true, but there are some facts that you should know about this process before you embark on it.
Foreclosure auctions happen when a homeowner ceases to make payments on their home or property and the lender who holds their mortgage takes possession of the property to sell it. This means that the home will usually be sold for less than market value and the process will be done via an auction to be sure that the home sells promptly. These factors make it a much different purchasing process than if you were to buy a home that is for sale by the owner or through a real estate agent.
If you still think this sounds like the perfect solution for your home buying needs, read on for more information!
How to Find a Foreclosure Auction
There are various sites online that will show you just foreclosure homes that are set to be put up for auction. This is often the best place to look for foreclosures in your local area and sites that are regularly updated will be your best bet. You still should know that not all of these sites are very current and you might inquire about many homes that have already been auctioned before you are able to finally find one to bid on.
You can also track down foreclosures through a third-party foreclosure agent who is also known as a trustee. Some people will also find homes that are being foreclosed on in their local area by simply driving by. You might be able to find out information about the foreclosure from a sign that has been placed in the yard of these homes, although this is not always how foreclosure is handled.
What Are the Stages of a Foreclosure in Florida?
· Default of payment
This is the first stage of the foreclosure process and it happens after a set number of payments have been missed. The lender will send out letters stating that payment is due, and if no payment is received, after a set period of time, they will begin the foreclosure process.
This is usually after three payments, but it can vary depending on the lender. The next stage of the process will make it formally recorded that the homeowner is in default. At this stage, you will still not be able to make an offer on the home, and you might not even know that this process is going on.
· Notice of Default
The bank will record the defaulted payment of 90 days or more with a letter that is placed on the home. The buyer will now have 90 more days to settle the amount that is due and reinstate the loan. This 90 day period can be the time period where people become aware that a home might end up at auction.
Some people will watch homes like this in their local area for the entire 90 days to see if they can purchase the home as an investment property.
· Notice of Trustee’s Sale
If the amount that is due on the loan has not been paid back by the end of the notice of default period, the lender will proceed with the trustee’s sale process. This will be recorded in the county where the home is located and the lender will publish a public notice in the newspaper that will indicate when the sale will take place. You might also find the date of the sale online.
· Trustee’s Sale of Foreclosed Property
This is the public auction that sells the home to the highest bidder. The sale starts with an opening bid that is the minimum that the lender will accept for the home based on the outstanding loan balance, any unpaid taxes, and other costs that will be associated with the sale.
You will need to be present to bid on the home or attend the online sale if the process is done virtually. The highest bidder will get ownership of the home at this juncture. You will need to know that you will have the final say about how long the current owner gets to stay after you have bought the home, and this will be written into the final documentation of the sale.
· Real Estate Owned Sales
If the home is not sold during the auction, the lender will become the owner and then will proceed to sell the home as the owner of the property with a real estate-owned sale. This is also called a bank-owned sale and the lender might actually remove the liens and do some work to improve the property before the sale.
You will probably pay more for this kind of purchase than you would if you were buying at a public auction, but you will have the benefit of getting to see the home before you buy and there will likely be efforts made to improve or fix issues with the property that will not be done before a public auction.
Why Are Foreclosure Homes Cheaper to Buy at Auction?
There are many reasons why this is the case. It might seem like this would not be true since the current owner can owe as much as 180 days of payments on the home, but the reality is that the lender is not motivated to take ownership of the home. This will cost them more money than the missed payments that are owed on the property.
The other factor that motivates banks to sell homes for less than market value is that there are often liens and other fees that need to be paid for the property that the new owner will have to pay for. This will add to the overall cost of the property and might scare away any buyers if the fair market value was asked for the home and then the fees and lien charges were lumped together for the sale.
One of the other reasons that a foreclosure property might be cheaper is that many of these properties have suffered neglect or outright vandalism at the hands of the current owner when they started to be unable to pay for the home. Some people will be so angry at their lender that they will actually damage the property as a way to express their displeasure.
It is not uncommon to have thousands of dollars worth of work that needs to be done to a foreclosure home before it will be fit to live in again. Buyers should be aware that the outside of a foreclosure home might look all right but often the interior is in terrible condition. You will often not be able to see the interior of the home before you buy at auction, so you should assume that there will be huge costs toward repairing and fixing up the house once you take ownership of it.
The other factor that some people are not aware of, is that buying at auction requires that you have the cash on hand. This is a major part of why the sale is not as expensive overall for the bank to conduct. Remember that you will not be able to finance this purchase like you would with a normal home investment. You might be asked to pay in full for the property the day of the auction, which means that overall, this is not really a cheaper purchase than a traditional one in some ways.
How to Bid on a Foreclosed Home at a Florida County Sale or Auction
The first step is doing your research. You should always make sure that you look into the property as thoroughly as possible before you decide to bid. You might want to pay someone to do a title search and make a drive past the property so that you can see the exterior of the home at least. You might also be able to see what the home looked like on a site like Zillow. Remember that the interior might not look like this now, but you will at least be able to see the arrangement of the rooms inside the home.
