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A lot of investors buy foreclosures with cash -- and for good reason. Paying in cash means a faster, easier sale, and it usually means a better deal, too. Sometimes, it might even open the door to more property options, as many banks avoid mortgage -backed buyers altogether. Are you considering buying a foreclosure with cash? Not sure how to go about it? This guide can walk you through it. There are tons of benefits to buying a foreclosure with all cash -- for both you, the buyer, and the bank holding the property.
For one, it means there's no financing involved. Mortgage financing is a lengthy and tedious process, and it requires tons of documentation, lots of time, and endless hassle.
While that's no fun for you or other investors, it's a downright turnoff for the banks holding these properties. You have to remember: Banks are losing money every day these homes sit vacant. They want a fast, easy, pain-free sale. Those won't achieve that at all. As a result, an all-cash offer could give you more negotiating power, especially if you're up against only financed buyers. There are other benefits, too, of course. Buying in all cash means no mortgage payments -- and that's a big win if you're just looking to flip the property or rent it out.
Additionally, there's no interest involved, so even if you pay listing price, you're technically paying less for the home over time. On the downside, paying all cash could mean a serious ding to your bank account. As a real estate investor, having a solid financial cushion is critical -- for maintaining both your properties and your business -- so if an all-cash bid requires too much of those reserves, it could be a risky move. On top of this, there's also less due diligence involved.
With a mortgage loan, your lender would probably require an appraisal and maybe even an inspection -- moves that protect your interests and ensure you're making a smart investment of your dollars. Buying in all cash doesn't offer these kinds of perks, and it may mean getting stuck with a dud of a property.
If you do go this route, research the property thoroughly and see if an inspection can be permitted. You typically can't inspect a home if it's still occupied. Another drawback is the lack of tax benefits. With a mortgage loan, there are a number of tax deductions you might qualify for on the purchase.
Cash offers don't allow for these sorts of perks, though this might not be a major deal if you're not planning to hold the property long. The exact process for buying a foreclosure with cash really depends on the venue -- whether you're buying through an auction or purchasing directly from a bank.
For clarity's sake, let's look at the process in each scenario:. Buying at a foreclosure auction is unique in that you're up against other buyers live and in real time. Additionally, you'll have to deal with the rules of the auction house, which tend to vary wildly depending on where you're buying. If you're buying from a bank or lender directly, the process will look a little more like a traditional real estate sale.
In both cases, it's never a bad idea to bring in a real estate agent, especially one experienced in foreclosed property purchases. Having a real estate attorney on hand is smart, too, particularly when writing your sales contract.
If an all-cash offer just isn't possible for you financially, there are other ways to buy a foreclosure property, including a conventional, FHA, renovation, or VA loan.
In some cases, the final sale might come in lower than some of the offers. When a bank-owned home comes on the market as a foreclosure home, it can attract many buyers if it's priced attractively.
Underpricing is one way a bank can get multiple offers for a foreclosure home. The problem that can arise is sometimes agents don't do a very good job explaining to potential buyers why underpricing occurs and how to make underpricing work for the buyer's benefit.
If the home is priced too low, many buyers will probably make offers over the asking price. In a foreclosure, as in any home sale, the asking price is simply the starting place for negotiations. The following is an example of how the process of buyer's offerings may work. This should help you understand the process behind each offer and price.
You will also see how each offer might rank, depending on the order in which they are received. And so it goes, the bank receives seven or more offers; these offers can be all over the board—some low, some high, and some incomplete. In the right market conditions, it might seem as though everybody and their uncle are throwing offers at the bank.
If a bank receives several high offers, why would it ultimately accept a lower one? There are a few reasons this might occur. A lot can happen during an inspection period and offer negotiations. The terms a bank agrees to in advance can change. A tree can fall on the house or market conditions could suddenly worsen.
Not to mention, interest rates could go up, putting downward pressure on prices. Sometimes the home could require extensive work, which was revealed during a home inspection. In these situations, buyers can ask the bank to lower the price to reflect a newly discovered condition. Also, in some cases, the listing agent represents the buyer making a lower offer and purposely—although it is generally against the law in most states—pushes their own buyer's offer to the top of the pile while downplaying the other offers.
The lender may be in no hurry to sell the home because it wants to be sure it gets top dollar. It is important to have a firm commitment, in writing, from a bank or lending company, to lend you the money to purchase the home. Include the preapproval letter with your purchase agreement. Hire a real estate agent who has verifiable experience in dealing with lenders and foreclosures. Interview several agents until you find one that you feel will properly represent you in the negotiating process.
Your agent will submit the offer you propose and guide you through the escrow process should your offer be accepted.
This is a free service that agents provide, and the information will help you to determine the amount you will offer on the home. Scrutinize the condition of the house from top to bottom.
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