The pandemic has undoubtedly changed the American economy, and those changes have created hardship and opportunity in the housing market.
Amid that environment, foreclosures are an interesting option for homebuyers for several reasons. Mortgage rates have hit new record lows more than 10 times in 2020, helping to fuel demand as many Americans continue to work and attend school from home. Meanwhile, the supply of homes for sale has shrunk, pushing up prices. While they’re pretty hard to come by these days, buying a property in foreclosure could be one way to limit that pricing pressure.
- Foreclosures can be a good way to find a deal in today’s seller’s market and still take advantage of ultra-low mortgage rates.
- Foreclosed properties may be harder to come by due to foreclosure moratoriums and other pandemic-related protections.
- Drawbacks to buying foreclosures in the pandemic include longer processing times and stricter protocols for viewing properties.
- Foreclosed properties are often in poor shape, so you should budget for repairs.
“Generally speaking, foreclosures are properties that are offered below market value,” Yawar Charlie, a real estate agent based in Los Angeles, wrote in an email. “They might be in a state of disrepair, the previous owner may have taken some of the appliances or plumbing fixtures, and they might need work. But at the end of the day, the buyer is getting a deal.”
Indeed, properties sold at foreclosure auctions in September went for 86% of their estimated market value, data from the real estate marketplace Auction.com shows. And foreclosed homes sold for a median of $180,250 in the third quarter of this year—just 60% of the $299,000 median price of all homes sold, according to market research firm ATTOM Data Solutions.
Foreclosure Relief Has Reduced Supply
The main obstacle to purchasing a foreclosed home in the pandemic may simply be availability.
As a result of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, lenders cannot foreclose on homes funded by a federal mortgage loan (FHA, VA, or USDA) or a Fannie Mae- or Freddie Mac-backed mortgage through at least Jan. 31 (this expiration date had been Dec. 31 until last week). Plus, the CARES Act provides homeowners the option to get up to 360 days of payment forbearance for all federally-backed loans if they are experiencing financial hardship. Many states and cities enacted their own eviction and foreclosure moratoriums during the early days of the pandemic, too.
These protections have led to a drastic drop in foreclosures. In October, there were 11,673 U.S. properties with foreclosure filings, 79% fewer than in October 2019, according to ATTOM Data.
That said, the supply of foreclosed homes is slowly rebounding. ATTOM’s October number represents a 20% increase from September, and according to Auction.com, the supply of foreclosed properties brought to auction in September was greater than its been at any point since the protections kicked in.
If you happen to find a home to buy through auction, be prepared for a long closing period, said Michael Gevurtz, CEO and founder of Bluebird Lending.
“Many of the (auctions) were halted during stay-home orders and, as things have begun to reopen, the legal system has had to catch up with a backlog,” Gevurtz said in an email. “This means the courts are not processing deals for the lenders as quickly.“
Another consideration may be increased competition for the limited supply. With the number of foreclosures still well below normal levels, there aren’t enough homes for all the buyers tempted by 30-year fixed interest rates under 3%. In the first week of December, they dipped to an all-time low of 2.71%, almost a full percentage point lower than a year earlier.
Record low interest rates have “given real estate investors confidence to buy more distressed properties,” Daren Blomquist, Auction.com’s vice president of market economics, said in an email. “At the end of the day there is more competition for a smaller pool of properties, and that is driving up the final sales prices and compressing the discount available.”
At 86% of estimated market value in September, auction prices on foreclosures represented the smallest discount since January 2014, according to Auction.com data. Prior to the pandemic, auction prices were around 78% of estimated market value.
Financing, Repair Budget, and Property Visits
If you do choose to buy a foreclosure during the pandemic, there are a few steps you can take to ensure things go smoothly.
Have Your Financing Lined Up Early
Lenders are eager to offload foreclosed properties and recoup their losses quickly, so have your mortgage loan (or your cash offer) lined up and be ready to move fast.
“When a property has been foreclosed on, the lender, at the end of the day, wants to get rid of that property and get it off their books as soon as possible,” Charlie said. “They will move forward with the cleanest, highest offer.”
According to Yawar, removing contingencies on your loan—such as the financing or inspection contingency—can help your chances.
“Some lenders nowadays are offering product lines where they put you through the underwriting process before you actually submit an offer,” Charlie said. “If you do that, it’s called an ‘advanced approval.’ If you are able to attain that, you can then put an offer on any property, without a loan contingency.”
Budget for Repairs
Since it’s harder than ever to view foreclosures, you’ll want to be wary of the home’s condition. This especially true if buying via online auction.
You should also be careful to line up enough cash for any repairs you may need to make later on.
“The number one thing to keep in mind when purchasing a foreclosure is to always assume the worst-case scenario about the property, and budget accordingly,” Gevurtz said. “I recommend budgeting a foreclosure from the mindset that the entire property will need to be gutted. This will ensure you have proper financing in place for any unforeseen issues that may come up.”
Visit the Properties if Possible
According to Matt Andrews, real estate investor and host of the Real Estate Influencer podcast, you’ll have the upper hand if you’re comfortable with visiting the properties in person.
“A segment of the population that isn’t willing to go out and look at properties on-site because of COVID,” Andrews wrote in an email. “That gives those who are willing a significant advantage because they’ll have a better perspective of a property’s real value and opportunity.”
But there may be social distancing protocols that make the process more difficult—particularly if you’re hoping to set up inspections.
“As real estate agents, we now have a very specific set of protocols we must put in place in order to show houses, do inspections, or give entry to houses,” Charlie said.
Just make sure to wear a mask and gloves, and bring hand sanitizer when visiting properties. You never know what condition a foreclosed home may be in.
Pros & Cons of Buying a Foreclosure During COVID-19
You’re likely to pay below-market value
You may be able to purchase the property fully online
It’s hard to find foreclosed properties
The process could take a while
You’re likely to have repair costs
Viewing is tricky with social distancing