How to Buy Foreclosed Homes with No Money

 

Buying a foreclosed home with no money is one of the best ways to buy real estate. The downfall however is that it can be tricky and not nearly as straightforward as getting a loan then buying property. Foreclosed homes also offer a unique upside: you can buy them with No Money Down. Meaning you don't need to save up $20k to buy your first rental.

 

Understanding Foreclosed Homes

The first step in buying a foreclosed home is to understand what a foreclosed home is. Foreclosure means that the previous owner failed or defaulted on their mortgage payments, putting the property back into the lenders position. This is called the foreclosure process.

Fortunately, this would be where you step in before the foreclosure process finishes. Stepping in after legal action is taken but before the home is put back into the lenders position presents a unique opportunity. This opportunity is called loan assumption. This is where you, the new buyer, could assume or take over the previous home loan. Taking over this loan can come with a few risks however it's perfect if you are looking for no money down.

Note: There are caveats to Loan Assumption that we will discuss later in the article.

 

Types of Foreclosure Purchases

The next step to purchasing a foreclosed home is to look at what type of foreclosure the home is under.

A detailed illustration of a foreclosed home with a 'For Sale' sign and a tag that reads 'No Money Down.' The house is modest. Image by ChatGPT

 

Pre-foreclosure

A Pre-foreclosure is when the lender notifies the borrower that they are in default (didn't pay their mortgage payment) and could potentially lose their residence. This while not great for the current resident is the perfect opportunity for a new buyer as you can sweep in an offer to take over or assume the loan. This prevents the residence credit from tanking.

 

Short Sale

If a house is underwater and the homeowner is experiencing some type of financial hardship, the lender may be willing to sell the property short and take less than the outstanding mortgage. This is a rather lengthy process and can take multiple months depending on the lender.

 

Sheriff's Sale Auction

This is the final step in the foreclosure process when the property is sold at auction. The downfall of this type is that you have to buy the property without seeing it.

 

Bank-Owned Properties

REO (Real Estate Owned) or Bank-Owned Properties are prosperities that don't go to Sheriff's sale Auction.

 

Government-Owned Properties

Properties that were financed with government loans, such as FHA, VA, or USDA, are repossessed by the government when the owner defaults on payments. Government-registered brokers typically take care of the sale to make up for the loss. You can find government-owned properties through the U.S. Department of Housing and Urban Development (HUD).

 

Benefits and Risks

Buying a foreclosed home with no money down can come with many benefits but it also comes with risks. We highly encourage you to look at the benefits and risks before you process the next steps.

 

Benefits of Buying Foreclosed Homes with No Money Down


  • Cost-Effective Entry
  • Diverse Investment Opportunities
  • Quick Turnaround
  • Creative Financing Strategies
  • Win-Win Scenario
  • Easier to Scaling

 

Risk of Buying Foreclosed Homes with No Money Down


  • Unpredictable Property Condition
  • Unknown Property History
  • Lack Of Inspection
  • Market Volatility
  • High Competition
  • Legal Complexities
  • Unforeseen Repairs
  • Property Vandalism Or Theft

 

Draft & Write Your Purchase Agreement

Now that we are ready to go ahead with the purchasing process we need to contact the homeowner and the lender to draft and write a purchase agreement. I'd first recommend finding someone knowledgeable on the subject such as a realtor in your area.

Head to google and type in "Realtor in {Your City}" for example "Realtor in Ashland WI" or "Realtor in Stevens Point WI"

You can also search "{Your City} Real Estate Agent" for example "Lodi Real Estate Agent" or "Monroe Real Estate Agent"

When drafting a purchase agreement investors must determine the maximum allowable offer using the after-repair value and the 70% rule. The ARV represents the property's estimated value after necessary repairs and renovations. Investors then multiply the ARV by 70% and subtract estimated repair costs to calculate the MAO.

This calculation ensures that the offer does not exceed 70% of the property's post-repair value while covering anticipated renovation expenses. Adhering to the 70% rule, investors safeguard their potential profits and ensure a sound investment strategy when purchasing foreclosed homes with minimal upfront capital.

 

Financing Options & Loan Assumption

The last step in preparing to purchase a foreclosed property with No Money Down is to iron out financing and or using loan assumption. This is where the No Money Down part comes into play.


  1. Hard Money Loans: Hard Money Lenders are perfect for those looking for a quick turn around as they don't look at the borrowed credit and instead look at the value of the asset.
  2. Private Lenders: Private lenders are perfect if you are going in and need some flexibility to purchase your foreclosed property.
  3. Seller Financing: In some cases the seller of the home will allow financing options to the buyer.
  4. Home Equity Line Of Credit: HELOC's or Home Equity Lines of Credit are great for current investors as they won't need an additional loan to purchase the property.

After you acquire the upfront cash through one of the above financing options you will then have an additional loan. This is done through Loan Assumption and is when the current loan on the foreclosed property is passed onto you.

 

Conclusion

Buying a foreclosed home with no money is a slightly more complicated variation of purchasing a rental property although it comes with many benefits. If you're looking to purchase your next rental, or get into your first we highly recommend looking at foreclosed properties.