Yahoo Finance The Top 10 Cities in the U.S. To Buy a Foreclosure — Experts Share the Do’s and Don’ts
For the second year in a row, foreclosures in the U.S. are on the rise. Records from the first six months of 2023 showed foreclosure filings for roughly 186,000 homes. For perspective, however, this is roughly 15 times less than the number of homes in foreclosure during the mortgage crisis of 2007 and 2008.
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“When you think about why there’s been an increase in foreclosure listings, it’s a backlog from when everything was put on hold [during the pandemic] for three years,” explained Linda Kody, broker owner of Kody & Company.
Rising property taxes, an urban exodus that has led to economic hardship in many cities and the paperwork finally catching up to homeowners who fell behind on their mortgages during the pandemic has led to an increase in foreclosure rates in at least 10 mid-sized metro areas, spanning from New Jersey to California.
U.S. Cities Where Foreclosure Rates Are Highest
Foreclosure filings are highest in these 10 U.S. cities, according to a heat map created by the National Association of Realtors, based on data from ATTOM.
Atlantic City, New Jersey.
Florence, South Carolina.
New Haven, Connecticut.
Baltimore, Maryland.
Mobile, Alabama.
Orlando, Florida.
Macon, Georgia.
Philadelphia, Pennsylvania.
Peoria, Illinois.
Modesto, California.
Some might (logically) think that an increase in foreclosures means a rise in affordable housing in those regions. But that’s not exactly true, according to real estate experts.
Kody pointed out that a foreclosure filing doesn’t mean the house is necessarily on the market for below value — or even that it’s on the market at all. A foreclosure filing merely means the process has begun.
Homeowners and banks alike have an incentive to keep the original owner in the house, if possible. “Doing a loan modification is the first step. The bank might pursue a short sale if the home is worth less than what’s owed on it. If there’s no cooperation on those two steps, then foreclosure is the plan C. Foreclosure is the last resort,” Lukasz Kukwa, of Lukasz Kukwa Realty brokered by EXP Realty, told GOBankingRates.
With this in mind, foreclosure filings don’t mean the market is flooded with foreclosed homes for sale in these cities. It could be years before these houses reach the market, depending on the process within the state.
Plus, Kukwa said, “The misconception is that foreclosures are always good deals — and that can’t be farther from the truth.”
Kody agreed: “Foreclosures are priced to the market. It’s not going to necessarily be a steal of a house. That’s just not happening anymore. For people looking to get a deal and find something affordable, this a slippery slope for them.”
Experts agreed that knowledge is key if you’re pursuing a foreclosed home as an owner-occupied property — that is, a house you plan to live in rather than buy and sell as an investment.
Follow these do’s and don’ts from our experts to increase your chances of finding a home that’s a good value.
Do: Understand the Stages of Foreclosure
If you’re considering buying a foreclosed home, it’s important to understand exactly what you’re thinking about. “Foreclosure properties can fall into three main stages: pre-foreclosure, foreclosure auction, or REO status,” Ryan Zomodori, COO and co-founder of Real Estate Skills, told GOBankingRates.
“During pre-foreclosure, the homeowner is in default of their mortgage but still retains ownership and the right to sell the home. This stage is akin to traditional sales, and you can approach it like any regular property transaction.”
At this stage, you might be able to snag a deal from a seller desperate to make any money from the deal (or at least break even).
“As time passes without a resolution, the property may proceed to a foreclosure auction, where the lender seeks to recoup their investment,” he continued.
Typically, you’ll need cash to win a bid and will likely be competing against more experienced investors with better resources and more knowledge.
“If the property doesn’t find a buyer at the auction, it becomes foreclosed upon by the lender, transforming it into a Real Estate Owned (REO) property, listed on the bank’s balance sheet. At this juncture, you’ll be purchasing the property directly from the lender,” Zomorodi said.
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Most banks still use real estate agents in an attempt to get the best price for the property, Kody revealed. “Realtors know the market, where the banks may not,” she said.
“The deal is structured based on how much the person owes,” Kukwa said. “The property then may not become a good deal. Sometimes these homes are [listed for] really close to market value.”