You will want to know the estimated value of the property and how much is owed on the mortgage before you bid. You should also find out how much the lien is on the property. This will impact what the starting bid is for the property. You will also need to pay off these liens when you take ownership, so this is valuable information to have.
· Attend the Auction
This might be an online auction, but you may also have to attend at a set location in person. You will need to be present before the auction starts to ensure that you know what the opening bid is for the auction and you will need to be sure that you do not exceed what you can afford.
Pay attention to the bidding process as things progress and determine what you can actually afford before you place each bid.
· Pay for the Foreclosed Property
You will have to buy the property the same day in most cases. You should have the cash on hand to do this or you will not be able to buy the home. This will be mentioned and explained prior to the start of the auction, but you should be prepared to pay for the property at the conclusion of the auction.
· Set a Budget Before the County Sale or Auction
You will want to be sure that you know exactly how much you can pay for the property. Knowing that you will have to pay in cash means that you should not exceed your budget or you will just not be able to buy the home at the end of the auction.
· Bid Smart During the Auction
Consider how many people are in the auction. You might not want to engage in an auction that has lots and lots of bidders because this might mean that you will not get the home for a fair price. You should know what homes that are not in foreclosure are selling for in the area so that you do not exceed the price point of these homes during the auction. You should never pay more than the market value of the home during the auction, especially considering that you need to pay off the lien and other fees when you take possession of the property.
Risk of Buying One of Florida’s Foreclosure Homes
There are always included risks when you choose to buy a foreclosure home. You should remember these factors before you decide to buy this kind of property.
1. Home is in Bad Shape
Foreclosed homes can often be in really bad shape. You might also find that some people who own a home that is being foreclosed on will actually damage the home intentionally during the process of the foreclosure before they are evicted. You could take possession of a home that is in very bad shape and might need to be gutted before it will be livable.
If this home needs to be your main living property, you might need to plan to live in an apartment or another home for a while until your new house is ready for you to move in. This can add to the cost and you will need to budget for the worst-case scenario for repairs on the property that you have purchased. Remember that this can be a major detraction to the process of purchasing this kind of home, despite the great price.
2. You are Responsible for All the Repairs
Unlike when you buy a home from a buyer that still owns the property, foreclosure homes will not be repaired or improved by the bank before they are sold. You will have to do all of the repairs that are needed for the property yourself. This is very different than when you have a home inspection on a property and agree with the current owner to split the costs for repairs that are needed.
Remember that things like a new roof, code violations that are within the home, broken appliances, and other major structural issues will be your responsibility when you take possession of the home. These repairs can be quite expensive and you should plan for all of them just in case.
3. The House Might Have Been Vacant and Vandalized Prior to the Foreclosure Auction
It is not uncommon to find that the home that you are planning to buy has been sitting vacant and was not locked up. This can lead to vandalism as well as squatters living inside the home. Make sure that you think about this because you might need to pay for exterminators to remove bed bugs and other vermin from your home and you might find that most of the home has been damaged by the unwelcome residents that have been living inside the house.
4. You Might End up Paying More Overall
While the purchase cost of a foreclosure can be quite attractive to people, the costs for repairs to make the home livable can be much more than you expect. This can lead to you paying more than the actual value of the home over the course of the process to restore it. Make sure that you think about how much the home might actually cost if you add in major repairs and pay off the lien and other costs associated with the purchase itself.
For some people, it might actually be cheaper and easier overall to buy a home that is not in foreclosure because there will be fewer unknowns involved. You will have less in the way of guarantees and much less information about a foreclosure than you would when buying a home that is on the market like normal.
5. The Foreclosed Home Purchase Process Can be Tough
Buying this kind of home might sound simple because you just pay at the auction and then take ownership, but there are lots of paperwork hoops that have to be completed before you can actually move into the home or start work on fixing it up. Some banks will take a long time to wrap up their side of the closing process and there might be issues related to documentation processes that can add weeks to the purchase process.
Be prepared to wait a while to move into your foreclosure home or to start repairs on the property. There are always a lot of variables that can be a factor that might slow down the overall purchase process with this kind of home purchase.
6. Competition for the Home
The auction process can lead to a lot of interest and also a lot of competition for the purchase of the home. You might think that you will be competing with just a few people who are interested in the home, but there might actually be a lot of wealthy buyers that are competing with you. Some investors are just interested in buying the land and do not care about the home.
If you do not want to feel pressured to spend too much during the auction, you should remember to set a budget for your purchase. It does not make any sense to exceed what you can afford to spend just trying to compete with investors who are not even interested in the home and just want to buy the property itself.
7. Liens and Other Costs
There can be many costs that come along with your purchase of a home that has been in foreclosure. There may be liens on the property and you might have to pay back HOA fees in the neighborhood. There could also be costs related to asbestos removal and other factors that you cannot know about when you take possession of the property.
As with anything to do with a foreclosure purchase, there can be lots of surprises related to added costs, but you can find out what the lien might be since this is a matter of public record, and sometimes you can collect information about what the HOA fees for the neighborhood are per month. This can help you to consider this factor with some real information before proceeding with your purchase.
What Can You Do to Mitigate the Costs of Buying a Foreclosed Home?
