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Who doesn’t dream of nabbing a really good deal when shopping for a home? Maybe you’re even considering a fixer-upper, a property that would allow for some sweat equity and would, over time and with work, help you grow your wealth.

If you have been studying the real estate listings, you have probably seen some potentially excellent deals on repossessed or bank-owned properties.

While the prices may look enticingly low, when it comes to how to buy a foreclosed house, you may be in for a lot of research, a long timeline, and financing issues.

This guide can help you learn the ropes of buying this type of property, including:

•   What is a foreclosed home?

•   What does “foreclosure” mean?

•   How can you find foreclosed homes for sale?

•   How can you buy a foreclosed house from a bank or other source?

•   What are the pros and cons of buying a foreclosed home?

What Is a Foreclosed House?

A foreclosed house is a home that a mortgage lender owns. Homebuyers agree to a voluntary mortgage lien when they borrow funds. If they don’t keep current with their payments and end up defaulting, the lender can take control of the property.

When the lender does so, the house is called a “foreclosed home” and can be offered for sale. Read on to learn more about the foreclosure process.

What Does ‘Foreclosure’ Mean?

A foreclosure is a home a lender or lienholder has taken from a borrower who has not made payments for a period of time. The lender or lienholder hopes to sell the property for close to what is owed on the mortgage.

Who can place a lien on a home? A mortgage lender or the IRS can. So too can the U.S. Department of Housing and Urban Development (aka HUD) for nonpayment of an FHA loan, resulting in HUD homes for sale.

A county (for nonpayment of property taxes), an HOA, or a contractor also can place a lien on a home.

Recommended: Foreclosure Rates for All 50 States

Types of Home Foreclosures

There are three main types of home foreclosures:

•   Judicial foreclosures: This type of foreclosure occurs when the lender files suit (that is, in court, hence the word “judicial”) to begin the foreclosure process. This usually happens when the borrower fails to pay three consecutive payments. If the loan isn’t brought up to date within 30 days of that point, the home can be auctioned off by a sheriff’s office or the court.

•   Power of sale (nonjudicial) foreclosures: Sometimes known as statutory foreclosure, this process may take place in 29 out of the 50 states. The contract in this situation allows for an auction of a foreclosed property to occur without the judicial system becoming involved, as long as certain notifications and waiting periods are appropriately observed.

•   Strict foreclosures: This kind of foreclosure only occurs in Connecticut and Vermont, and usually these only happen when the value of the loan debt is more than that of the house itself. If the defaulting borrower doesn’t become current with their loan in a certain amount of time, the lender gets possession of the property directly but is not obliged to sell.

How Does the Foreclosure Process Work?

Foreclosure processes differ by state. The main difference is whether the state generally uses a judicial or nonjudicial foreclosure process. A judicial foreclosure may require an order from a judge.

•   Once a borrower has missed three to six months of payments, depending on state law, the lender will post a public notice, sometimes known as a notice of default or “lis pendens,” which means pending suit.

•   A borrower then typically has 30 to 120 days to attempt to avoid foreclosure. During pre-foreclosure, a homeowner may apply for a loan modification, ask for a deed in lieu of foreclosure, pay the amount owed, or attempt a short sale.

   A short sale is when the borrower sells the property and the net proceeds are short of the amount owed on the mortgage. A short sale needs to be approved by the lender.

•   If none of the options work, the lender might sell the foreclosed property at auction — a trustee or sheriff’s sale. Notice of the auction must be given at the county recorder and in the newspaper.

•   If no one buys the home at auction, it becomes a bank or real estate-owned (REO) property. These properties are sold in the traditional real estate market or in bulk to investors at liquidation auctions.

•   In some states under the judicial foreclosure process, borrowers may have the right to redeem their property after the sale by paying the foreclosure sale price or the full amount owed to the lender, plus other allowable charges.

Recommended: Home Affordability Calculator

How to Find Foreclosed Homes for Sale

In addition to checking with local real estate companies for foreclosed homes, there are paid and free sites to search when you are shopping for a repossessed or foreclosed home.

Among the free:

•   Equator.com

•   HomePath.fanniemae.com (Fannie Mae’s site)

•   HomeSteps.com (Freddie Mac’s site)

•   Realtor.com

•   reo.wellsfargo.com

•   foreclosures.bankofamerica.com

•   treasury.gov/auctions/irs/cat_All%2066.htm for IRS auctions

•   properties.sc.egov.usda.gov/ (USDA resales)

•   hudhomestore.gov (the official government website for foreclosed homes)

•   vrmproperties.com

Paid sites include foreclosure.com and RealtyTrac.com, among others.