Do: Be Cautious Buying an Occupied Home
In certain situations, the prior homeowners may refuse to leave a foreclosed property. They may have rights under squatters’ laws. “Know the eviction regulations in your state before making an offer on occupied property,” Kody advised. “You might have to offer relocation assistance, which could cost $10,000 or more. That’s a decision you have to make when you consider the overall cost of the property.”
Do: Be Prepared To Pay Cash for the Best Deal
Kody pointed out that occupied properties will usually demand a cash payment for the home, since it won’t be mortgageable with people living there. But you can often secure the best deal on a foreclosure if you’re prepared to pay cash.
“The vast majority of foreclosed homes transact with cash or private financing,” Kukwa pointed out. “Cash provides the least amount of red tape and obstacles. If you can come with cash, the sellers favor it.”
Do: Understand the Value of the Area Where You’re Buying the Home
The top 10 cities where foreclosure rates are rising may not be the most booming metropolitan areas in terms of job opportunities or growth right now. “Investing in up-and-coming cities presents significant opportunities for real estate investors with a longer time horizon for ROI,” Zomorodi said. “Additionally, the recent rise in interest rates has made these markets even more attractive for first-time home buyers due to their affordability.”
However, remember that home values may not appreciate as quickly in cities under revitalization. “A surplus of housing stock provides buyers with ample options, which can dampen the rate of home value appreciation,” Zomorodi explained.
If a home needs repairs, he warned, you don’t want to pay for improvements that would cause the house to exceed the value of the neighborhood. “There is a limit to how much value can be pushed until a substantial shift occurs in the local economy,” he said.
Do: Understand Your Financing Options
“When considering purchasing a foreclosure property, it’s essential to be aware of the financing options available based on the property’s condition,” Zomorodi explained. “In some cases, foreclosed properties may be uninhabitable or require significant improvements. Traditional financing may not be feasible. In these situations, buyers should explore alternative funding methods.”
Kukwa pointed out that private financing, sometimes known as “hard money loans,” often come with high interest rates and high fees. “These products exist and they work,” he said, warning that they may not be the best option for homebuyers with no investment experience. “They just don’t meet everyone’s needs.”
FHA loans exist for foreclosed homes, especially for first-time homebuyers. HUD may also have programs available. Your realtor should point you in the right direction in light of your individual situation.
Do: Seek Expert Help
Experts agreed that buyers should look for a realtor who understands foreclosures — and the specific neighborhood where you’re shopping — to help you navigate the landscape.
“The first very thing anyone needs to look at is to get a real estate professional familiar with the process — someone who has experienced what this market is like,” Kody said.
Don’t: Skip the Inspection
Any expert realtor should advise a home inspection. “You definitely want to have somebody who is familiar with property look at it and tell you exactly what work has to be done,” said Kody, adding that you may want to bring in a plumber and an electrician, even if you aren’t permitted to turn on utilities. These professionals will know how to assess the property.
“Most of the time foreclosed property has deferred repairs. Just make sure you know what the repairs and improvement costs are going to be,” Kody advised.
Kufka refers to this as checking out the “organs of the home.” He said, “Do your due diligence with anything structural, mechanical, plumbing, and electrical.”
Don’t: Expect To Negotiate (Much)
“The seller is going to say the inspection is for information only,” Kody said. That means the home is sold as-is.
“Most of the time, you can’t use repairs as a point for negotiation,” Kufka added.
Don’t: Overpay
Since you know you’ll be responsible for repairs, Kody said: “Have your agent do a market analysis and make sure the cost of the improvements will equal the value of the property when they are done.”
Don’t: Skip Title Insurance
Lastly, even if you’re buying the home with cash at a tremendous value, you want to purchase title insurance no matter what, Kody advised. “I would never tell somebody to buy ANY property without getting owner’s title insurance. You’re protecting your asset.”
She continued, “Even if you do a title search, you want that insurance. Cash buyers don’t always feel a need to do that. But they should.”
Title insurance represents a small investment for tremendous peace of mind, according to our experts.
The Bottom Line
Buying a foreclosure may save you money, depending on the condition of the home, the amount owed and the seller’s asking price. Cash puts you in a better position to negotiate. If you can find affordable ways to make the necessary repairs or finance it through a rehab loan, you could come out ahead in today’s competitive real estate market.
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This article originally appeared on GOBankingRates.com: The Top 10 Cities in the U.S. To Buy a Foreclosure — Experts Share the Do’s and Don’ts
