What is a Foreclosed Property? (Full Guide 2021)

Foreclosures are some of the most sought-after homes on the real estate market. While they do come with some risk, the amount of savings can be considerable.

In fact, many foreclosed homes are offered at a fraction of their actual value. However, many people do not take advantage of the potential savings because they believe cash is needed to purchase a foreclosure.

What is a Foreclosed Property?

A Foreclosed home is a property that has been turned back to the owner of the mortgage as a result of foreclosure. In other words, the buyer of the home who used a lender to get the money needed for the purchase can no longer make the monthly payments.

The lender will then call back the mortgage and take possession of the home. This is known as a foreclosure.

In most cases, the foreclosure does not occur until a pre-sent number of attempts are made to resolve the issue. This may mean the homeowner may get back into the good graces of the lender over time or the home may be foreclosed after the first notice.

Most of the time the lender will make every effort to work with the homeowner with foreclosure being the last option.

Once a foreclosure occurs, the lender will evict the homeowner and then put the property up for sale. While the lender is under no obligation to place the home on the real estate market, they usually do so in order to gain some of the money back that they were lending.

A foreclosure should not be confused with a tax sale, a property that is being sold because the homeowner did not pay the property taxes that are due. Such homes can go for a mere fraction of their overall fair market value because the local, state, or federal government is only selling the property at a value to reclaim the taxes that are due.

Such sales are normally cash only and often happen at auctions. This means that you will need to have the cash on hand to make a tax sale purchase.

Why is Foreclosure Cheap?

There are exceptions of course that may result in a home being marked down considerably compared to its fair market value. The most common exception is that the lender wishes to sell the property quickly. There are reasons why a lender may want to unload the home and get as much money as possible for the sale.

  • The fair market value is low
  • The home is difficult to sell
  • The property needs repairs or work that is beyond what the lender wants to pay

Homes that are difficult to sell are usually those that have been on the market for a considerable time. This normally means a year or longer which may drive the price downwards.

Under such circumstances, the lender may just want to get rid of the home as quickly as possible. This may result in the home being 10%, 20%, or more below the fair market value. While there are many different circumstances as to why a home may be undervalued, but the bottom line is that a quick sale is being sought after by the lender.

One tactic is to ask the bank for information on a home property that it has held the longest. Quite often, properties that have been held by the bank or lender for years will be discounted so they get something back.

Are Foreclosed Properties Always Sold at a Discount?

The answer will depend on how much the lender needs to get back the money they loaned and how quickly they want to get it.

In most cases, the property is sold at fair market value which means that price is generally no different than a new home for sale.

The property is assessed, the comparisons to similar homes are made, and the fair market value is established.

This is because the lender may make a sizable profit if the homeowner paid a considerable amount on the loan before defaulting.

If the fair market value of the home has risen over time. In this regard, all the traditional methods of preparing and selling the home are made in a similar fashion to a homeowner putting up the property for sale on their own.

Who is the Lender for the Foreclosed Homes?

Lender that offer home mortgages tend to be the local bank. They may also be lenders who specialize in creating home mortgages.

But the truth is that anyone who lends money so that another person can purchase property is considered a lender in the home ownership sense.

This includes private investment firms and individuals who draw up legal contracts that bind the homeowner into paying back the loan that is taken for the home with the property as collateral.

So, it may seem odd at first that your local bank also owns properties, but in every community that is the case.

They will normally advertise the properties they sell through real estate agents or on their own. Quite often, you can find a list of foreclosed homes from the bank itself.

Do I Have to Pay Cash for a Foreclosure?

Cash is not required to buy a foreclosed home. Many foreclosed or Real Estate Owned (REO) properties have financing available. However, to purchase such as property is not quite the same as buying a new home.

This means that most people can get their own financing to purchase a foreclosed property. However, if you have the cash on hand, then you can always purchase the home regardless.

The lender is a seller just like the homeowner. They are looking to sell the home and get back the money they lent.

It is possible that some lenders may require cash for a foreclosed property if it is being auctioned or sold at a relatively low price compared to its actual fair market value.

Such circumstances tend to be quite rare and more associated with a short sale.

What is the Difference Between Foreclosure and Short Sale?

Short sales are voluntary transactions, which require approval from the lender. In most cases, the homeowners are responsible for any deficiency that the bank may have.

Short Sale occurs when a homeowner knows they are about to default on their mortgage. And thus, they wish to sell the home for what remains to be paid on the loan.

It is called a short sale because the time frame of when the home can be sold is usually 30 days or less. Because the cash is needed to pay off the lender, such homes may sell for cash only to speed up the process.

But a short sale is not technically a foreclosure since it occurs before a foreclosure happens. Many foreclosures occur after the homeowner has paid something against the loan and property values rise.

What are Cash Only Foreclosures?

As the title suggests, these are foreclosures in which cash is the only means of purchase. The reasons why a home may be sold as a cash only foreclosure often has little to do with paying off the loan and more with the property itself.

Cash only normally means that the property does not qualify for a loan. This is because the property itself has flaws significant enough to fail home inspection.

If a property cannot pass a home inspection, it cannot be used for collateral which is the basis of a mortgage. Correcting the issues to pass a home inspection may be too insurmountable for the lender to take on, so the home is sold as cash only.

This normally means that the property is sold “as is” or in its current condition. Such properties are often sold for a fraction of their fair market value assuming that it was in good condition.

This is often known as a “fixer-upper”, a home that when repaired can be put on the market again and sold for a much higher price.

How Do I Buy a Foreclosure?

You will need to take the same steps to purchase a foreclosed property as you would a home that is put up by the owner or real estate company.

You should evaluate the fair market price, search the home inspection records or conduct one of your own to determine what repairs if any are needed, and look at the other factors that determines the overall price.

At that point, you should look to your own finances to see what you can be pre-approved for in terms of buying a home.

From there, you can then narrow the search for homes that you can afford. If such homes include foreclosed properties, then you are in relatively the same position.

The differences are found in foreclosed properties that may be priced well under market value. The reasons for the pricing will have to be known, such as if the home needs substantial repairs.

Once you have completed your research, then you can make an offer on the home that best suits your needs and budget.