How to Buy a Foreclosed Home

Here are the usual steps for buying a foreclosed house. Whether you qualify as a first-time homebuyer or someone who has purchased before, it can be wise to acquaint yourself with the process before searching for a home.

Step 1: Know the Options

Buying foreclosed houses at an auction or through a lender are the main ways to purchase these homes. Keep in mind that a foreclosure is usually an “as-is” deal.

Buying at Auction: In almost all cases, bidders in a live foreclosure auction must register and show that they have sufficient funds to pay for the property in full.

Online auctions have gained popularity. You can sign up with a site to find foreclosure auctions in an area where you want to buy. Or you might research foreclosure sales data by county online, at the county courthouse, or from the trustee (the third-party foreclosure sales agent).

It’s important to look into how much the borrower owes and whether there are any liens against the property. The winning bidder may have to pay off liens. It’s smart to hire a title company or real estate attorney to provide title reports on properties you’re interested in bidding on.

Buying From the Lender: You can find listings on websites that aggregate REO properties or on a multiple listing service. When checking out the homes you like, take note of the real estate agent’s name. Banks usually outsource the job of selling foreclosed homes to REO agents, who work with standard real estate agents to find a buyer.

REO listings are often priced at or below market value. Also good to know: The lender usually clears the title and evicts the occupants before anyone buys a foreclosed home.

Looking at Opportunities Before Foreclosure: If the lender allows a short sale, potential buyers work with the borrower’s real estate agent and the lender to find a suitable price.

With pre-foreclosures, when borrowers have missed three or more mortgage payments but still own the home, the lender might work with them to avoid foreclosure. Another scenario: The homeowner might entertain purchase offers, whether the home is listed or not.

Step 2: Hire a Real Estate Agent

It’s a good idea not to go with just any agent, even if you like them and have used their services for a standard home purchase, but to find an agent who specializes in foreclosure sales.

That agent can help you search for a home, understand the buying process, negotiate a price, and order an inspection. Your offers might be countered as well, and an agent can help you figure out the best next step.
An agent can also help you understand the market in general and ways to smooth your path to homeownership, such as programs for first-time homebuyers.

Step 3: Find Foreclosures for Sale

As mentioned above, there are paid and free sites where one can scan for homes. Some divisions of the government offer foreclosed homes, as do some lenders.

Also, there are real-estate companies that specialize in these properties and can help you with your search.

Step 4: Get Pre-approved for a Mortgage

If you want to act fast on buying a foreclosed home, you’ll want to get pre-approved for a mortgage. Pre-approval tells you how much money you are eligible to borrow and lays out the terms of final approval on a mortgage in a pre-approval letter.

Pre-approval may help you compete with the all-cash buyers who are purchasing foreclosures. Bonus: As you move through this step, you are also likely to learn important home buying and financing concepts, like loan-to-value (LTV) ratio.

(If you are looking into repossessed properties, owner financing, or a purchase-money mortgage, will not be an option.)

Step 5: Get an Appraisal and Inspection

Buyers of REO properties would be smart to order a home inspection. A thorough check-up can document flaws and help you tally home repair costs.

An REO property appraisal usually consists of an as-repaired valuation — the market value if the property is repaired, compared with comps — and an as-is valuation. Some lenders also ask for a quick-sale value and a fair market value.

You can challenge the results of an appraisal if you think the figures are off, and you can hire another appraiser for an independent assessment.

Step 6: Purchase Your New Home

If you decide to move forward, contact your mortgage lender to finalize your loan. Submit your offer with the help of your real estate agent. If your offer is accepted, you will sign a contract and transfer ownership. You may be required to pay an earnest money deposit.

The certificate of title may take days to complete. During that time, the original borrower may, in some states, be able to file an objection to the sale and pay the amount owed to retain their rights to the property. This is called redeeming or repurchasing a home, but it rarely happens. Nevertheless, it’s a good idea to not dig in and start any work on the property until you receive the certificate of title.

Recommended: What’s the Difference Between Pre-approved vs Pre-qualified?

Benefits of Buying a Foreclosed Home

Buying a foreclosed home can be a great deal for a buyer who sees the potential, is either handy or budgets realistically for repairs, and knows the fixed-up value. Some points to consider:

•   Not all foreclosed properties are in poor shape, as you might expect. If a homeowner dies or has a reverse mortgage that ends, a home that was well maintained may be returned to the lender.

