Buying a foreclosed home

Written by in Buying

What is a foreclosed home?

There are a few names for this: ‘mortgagee-in-possession’, ‘foreclosure’, or ‘mortgage delinquency’ for the position a homeowner may find themselves in when they cannot meet their payment deadlines for their mortgage (known as being in arrears) and their lender is forced to take over their mortgage and possession of the property. Note that a ‘foreclosed’ home for sale is different to a repossessed home. Note: a repossessed home involves a lender seeking a court order to sell the property with the owner remaining on the title, while a foreclosure involves the bank taking over the title of the property. 

Buying a foreclosed home often comes with the main advantage of being able to secure a property for cheaper than its market value due to the lender’s desire to offload the asset as quickly as possible. A bank or lender is not in the business of owning bricks-and-mortar assets (apart from their own business operations). They do not like having their capital locked up in a physical asset that cannot be easily used as liquid capital. Because they do not like being in this position for long, they care less about making a profit from the sale of the property and care more about simply earning back the value of the loan they originally made.

‘Mortgage delinquency’ as it is known is often a sign of some weakness in a local economy or even in the larger economy as a whole. A series of foreclosures in a small geographical area may point to any number of local factors, such as a major source of jobs closing in the area. It may also point to an overvalued market, failures in the financial system to regulate lending, or weaknesses in wage growth etc.

One such example of significant mortgage delinquency is in Western Australia. The mining boom that occurred in the 2000s and into the 2010s after the GFC saw property values in WA skyrocket, with the state’s economy growing 14 per cent year-on-year in 2012 and mortgage delinquency rates at only 0.5 per cent.

By 2018, the boom had ended, unemployment had risen by approximately 2 per cent and the delinquency rate was five times higher. WA led the country in this period for the growth of delinquency rates, followed by South Australia, the Northern Territory and then Queensland.

But for savvy investors, this poses an opportunity for acquiring an asset at a good price, as long as they do their due diligence and are aware of why that foreclosure took place and what market conditions may mean for their own financial position.

Finding a home that is being sold by a lender

These can be difficult to find, so one of the best ways is through an agent. Rather than spend your time filtering through various properties and even inspecting properties that in the end don’t satisfy what you are looking for, team up with an agent and provide them with everything you are looking for and what you are willing to compromise on so that they can come back to you with clear winners. The money you spend on their service will be made up by the time you save.

Find out as early as possible why the property is for sale, to ascertain whether or not the purchase of the property poses too much of a risk for you (i.e. the entire neighbourhood may be experiencing falling values so that your own property is overvalued when you buy it).

What is it like buying a foreclosed home?

Buying from a bank or lender as opposed to a homeowner is slightly different, but only in the seller’s approach to the process, and this is where you can take the greatest advantage.

A lender is more inclined to sell the property quickly and for cheaper than its market value because they do not want to have their capital locked up in a physical asset that can take months to sell. Whatsmore, the original owner of the home is liable to their lender for any shortfall when the property is sold, with Lenders Mortgage Insurance being a safeguard for the lender not the borrower. Knowing this will give you an element of confidence that can help you or your buyer’s agent negotiate harder than you would any other property.

Expect some deviations from the norm when it comes to typical foreclosures. A bank may try to waive or reduce typical conditions in your contract, such as a cooling-off period. Be prepared for this and have a solicitor inspect the contract to inform you of the lender’s expectations. If you are prepared and have your finances ready, then this may suit you more.

Budget for extra costs

While accounting for the various hidden costs of buying a home, such as stamp duty, inspections costs, travel costs, solicitor’s fees etc., there is the possibility that you may have added immediate repairs to account for. This is because a homeowner who has been unable to pay their mortgage off for an extended period of time would not have been able to make the regular repairs of a home. 

If you are willing to do your research, be patient and negotiate hard, then buying a foreclosed home can see you achieve significant savings in the purchase of your first home or your next investment property.