Whether you are a first-time home buyer, an experienced buyer, or you are considering becoming a real estate investor, you need to know about foreclosures if you are buying real estate in Florida. In 2017, Florida ranked among the top 10 states for highest foreclosure rates. If you consider purchasing a foreclosure, it will give you more options and, sometimes, more bang for your buck. This guide will give you the good, the bad, and the ugly about foreclosure properties, followed by steps to take if you decide that buying a foreclosure property is the right choice for you.
What is a Foreclosure?
When a homeowner doesn’t pay the mortgage, the bank forecloses their home. Florida is a “judicial foreclosure” state, which means that, technically, the bank files a lawsuit against the mortgage holder for nonpayment. Under Florida law, the bank needs a judgment from the court to get the legal title and take possession of the real estate. After a judge rules against the homeowner, the court sets a date for the sale, which is between 20-35 days after the court date. The highest third-party bidder purchases the property or it reverts back to the bank and becomes an REO (real estate owned property).
How to Buy a Foreclosure Property
Buying a foreclosure property may refer to three different things: buying during pre-foreclosure, buying at an auction, or buying the property from the bank. Each type of purchase has its own set of advantages and disadvantages.
Pre-foreclosure This is the stage where the homeowner has missed enough payments that the bank has filed suit and given notice that the foreclosure process will begin. This is an opportunity for buyers to approach the homeowner and buy the home saving the homeowners from going through the foreclosure process. This is what’s known as a “Short Sale.” When an offer is made, the seller may agree to it, but it’s not official until the bank approves that sale price. Once the paperwork goes to the bank they will typically have a BPO (Broker Price Opinion) done by a local real estate professional. This is like an appraisal, but cheaper and faster. If the BPO comes back high, the bank will sometimes counter with a higher sale price than the one you agreed to with the seller. This process alone could take up to a month. What’s the key takeaway? Ask your agent to find out if there’s already a bank-approved sale price for the home. This could save you a month’s worth of time and heartache when you find out you’re not getting as good of a deal as you thought.
- You will perhaps get a better deal because the seller will be motivated for a fast sale.
- You will be able to do your due diligence on the property, including standard inspections and researching the title.
- The bank will typically need to approve the terms of the sale; often a short sale is involved because the mortgage does not cover closing costs.
- The lender may not approve the terms of the sale.
- Short sales take longer to close, so you may have to wait 45-90 days, but in Florida, short sales can take up to seven months.
- Sellers still need to vacate the property.
Foreclosure auction The auction is the sale that was ordered by the courts. Most counties hold online auctions through their clerk of court websites. Duval county’s real estate foreclosure auctions are held at www.duval.realforeclose.com.
- The auction bid starts at the outstanding mortgage balance. If the homeowner has been paying for a year, this price may be very low.
- You are required to pay cash, which reduces the competition.
- You must pay cash on the same day as the auction; you will most likely have to pay auction fees, too.
- You assume all risk by purchasing the property ‘as is’ and cannot have it inspected.
- The homeowner may have other liens, back taxes, and mortgages. You are responsible for those costs, so you must research the title prior to purchase.
- The bank isn’t able to provide any information on the property’s history or condition.
- The bank may buy the property at the auction if it believes it will lose too much money with the sale.
- Angry homeowners may damage the property.
Bank-owned (REO) If a home fails to sell at an auction, it reverts to the bank, or the bank may buy the property at the auction if it believes it won’t get a good price.
- Banks don’t want to be in the real estate business, they are motivated to get the property sold and will negotiate many terms. In Florida, where there are a high number of foreclosures, banks are even more eager to sell.
- You will get a clear title from the bank.
- You can finance the home with a mortgage, have inspections done during the contingency period, and the sale will close in a normal amount of time.
- Sellers have moved out by now, so the house is vacant.
- You can find these properties on MLS, so you can use a real estate agent that specializes in foreclosures; the bank typically pays the agent’s commission.
- REO sales are also ‘as is’ sales and the bank cannot provide any history or the condition of the home.
- The bank will typically require extra paperwork for the sale.
Tips for Buying a Foreclosure Property
Unless you are a real-estate investor with buckets of cash, most buyers looking for a foreclosure will consider buying bank-owned properties. Here are a few tips to begin the process:
- Find a reputable broker. Not only do you want to find a reputable real estate broker, but you want to find one that works with banks. Many banks hire brokers to sell their REO properties and maintain relationships with them. Often times, the broker will know about REO properties that haven’t been listed yet. Additionally, they are experienced with the process and will guide you through it painlessly.
- Find a lender. Bank-owned properties are good deals, so they sell quickly. Show your broker and the bank that you are serious and get ahead of the crowd by getting a pre-approval letter. The bank that is selling you the home will not finance it, so don’t make that assumption.
- Do your research. Buying a foreclosure property is no different than buying any other property in the way that you must look at the comps in the neighborhood. You should have an idea what a fair price before you make an offer. If you shoot a low-ball offer at the bank, it will likely be rejected.
- Make friends with contractors. Take the time to forge connections with local contractors who can help you with multiple things. You will need someone who can assess damages from pests and check the heating and cooling systems because the house was sitting vacant. Additionally, you may need someone to patch some drywall, paint, or make plumbing or electrical repairs.