•   REO properties rarely have title discrepancies. The repossessing lender has extinguished any liens against the property and ensured that taxes were paid.

•   It can be possible to negotiate when buying REO properties. You could ask the lender to pay for a termite inspection, the appraisal, or even the upgrades needed to bring the property up to code.

Risks of Buying a Foreclosed Home

Buying a foreclosed home can be complicated. The process is governed by state and federal laws. Take note of these possible downsides:

•   Some foreclosed homes have indeed been sitting empty and may have maintenance/repair issues, necessitating that you have cash available to get the work done.

•   Because many REO properties have sat vacant and most are sold as-is, financing can be a challenge. See below for more details.

•   Many people, especially first-time home buyers, think foreclosures are offered at a deep discount, but even low-priced homes might get multiple offers above the asking price from buyers eager to snap up a fixer-upper. You might find yourself tempted to pay more than you had expected just to close the deal.

What Are Financing Options for Foreclosed Homes

When it comes to financing the purchase of a foreclosed property, here’s what you need to know:

•   Some sales may be cash-only. If you don’t have access to the amount needed, it’s smart to sidestep looking at these kinds of auctions.

•   If the home is in livable condition, you may be able to get a conventional or government-back mortgage loan.
If you are planning to finance the purchase of a repossessed home, consider this:

•   Fannie Mae dictates that for a conventional conforming loan, the home must be “safe, sound, and structurally secure.”

•   For an FHA, VA, or USDA loan, the home must be owner occupied (that is, not a multi-family home where you will rent out all units) and in livable condition, with a functional roof, foundation, and plumbing, electrical, and HVAC systems, and no peeling paint.

•   A standard FHA 203(k) loan includes the purchase of a primary house and substantial repairs costing up to the county loan limit. But relatively few lenders offer these loans. Also, the application process is more labor-intensive, and contractors must submit bids and complete paperwork. Mortgage rates are somewhat higher than for standard FHA loans.

Who Should Buy a Foreclosed Home

Buying a foreclosed home is usually best for people who are prepared for a lengthy and potentially expensive process to buy a home at a good price.

•   You will need to do considerable research to find available homes and know how to make an offer.

•   You will likely face a significant amount of paperwork and time delays.

•   Having cash reserves to pay for repairs and deferred maintenance issues is important, as well as dealing with unpaid taxes and liens on the property.

Who Should Not Buy a Foreclosed Home

A foreclosed home may not be the right move for someone who is under time pressure to move into a new home.
It can also be a problematic process for those who don’t have a good amount of cash set aside to pay for rehabilitating a property that has been sitting empty or to take care of overdue tax bills and liens.

The Takeaway

Buying a foreclosed home requires vision, risk tolerance, and realistic number crunching. If you need financing, it’s a good idea to get pre-approved for a mortgage so that all your ducks are in a row when you spot a potential deal.

If you’re shopping for a mortgage, consider what SoFi offers. Our home mortgage loans have competitive, flexible options, and down payments as low as 3% for first-time borrowers or as low as 5% for all other borrowers.

SoFi Mortgages: We make it simple.

FAQ

What are the disadvantages of buying a foreclosed home?

Disadvantages of buying a foreclosed home can include the amount of research involved, the considerable amount of paperwork and potential delays, and the cash often required to make repairs, pay back taxes, and remedy liens.

How are repossessed houses sold?

Foreclosed homes are often sold at auction, by a lender, or by a real estate company (often ones that specialize in such repossessed properties).

How long does it take for a repossessed house to be sold?

Depending on the state and the specific property, the sale of a foreclosed house may take anywhere from a few months to a few years.

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Automated investing is a type of investing that uses computer algorithms to generate tailored financial planning or retirement advice to individuals. Automated investing platforms, also known as robo advisors, tends to feature lower fees, lower minimum balances, digital applications, and a more hands-off approach to investing.

Because automated investing can be done with little or no direct human effort, it can be an ideal option for investors just starting their wealth-building journey. Automated investing may reduce the learning curve for some investors entering the financial markets, helping them start building and managing a portfolio to achieve their financial goals.

Automated investing uses computer algorithms to select and trade stocks, exchange-traded funds (ETFs), or other assets without the need for oversight by a human financial advisor.

