How to Buy a Foreclosed Home in Missouri
Foreclosed homes can be appealing to house flippers, investors, and ordinary homebuyers looking for a bargain. Once a lender takes possession of a foreclosed home, they will seek to sell it quickly. They are less concerned about making a profit and simply want to break even on the amount they lost due to non-payment of the mortgage.
A homeowner who is having trouble making payments is sometimes willing to take what they can get, too, if it means avoiding foreclosure.
Along with a lower purchase price, however, buyers of foreclosures take on more risk and need more patience. Those willing to try it need to understand how to buy a foreclosed home. It is not exactly the same as buying any other house on the open market. States vary on some of their foreclosure procedures. In Missouri, a lot depends on at what stage the house is in the foreclosure process.
What Happens During a Foreclosure
The term “homeowner” is a bit misleading, because until someone pays off their mortgage in full, the bank or lender is the true “owner” of the home. When people get behind in their mortgage payments, they risk foreclosure, meaning the bank takes possession of the house.
There are laws that determine how a bank must go about foreclosing. In Missouri, borrowers are entitled to the following:
- Written notice that the loan is in default
- Foreclosure can not begin until payments are 120 days past due
- The bank must notify borrowers 20 days prior to a sale and post notice in local news sources 20 times
- Borrowers can redeem the property if they pay the full amount of the loan within one year of foreclosure—provided they give notice of their intent to do so at the time of foreclosure, and that the property has not been sold to a third party
The foreclosure timeline is split into three segments.
1) Pre-foreclosure is the 120 days when the borrower is not paying their mortgage, but the bank is not allowed to move forward with foreclosure yet.
2) Next, the bank or a trustee will hold a public auction. The house will go to the highest bidder. The bank may bid on the home for the amount of the loan. If the rest of the offers come in lower, the bank owns the house.
3) Once the bank or lender takes possession, the home is termed “REO” or “real estate owned.” They will then prepare and advertise the house for sale to a third party. If it is not sold within a year and the original owner can afford to pay off the mortgage, they may redeem the property and move back into the house.
The Phases of Foreclosure from the Buyer’s Perspective
As these procedures are playing out between the homeowner and their bank or lending institution, buyers have a few different opportunities to purchase it. How to buy a foreclosed home is different depending on whether it happens in pre-foreclosure, at auction, or when it is real estate owned.
Buying in Pre-foreclosure
When a foreclosure is looming, the owner might try to sell the property and pay off the bank. If the house gets a good price, it will cover the loan amount and there may even be some money left over.
If the sales price is less than what is owed, it is called a short sale, as it will leave the owner short of being able to pay off the loan in full. This requires permission from the bank or lender, which can take a considerable amount of time. The situation is not ideal for a buyer who is in a hurry to find a place to live. Instead, most pre-foreclosure sales are made to investors and house flippers.
Finding pre-foreclosure homes for sale can be tricky, as they are not technically on the market. Investors can use online databases to find them and they or their agent will contact the owner or the lender directly. Not all realtors handle short sales, but those who do know how to find them and negotiate with lenders for the best price.
Borrowers can get financing to buy a pre-foreclosure, but it could be difficult. These homes tend to be sold as-is, so an inspection could turn up a lot of problems.
Buying at Auction
A foreclosure auction sale is just that—a public auction where bidders can make their best offer on a house. These auctions may be held online or on-site at the home or at the county courthouse. Most homes sold at auction are bought by real estate investors, so be prepared for a lot of competition with a lot of experience.
Buying at auction almost always means buying with cash, so having funds available ahead of time is a necessity. And unlike a pre-foreclosure that takes time to complete, the winning bidder can take possession almost immediately.
Like pre-foreclosures, homes are sold as-is, and buyers are typically not even allowed a walk-through. Often foreclosured homes have stood vacant for an extended period of time or are rundown and neglected. This is risky for obvious reasons. There is no chance for an inspection, so there is no way of knowing what damage or problems exist. While the sales price might be way below the market rate, it might cost a lot of extra money to fix whatever is wrong with the house.
Buying an REO Home from the Bank
The lender will take possession of a foreclosed home if enough money is not offered for it at auction. Once they own it, they may do some repairs to make sure it is liveable, but for the most part will do the bare minimum just to get it off their hands. Real estate is not their business and every day the house remains in their inventory costs them money in taxes and insurance. They will hope to recoup the amount of the defaulted mortgage, but may end up having to take a loss.
A foreclosure that is owned by the lender is the most like a normal sale. The house is on regular market listings accessible to all real estate agents. Potential buyers can tour the home and have inspections done if they are interested in making an offer.
It is important to understand that the purpose of inspections of a foreclosure is different than for any other purchase. There is typically no negotiating to either get things fixed or lower the price because of problems. Instead, the inspection is simply a tool to find out what issues are present in the house, and whether or not they will fit into the budget. Repairs are entirely the responsibility of the buyer.
Because REO homes are usually sold as-is, securing loans to not only purchase the property but to fix it up could be difficult. Buyers can include contingencies in their offer so they can back out if there is something seriously wrong. But some banks and lenders may not be willing to negotiate at all. Often there is enough competition vying for foreclosed houses that they can find an acceptable buyer without agreeing to contingency requests.
Buyers will want an experienced real estate agent who is used to dealing with foreclosures to guide them through the process.
How to Buy a Foreclosed Home
The typical home buying steps also apply to buying a foreclosed home.
- Find out how much you can afford
- Get pre-approval from a lender (this does not have to be the lender who owns the foreclosure)
- Make an offer and include contingencies (if possible)
- Arrange for an inspection (if possible)
The difference is the unpredictable nature of the process. Buying a house as-is and possibly sight-unseen is risky and could end up costing way more than the buyer anticipated. Funding can be difficult. Participating in an auction could mean competing against seasoned investors who have the upper hand.
Still, finding a foreclosure can be a way to get into a coveted neighborhood for less. Or getting more house for the money, especially for those willing to do repairs themselves on a fixer upper. Be sure to understand the pros and cons of foreclosures before you start.
Most important of all, find a great real estate agent to help you with the process. The realtors at Berkshire Hathaway HomeServices Select Properties know how to buy a foreclosed home in Missouri and can’t wait to show you the possibilities.
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