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A Beginner's Guide to Foreclosed Property

Blog | March 31, 2023

If you have limited funds for buying a property and want to purchase below market value, you may consider buying a foreclosed property.

What is the difference between a foreclosed property and a regular one on the market? How can buyers find and inspect the foreclosed property, and ultimately make a purchase? Let Spacious explain it in detail.


Jump to: Definition of Foreclosed Properties | Pricing a Foreclosed Property | Buying a Foreclosed Property | Mortgaging a Foreclosure Property | FAQ



What is a Foreclosed Property?

If a property owner is unable to repay their mortgage loan on time, the lender may take a “Call Loan” action, which means the bank decides to recall the loan and stop lending to the borrower. The property owner must clear the outstanding balance within a designated period.

If the property owner fails to repay the loan, the lender will file a lawsuit with the court. The court will then seize the mortgaged property, and the lender will appoint an agent or auctioneer to sell it to the public to cover the debt. The property that is confiscated and sold are known as foreclosed property (or repossessed property).

The lender may not always be a bank. If the mortgage of the property is borrowed from a from a developer’s financial institution, then the owner of that foreclosed property is the financial company.


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Pricing a Foreclosed Property

Some people misunderstand foreclosed properties as those properties without proper legal documents or those with unresolved issues, causing buyers to bear additional risks. They might think foreclosed properties are sold below market value for those reasons.

However, foreclosed properties do not have ownership issues. When the bank repossesses the property, the bank becomes the unit’s owner. There are no hidden worries that could drag down property prices.

However, some of the foreclosed properties are actually transacted below market value. There are some reasons behind a lower price.

1. Economic Downturn

The emergence of foreclosed properties is often due to an economic downturn, where owners are affected financially and have no choice but to default on their mortgage.

The bank will use the property’s latest valuation as the basis for pricing after it repossesses these properties.

The worsening economy causes the latest property valuation to drop below the purchase price. However, this does not mean that repossessed properties will be sold below the market value.

2. Poor Condition

The quality and condition of foreclosed properties vary. Some look like regular homes, while others are littered with garbage and in poor condition. Those with poor maintenance naturally have to be sold at a discount to attract buyers.

3. Overpricing in the Open Market

Foreclosed properties are priced based on their valuation, while property owners selling in the open market can freely set prices.

For the sake of better negotiation, the owners usually set prices 5%-10% higher than the valuation. As a result, foreclosed properties that are closer to market value are considered more reasonable.


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Buying a Foreclosed Property

1. Search for Foreclosed Properties

You can find advertisements for foreclosed properties on auction websites, newspapers, flyers, real estate stores, and even social media groups. The ads will include the auction date, time, and location. Generally, foreclosed properties need to be purchased through an agent.

2. Schedule a Viewing

Before the auction, you can schedule a viewing. Some foreclosed homes are not ready for occupancy, meaning the previous owner did not restore the unit before moving out, and the bank will not clear the unit either.

Some others may be sold with leases, and whether you can inspect the unit is subject to the tenant’s permission.

3. Participate in the Bidding

Once you have found a favourite, you can bid in the auction, which involves open sales or public auctions.

Open Sales

The bank will commission a real estate agent to sell the property, with the price generally referencing market prices. If a buyer is interested, they can bid through the agent by writing their offer in the bidding documents and submitting them to the bank.

This “silent auction” generally has a bidding period, and the bank will sell the property to the highest bidder after the deadline. If all bids are lower than the bank’s reserve price, the bank can re-auction the property.

When bidding, agents usually require buyers to pay a deposit (approximately 3-5% of the offer) to prevent buyers from backing out after winning the bid. Buyers who are unsuccessful in purchasing the property will receive a refund of the deposit.

Public Auction

If the property condition is subpar and no one is interested after multiple bidding rounds, the bank or auction house will auction the property. On the day of the auction, the auction house will commission several surveying companies to conduct property appraisals, and the median appraisal value will be used as the reserve price for the auction.

Interested buyers can bring a deposit and make an open bid on the day of the auction. The winner of the auction is the highest bidder, and they must immediately sign the auction contract. If the buyer’s bid is still lower than the bank’s reserve price, the bank can choose to re-auction the property.

As long as the buyer’s bid is higher than the bank’s reserve price, the foreclosed property will belong to the highest bidder. This is different from negotiating with the property owner, which may involve a lot of back-and-forth conversation.


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Mortgaging a Foreclosed Property

If a unit is foreclosed due to debt issue of the original owner, there should be no difficulty in applying for a mortgage after the new buyer purchases it.

However, if the foreclosed property also has issues such as illegal structures, missing property deeds, and unclear property rights, it will affect mortgage application.

After signing the provisional sale and purchase agreement, the buyer is deemed to have accepted the current condition of the property, and even if any assignment issues arise after signing the contract, the buyer cannot raise disputes with the bank.

If there are illegal structures, most banks will approve the mortgage application after the buyer clears them.

If important documents such as an assignment is missing, the buyer can also try to make a declaration of the lost document and have it re-issued. There is still a chance to acquire the mortgage.

If the documents cannot be retrieved, the bank may not be willing to provide a mortgage. Also, if the titles of the property are unclear, the bank will not approve it either.

Foreclosed properties are not necessarily priced under market prices, and there is a chance that mortgage applications will be affected by unclear titles.

In fact, property transactions under market price often occur in the secondary market. The key to find them is to research. Go to Spacious to view quality listings in various areas.


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FAQ

Does a mortgage bank consider the purchase price or the appraised value of a foreclosed property?

Generally speaking, the bank will compare the two prices and use the lower one as the basis.

How is the transaction period of a foreclosed property determined?

The transaction period is determined by the bank, usually around one and a half months. If a high LTV mortgage is needed, you should submit the application as early as possible.


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