Automated investing has changed the financial advisory game in fundamental ways. Like so much else that has happened during the digital revolution, automated investing has eliminated the middle man and is delivering a service directly to the client – you, the investor.

Investors who sign up for an automated investing platform usually take an online survey. This survey collects information about the investor’s financial situation, risk tolerance, and goals. The automated investing advisor then uses this data to recommend investments to the client that may help them meet their financial goals. Based on the investor’s input, the automated investing platform will recommend and manage a pre-determined portfolio for the investor using computer algorithms and other data.

Automated investing advisors may also handle portfolio rebalancing and tax-loss harvesting if the client chooses these services. (SoFi’s automated portfolio includes the above features, but not automated tax-loss harvesting.)

Most automated advisors use Modern Portfolio Theory (MPT) to create and manage a portfolio’s asset allocation. The idea is to decrease risk by diversifying a portfolio into many assets and not “put all your eggs in one basket.”

The automated investing industry is growing fast; client assets managed by automated advisors are estimated to be $2.76 trillion in 2023, up from about $19 billion in 2017, according to data from Statista.

Of course, the automated investing phenomenon is relatively new; its direct-to-investor services only began to be established in about 2009-2010, so it’s difficult to report a long-term, industry-wide track record.

Automated Investing vs Robo Advisors

Automated investing tools are sometimes referred to as robo advisors. Investors may see the terms automated investing and robo advisors used interchangeably to describe digital tools that use computer algorithms to manage a financial portfolio.

In reality, though, automated investing is a broader term that can refer to several aspects of today’s financial products and features.

•   Using automatic transfers and contributions to investment portfolios and retirement plans is a form of automated investing.

•   Target date funds, a type of mutual fund that rebalances over time to become less conservatively invested, uses a form of automated investing known as a glide path.

💡 Recommended: Robo Advisor vs. Financial Advisor: Which Should You Choose?

Why People Choose an Automated Investing Strategy

There are several reasons why investors choose automated investing tools to help them manage an investment portfolio.

Low-Cost Process

Automated investing advising generally costs less than traditional financial advisors. The reason the cost of automated advising is lower is because it relies on an algorithm, while the guidance of a live person can cost more.

Automated investment fees are usually a percentage of the assets under management (AUM). Typical fees are less than 0.5% of AUM annually. So if an investor puts $10,000 into an automated investing service, they generally pay less than $50 per year.

By comparison, a reasonable rate for a human financial advisor would be a 1% investment fee. On a 10,000 investment, that’s $100 a year just for the advisory fee. Investors may also have to pay fees on their investments and commissions for products the financial advisor sells.

However, automated investing services have additional fees as well. Robo advisors charge a brokerage fee, and the ETFs themselves typically generate management fees, taxes, and other costs for which the consumer is responsible.

Like many investment costs, however, these fees can be hard to track as they may simply be deducted from investor returns. That’s why it’s important to look beneath the hood, so to say, of any investment product to learn the exact costs.

💡 Recommended: How Much Does a Financial Advisor Cost?

More Affordable Initial Investment

Many automated investing platforms have low minimum account requirements. And some platforms have no minimum initial investment requirements.

In contrast, some human financial advisors won’t take on a client unless they have more than $100,000. At the high end, private wealth managers could require minimums of $5 million.

Because of the lower initial investment required, younger consumers have turned to automated investing in planning for their financial future. Previously, high minimum balances had been headwinds to younger investors, preventing them from getting financial advice.

As younger investors, like Generation Z and millennials, start hitting life milestones like getting married and saving for a house, automated investing may be a good option for them to begin building wealth.

Efficient & Convenient Access

With traditional financial advisors, clients had limited access and had to work around the human advisor’s schedule. Automated advisors use digital platforms. This allows clients to ask questions and access help 24 hours, seven days a week, if needed.

Need to make a trade or a change? There is no need to call to schedule an appointment, fill out a physical form, meet with an advisor in person, or wait for office hours. Usually, a few button pushes can do the trick.

Lower fees and minimum balances have attracted younger investors to the automated investing industry. But the digital and mobile platforms these services offer have also made younger users turn to such automated services more.

Concerns About Automated Investing Services

Robo advisors do come with some downsides, however.

Limited Human Interaction

While some automated services may offer investors the ability to contact a live advisor or representative, not all of them do. And even when that’s available, your access may depend on how much money you have invested.

In any case, if you have pressing questions or an investing dilemma, it’s likely it will be up to you to figure out the right steps to take.

