In the early 2000s, if you had a pulse, you could buy a house. Well, the husband and I each had a pulse so we bought houses. Lots of houses. Between 2003 to around 2008 we bought over 30 fixer uppers and OUT of all of those homes, 28 of them were foreclosures.
Foreclosures are here, the numbers are growing and today, we’re going to talk about those numbers and I’m going to tell you exactly how you can buy one. Oh and stick around to the end because we’re going to go over the foreclosure numbers in real time, right here in Dallas.
Well, Attom Data Solutions reports that “U.S. Foreclosure Activity In January Continues To Increase Annually For 21 Consecutive Months” In their January Foreclosure Report they showed that “there were a total of 31,557 foreclosure filings which is up 36 percent from a year ago.” They expressed their concern that ”The uptick in overall foreclosure filings points toward a trend that may suggest more increased activity is on the horizon.”
You know, just as Van Thompson describes, “no one likes to think about economic turmoil and the tragedy of people losing their homes.” However, he comments that “one family's tragedy can be your family's gain if you choose to buy a home in foreclosure.” He reports that “Foreclosed homes are, on average, about 28 percent less than other homes.” The National Association of Realtors reports that “foreclosures sell for about a 20 percent discount compared to conventional sales. But that's an average - many sell for much bigger discounts..” Let’s put that in real numbers. If you’re buying a home for $400,000 by thinking outside of the box and buying a foreclosure you can walk in the door with $80,000 in equity.
What are foreclosures?
Elizabeth Weintraub explains that “foreclosures are homes that a bank has foreclosed on and now carries in its inventory.”. Basically, if a homeowner gets behind on their loan payments the bank can seize the home and resell it.
Buying a foreclosed home is different and a bit riskier, but it’s not that much more complicated than buying a traditional home. It’s more work for the Realtor so you need to use an experienced one. But for the buyer it’s more that you have to be flexible, it may take a little more time, and you have to be willing to see the diamond in the rough.
Now, Step 1 to buying a foreclosed home is finding one.
I’ve got some great news for you on this front: by and large, foreclosed homes are going to be listed in the MLS right alongside all the others homes. The bank usually wants to have the greatest exposure possible right? So they’re going to list it where everyone else is looking. Now you’ll generally find those same foreclosure listings on each individual website and they might show up there first! If you want to be the early bird that gets the worm we’ve listed several of those websites in the description section.
Step 2: After finding a foreclosure, take a look at it!
Well if you’re going to see a house that’s been foreclosed on, you need to prepare yourself mentally for what you’re going to find. First of all, the home’s going to be vacant with utilities off so bring a powerful flashlight!. Secondly, it’s probably not going to be in great condition. Investopedia says it well, “after all, if the owner can't make the payments, they are likely falling behind on paying for regular upkeep.”
So don’t be too put off if the home is dirty or smells from being closed up for too long. Remember, no one’s been living in this home since it’s been foreclosed on and it’s quite possible the family moved out long before the actual foreclosure. The walls are probably dirty, you might find pencil or coloring marks, or maybe there are holes. The carpet’s probably stained. It’s going to look lived in because the previous owners didn’t have any motivation to clean it when they moved out. For you to visualize this, it might help to look around your home now. You probably have some things you’ve been meaning to fix and haven’t gotten to yet and unless you’re Martha Stewart you probably have your share of dirty walls and bathtubs. Picture if you put your home up for sale at this very minute without cleaning at all - that’s what many foreclosures will look like. Remember that $80,000 in equity? Be prepared that it may come wrapped in a not so pretty package.
Ok, so you’ve survived the showings. You’ve managed to visualize a diamond in the rough and you’re ready to make an offer. Let’s get to the good part.
Alright, Step 3: Submitting an offer.
This is where foreclosures are a little different. There’s not going to be a seller’s disclosure for you. Texas law does not require foreclosures to have a seller’s disclosure. Plus, you’ll be signing a lot more forms than you would with a regular home purchase. You might even feel like you’re signing your life away.
On top of that, you’ll find the offer process and option period are quite a bit more rigid than a traditional sale. Banks will often demand a specific amount of earnest money and specific details for the option period as well. Sometimes there isn’t even an option fee. They’re giving you an inspection period and it’s not up to you or how much you offer for an option fee.
You can expect them to tell you exactly how to submit your offer, what kind of financing they will accept, and they will probably require that you include proof of funds for your earnest money with your offer. In fact, it’s pretty common for them to require this to be a copy of an actual earnest money check and sometimes even a cashier’s check.
Don’t expect to include things like home sale contingencies. I have seen them assist with closing costs but in general, the cleaner and simpler the offer the better. Now, all of these things may or may not be the case with the foreclosure home you’re looking at. Foreclosures are owned in different ways and the way you submit an offer will depend on who owns it.
So how do you tell the difference?