There are some ways that you can help reduce costs for this kind of purchase. At worst, these steps will at least prevent surprises that might crop up along the way. Working with the right planning on your side when you are buying a foreclosure can make all the difference in your overall buying experience.
1. Work With a Licensed Florida Agent Experienced in Foreclosure Purchases
A real estate agent who specializes in foreclosures can be a very big help to your overall purchase process. You will find that not all realtors have this experience, but you can look for people who advertise that they know about short sales and have an SFR designation if you want a specialist in this kind of purchase. Your realtor can help take the guesswork out of the purchase process and make sure that you consider all of the potential costs.
2. Have Extra Money Set Aside
You should have more than just the money that will be needed to buy the house in savings. This extra cushion of cash can help fund surprises like higher bids than you expected and costs related to liens, HOA fees, and repairs. The more money that you have set aside for this project, the better off you will be when it comes time to take possession of your foreclosure home. The commonly suggested amount of savings for this kind of purchase beyond the price of the actual home itself is 6 months of your income/mortgage payments.
3. Be Aware of Local Florida Area Laws and Neighborhood Rules Before Buying Foreclosed Property
The local law in your area can dictate how your foreclosure will be handled and what costs you will need to cover after you take possession of the home. You should know state and county laws that could affect your purchase so that there are no surprises that make the purchase stressful for you or burdensome financially. Most of these laws will have to do with evicting the current owners and liens on the property.
These kinds of laws can also affect how you are allowed to take possession of the home and the process by which you can take care of repairs and handle HOA dues. You should always look into every law and ordinance that might govern the local area and the neighborhood before you decide to go ahead and jump at the chance of buying a foreclosure home. Imagine moving in just to be able to build a pool or park your camper in the driveway, only to find out that neither of these things is allowed per the neighborhood rules!
4. Be Careful Not to Pay Too Much
You should always know what the market price and fair value are of the other homes in the area of foreclosure that you are thinking of buying. Being sure that you will not exceed the realistic value of the home and property during the process of fixing it up is important. After all, you will not be saving any money if the auction price of the property combined with the cost to repair everything that is damaged is more than the actual value of the home.
5. Get Pre-Approved
If you are going to be able to buy the home and finance the remainder after the down payment, you should take the time to get pre-approved. There are often time limits involved for these kinds of sales related to the final date that you can pay for the home, and you do not want to have your financing process take so long that you do not get to actually purchase the property.
Being pre-approved will also let you know how much you can afford to spend on the foreclosure that you are looking at. This will eliminate the risk of over-extending yourself when you are bidding unless you have additional cash that you can bring to the table for an increased down payment. You will have a much better idea of what you can afford when you have taken the time to get pre-approved for this kind of purchase.
6. Know the Various Areas of Florida and the Forclosure Property Market
It is always worth finding out if the area that you are looking at foreclosures in is a hot area that has a lot of investors interested in it. For some areas that have transitioned from solely residential, it can be possible to purchase these kinds of properties to put up office buildings or other kinds of businesses and this can draw in big investors who will bid on the auction alongside you.
Another consideration related to the process of buying a foreclosure in an area that is changing from a residential area to a more commercial one is that this might change the value of your property in the future. It would be a shame to buy a home for a fair auction price and then find out down the road that the value of the property is going to be much less than if it had been converted to a commercial property.
These considerations can be determined with the help of a realtor if you are not sure how to research this kind of question. You should always have at least some idea of the future land values of the property that you are buying, especially if you think that you will have to pay more than you might want to just to get ownership of the property.
7. Do a Drive-By
If you can make it work, do a drive-by of the property. You can assume a lot about the inside of a home from the condition of the outside, and sometimes you might even be able to go up and look in the windows if the former owner has moved out. You will be able to get a rough idea of what you are signing up for if you go see the property and look at the condition of the home and the surrounding area.
For some buyers, the home is not really important and the property is more the focus of the purchase. This can mean that you don’t need to care about much other than the cost to tear down the existing house and start over. However, if you want to save the home that is on the property, you should probably take a few minutes to drive by and take a look at it. More information is always helpful rather than less.
Buying a Foreclosure Home in Florida Can be a Blessing or it Can be a Curse
At the end of the day, the more than you know about a home that is being foreclosed on, the more educated you will be about the possible costs related to restoring and purchasing the property in question. It is an all-too-common story to hear that people have bought a foreclosure just because the purchase price was so reasonable, only to find out that there is an entire list of other costs that they did not know they would have to pay for the home.
If you are thinking of buying a foreclosure, always make sure that you do your research, get the help of a realtor if you think that you need it, and consider all of the many variables that can affect your ability to secure the home through a public auction. You might be buying a great house at a great price, but it is also possible to be purchasing a money pit that you will regret owning. The more you know about the process and the property itself, the more likely you are to be happy with the end result.
Buying a foreclosure home can get you the home of your dreams for a reduced price, but only if you shop carefully. One of the biggest ways to make this process more successful is having legal representation on your side each step of the way. Our team is experienced in real estate law and would be happy to guide you through the foreclosed property purchase process. Call us today at 866-868-0582 for a case evaluation.