Not Fully Customizable

It’s true that a robo advisor is designed to offer a range of pre-set portfolios, one of which will hopefully meet an investor’s needs. But automated platforms don’t have the flexibility to offer each person a fully customizable portfolio — for that they would need to craft their own or work with a professional.

By the same token, if your personal circumstances changed in such a way that your investment strategy also shifted, it’s unlikely that you’d be able to adjust an automated portfolio except in terms of its basic asset allocation.

Risks and Costs of ETFs

Most robo advisors use a mix of ETFs and low-cost index funds. ETFs hold a basket of stocks or bonds and the vast majority of these funds are passively managed, i.e. they are built to mirror an index, such as the S&P 500. ETFs differ from index mutual funds in that they are traded throughout the day on an exchange, similar to stocks.

ETFs come with certain risk factors. Because ETF shares are traded throughout the day, they’re bought and sold at the market price, which may or may not reflect the fund’s net asset value or NAV. Thus, an ETF’s performance is subject to market volatility. In addition there can be tax consequences, owing to the trading of shares.

What to Look for in an Automated Investment Platform

If you’re interested in opening an automated investing account, there are several factors you may want to consider before deciding if automating investing is right for you.

Automated Investing Fees

As mentioned above, automated investing fees are generally lower than traditional financial advisors. However, you still want to compare the fees of the various automated investing platforms on the market.

Some platforms charge a flat fee, while others charge a percentage of your assets under management. In addition, some platforms charge fees for specific services, such as tax preparation or additional investment advice.

Affordability

Some automated investment platforms require a minimum investment to open an account. You’ll want to understand any minimum investment requirements before opening an account. For example, some automated investing platforms may offer a $0 account minimum, but that might not include certain robo advisory services you’re looking for.

Investment Options

The investment options offered by automated investment platforms vary. Some platforms offer a limited selection of investment options, while others offer a wide range of investments. You want to ensure the automated investing platform you choose offers investment options that meet your needs.

Usually, robo advisors only invest in ETFs and mutual funds, so you’ll want to see if the services offer a range of funds, from international equities to domestic corporate bonds. Knowing what investment options a robo advisor provides may help you ensure that you may end up with a diversified portfolio that aligns with your goals.

Investment Rebalancing

Generally, a robo advisor will make automated investments based on your risk tolerance and financial goals. These services will create a portfolio of a certain percentage of stock ETFs and bonds ETFs based on risk tolerance. But you want to check that the automated investing services will rebalance your portfolio to maintain that percentage of stocks and bonds.

For example, an investor with a more aggressive risk tolerance may have a portfolio with an asset allocation of 80 percent stocks and 20 percent bonds. With time, the portfolio may change and knock that ratio off balance — too much of one and not enough of the other. An automated investor can automatically rebalance your account to its original 80/20 ratio. No human interaction is needed; the rebalance happens through the automated investing algorithm.

Human Interaction

Some automated investing services may give investors access to human financial professionals, which can be helpful for investors who need to ask questions, discuss goals, and plan for the future. Automated investing services might charge for this service, but it could be helpful to have this option.

Who Might Want to Consider Auto Investing?

Automated investing may be a good option for people who want to invest for the long term but do not want to manage their own portfolios or pay high fees for a traditional financial advisor. It can also be a good option for people who want to invest in various asset classes, but don’t have the time or expertise to do so themselves.

That doesn’t mean auto investing is right for everyone. For those who aren’t particularly tech savvy or comfortable with automated platforms, using a robo advisor might not make sense. Again, it’s important to be comfortable with the investments offered in these pre-determined portfolios, as well as the risks and costs associated with these products.

As noted above, many younger investors have begun using robo advisors to create portfolios and make automated investment decisions. This may allow younger investors to build up experience in the financial markets while using a pre-set portfolio. As they build wealth and expertise, younger investors may decide to make investment decisions on their own or hire a traditional financial advisor to help manage their financial goals.

The Takeaway

An automated investing platform can be ideal for many investors, particularly regarding affordability, convenience, and avoiding potential human errors. This investment tool allows investors to use a hands-off approach, which many people may prefer over the time-consuming research and management required for picking and choosing stocks, bonds, and other assets to build and manage a portfolio.

If you’re interested in opening an automated investing account, SoFi can help. With SoFi Invest® automated investing, we recommend a portfolio of stock and bond funds for you based on your goals and risk tolerance. And SoFi doesn’t charge a management fee.

SoFi Invest®