According to Forbes, a “bank-owned property—is property owned by a lender (like a bank or credit union) or government entity (like Fannie Mae or Freddie Mac)”
With bank foreclosures, each bank can be vastly different in how to submit an offer, whether they will consider any repairs or whether or not the sale is as-is. It could be large banks like Wells Fargo or Bank of America or it could even be small banks you’ve never heard of.
Another type of foreclosure is HUD homes. These are homes that had FHA financing and were foreclosed. Since FHA financing is government backed, HUD is owned by the government as well. Submitting offers on HUD homes is very different. Here’s something important to know: HUD wants homeowners, not investors. Even though it’s a government entity you may find they’ll do things to prioritize bringing in what they call an owner occupant.
When offering on a HUD home you’re going to start off by submitting a bid in an auction. Hud.gov states how these auctions are first “offered on an exclusive, priority basis to owner occupant purchasers (people who are buying the home as their primary residence).” Now don’t let the word auction scare you. For the most part this process is signing paperwork like you would any other offer. Your Realtor is the one doing the extra work in terms of submitting an offer on the auction. There are plenty of Realtors who just won’t work with foreclosures because it is extra work.
Speaking of which, a HUD home can’t be bought with just any Realtor. Nope, they must be certified - “In order to qualify to sell HUD Homes, real estate brokers must complete and sign (specific) forms”
Another type of foreclosure are the ones that were originally VA loans. VA foreclosed homes are also backed by the government but they are guaranteed by the Veterans Administration, not HUD. “The Department of Veterans Affairs (VA) acquires properties as a result of terminations on VA-guaranteed loans. These properties are marketed for sale through Vendor Resource Management (VRM).”
If you’re making an offer on a foreclosure, prepare for a response on the offer to take a much longer time. These often have to go through several chains of command who each have to sign off on it before any decisions can be made.
Ready to move on? I know that was a lot of information but there’s still more!
Step number 4 is the Option Period
So your offer has been accepted! Woohoo! But don’t celebrate for too long because the clock is ticking. You’ll often have a built in inspection period that you don’t get to choose. 10 days is a common time frame.
The foreclosing bank will generally turn the utilities on for the inspection so you can get a better idea of what is and isn’t working but most of the time you’ll be looking at an as-is sale and the inspection is just fyi.
According to bankrate, “Most banks will allow inspections,” “but will not provide any assistance in repairs.” Basically, the option period here is very similar to what you’d see with a traditional sale except that they usually won’t offer any negotiations on repairs.
Ok, Step 5: Finishing things up
Once you are out of the option period, the rest of the sale is just like any other sale because it depends on you as the buyer. If you think about it, most sellers don’t do much after the option period, the ball is in the buyer’s court.
You’ll work with your lender and then move towards closing. The only possible difference here is that the owner may charge a penalty by the day if you don’t close on time.
Step 6: After closing
It’s pretty common for the sellers to winterize the house so be cautious when turning the utilities back on. You’ll also often see that the sellers will change the locks so be ready for that.
And that’s how you buy a foreclosure. You made it!
Now let’s take a look at how many Dallas homes we’re talking about that are in foreclosure.
According to Attom data solutions, “Lenders starting the foreclosure process are up 169 percent from 2021.” And “In Texas, foreclosures rose by 187.3% in the first six months of 2021 to the first half of 2022. The foreclosure rate of one in every 1,005 homes ranks as the 19th highest in the nation.”
Last month Attom updated their report and said “Those states that saw the greatest number of foreclosure starts in January 2023 included Texas with 2,136 foreclosure starts.”
Scary stuff! What’s in store for 2023??
Well, Daren Blomquist describes how “a growing backlog of pandemic era properties that are no longer mitigated by foreclosure-protection law” could drive foreclosures in the year ahead.
He explains that, “While pandemic protections were highly successful, there is still a small backlog of distressed properties that is gradually growing...This backlog represents one source of likely foreclosure volume in 2023.”
Black Knight states that as of August 2022 “488,000 mortgages were considered “unprotected, meaning they were either delinquent or in foreclosure and not covered by forbearance or loss-mitigation programs.”
Daren Blomquist explains that another problem “is the growing risk of an…economic downturn that pushes more homeowners into distress.” He continues saying, “if the U.S. unemployment rate rises to 6% in 2023… an estimated 56,000 additional foreclosures would be completed next year.”
Basically, if things continue on as they are now we can expect to see around 175,000 foreclosures this year. However, Blomquist states “this number could swell by nearly 60% to 278,000 if the country slips into recession.”
Now remember when I explained how HUD is the governing entity that forecloses on FHA homes? You can expect a lot of these upcoming foreclosures we’ve been talking about to come through either HUD or VA. Why is that? Because FHA loans require a very low down payment and VA loans don’t require a down payment at all and that’s bad news when home values have dropped. Black Knight explains that “More than 25% of 2022 FHA and VA mortgage holders have now dipped into negative equity, with 80% having less than 10% equity” When these buyers get into trouble it’s going to mean foreclosure because they don’t have the equity to sell their homes.
This could be a huge problem for Dallas and I did a whole video exploring this crisis of underwater homes that you can view right here.