As a first-time homebuyer exploring the local listings in Oklahoma City, you may notice that foreclosed homes tend to sell for far less than standard properties. If you have an above-average risk tolerance and the ability to fix up the house after you buy it, you could get an outstanding deal. Learn more about foreclosures, the process of purchasing a foreclosed home, and whether this is a smart move for first-time homebuyers.
What is Foreclosure?
Foreclosure occurs when a homeowner falls behind on their mortgage payments, and the lender exercises their legal right to seize the house, which serves as collateral. The house then goes up for sale to help the lender recoup their financial losses.
Auctions are a common way to sell foreclosures. Lenders often list these homes well below market value, especially if the previous homeowner left the property in disarray. If a home fails to sell at auction, lenders may slash the price even further and attempt to sell it directly.
What is the Foreclosure Timeline?
Foreclosures typically follow a set timeline, and purchasing procedures differ during each stage. The duration changes from one foreclosure to the next and may vary based on state or local law. Still, the stages of foreclosure typically occur in this order:
- Pre-foreclosure (short sale): A short sale is when a lender agrees to let a financially stressed homeowner sell their home for less than the outstanding mortgage amount, with all proceeds going to the lender. This step is likely if the lender determines they can cut their losses by pursuing a short sale instead of a foreclosure.
- Auction: Foreclosed homes for sale at auction are offered as-is, and the seller assumes no responsibility for property damage, repairs, or unpaid liens. In most jurisdictions, auction sales are final, and getting out of one is costly, if not downright impossible.
- Post-foreclosure (real estate-owned sale): Most REO properties have failed to sell at auction and are now sold directly by the lender. They are typically not advertised and can only be purchased with a real estate agent’s help.
What First-Time Homebuyers Should Know
The main reason to purchase a foreclosure is to save money. After all, it’s often possible to buy a foreclosed home for considerably less than a comparable, non-foreclosed home. But foreclosures are risky. Here’s what you need to know if you choose to pursue a foreclosed property as a first-time homebuyer:
- You’ll have to compete with investors: Because foreclosures are such a bargain, they’re popular among real estate investors who want to fix and flip them for a quick profit or turn them into rental properties. Competing with experienced investors—who often have significant credit and can make sizable down payments—can be challenging for first-time homebuyers.
- Foreclosed homes are sold as-is: You likely won’t have much chance to size up the property before placing your bid. Even walkthroughs are typically not available before purchase, so you must be willing to accept some risk. It’s helpful, sometimes necessary, to work with a real estate agent who has foreclosure experience.
- You’ll need some cash to get the property move-in ready: Consider that foreclosures sometimes sit for weeks or months without heating or air conditioning until they sell. The past owners may also have neglected or vandalized the property before their departure. If you’re an avid DIYer, you may see this as a golden opportunity. However, if you’re less capable or ambitious, you might be better off putting your repair budget toward a down payment on a more traditional property.
How to Purchase a Foreclosure as a First-Time Homebuyer
Buying a foreclosed home isn’t right for everyone, but if you’re fully aware of the risks and how to compete with investors, you could save a bundle on your first home. Follow these steps to help the process go as smoothly as possible.
Get Pre-Approved
The only way to stand a chance against cash-buying investors is to demonstrate your ability to pay. A pre-approval letter shows that a mortgage lender has agreed to finance your home purchase up to a certain amount with a specific down payment required. Be aware that some foreclosures may not meet the eligibility requirements for some types of home loans.
Conduct a Title Search
Foreclosed homes are usually listed long enough in advance to conduct a title search, which helps you spot any unpaid taxes, legal judgments, and liens. You’ll have to pay off these financial obligations before you can resell the property, so a title search ensures you know what you’re getting yourself into.
Consider Contract Contingencies
It’s important to know that inspections and title searches may not take place until after an auctioned property has sold. Some lenders balk at contract contingencies because they want to sell their foreclosed properties as quickly as possible. However, if you want to know about hidden problems before finalizing your decision, only bid on a foreclosed home if you’re allowed to walk away based on the outcomes of a title search and property inspection. This attitude may cost you the sale if another bidder makes no contingencies, but it could also save you from being saddled with heavy lien obligations or costly repairs.
Research the Process Further
Before putting your money on the line, become more familiar with the foreclosure stage you wish to pursue—short sale, auction, or REO. Then, hire a seasoned real estate agent who can offer their professional advice as you navigate the process.
Get Pre-Approved for a Mortgage
Whether you buy a foreclosure or a more conventional property, Financial Concepts Mortgage offers first-time homebuyer loans that may interest you. We are Oklahoma’s premier mortgage lender, offering competitive rates and a stress-free application process to bring you one step closer to homeownership. As a locally-owned mortgage bank, we’re able to provide in-house loan origination, processing, underwriting, and closing to keep your information private and secure. Call us at (405) 722-5626 or apply online to begin the mortgage pre-approval process.