The Facts of Buying on Foreclosure

Posted by    |    April 25th, 2012 at 5:15 am

It’s plastered all over the media, from network news to late night talk; the number of foreclosures nationwide is at a historic high.  According to Realty Trac over 198,000 new foreclosures hit the market in March, 2012.  And although the number of foreclosed homes is beginning to decline, we are hardly out of the woods when it comes to the number of homeowners affected by the mortgage crisis.  That translates into deals to be had for buyers who are recognizing the potential savings of buying a home on foreclosure.  However, when it comes to foreclosures, price points can be deceiving.  If you’re considering buying a foreclosed property don’t lose sight of the big picture.  Do your research and know the ropes. The following may help you see the forest through the trees.

There are three stages of foreclosure and the stage at which a buyer gets involved can have a tremendous impact on the success of the transaction.

Pre-foreclosure

Being in pre-foreclosure means a homeowner has sent up a flare letting the bank, real estate agents and potential buyers know they are in distress and may be considering off-loading their property to avoid the long term negative effects of going into full foreclosure.  Locating these property owners can be a lucrative business, but the best place to start can be your county clerk’s office where “Notice of Default” reports must be filed by lenders in order to initiate the foreclosure process.  There are also various online pre-foreclosure listing services that can be of value if you’re willing to pay the access fee.  However, keep in mind the lag time between public posting of pre-foreclosure status and when it appears on the listing site.  It may be several days to weeks, and if you’re serious about getting your piece of the foreclosure pie, time is of the essence.  Saving a buck usually means doing some serious leg-work on your own.

So you find a distressed homeowner and approach him regarding the possibility of purchasing his home.  You visit the property and find it in a state of disrepair.  It makes perfect sense; if a homeowner cannot make his mortgage payments, he has most likely also not been able to do necessary maintenance and repairs on his property. Buyer beware:  the money you save on the purchase price may be eaten up by the repair costs associated with bringing the property back to life. 

Auction

Public auctions are held in hopes of securing a buyer for a bank owned property so that the bank may avoid the costs associated with repossession and having to list the home with an agent on the open market.  If you wish to purchase on foreclosure it would be wise to attend an auction to witness firsthand what its all about.  Buyers must come prepared to buy.  That means a cashiers check and the guts to wave it in front of the government official conducting the auction.  It is not for the faint of heart and can mean forking over a substantial amount of money in a very short period of time.  If you go this route, make sure you know what you’re getting yourself into.  Have you been by the property?  Done a title search?  Hired an inspector?  Determined market value?  Do the research, set your maximum bid and stick to it.

REO

Real Estate Owned property is property that has not sold at auction or has been repossessed by the lender with the intent of listing it on the open market in hopes of obtaining a sales price closer to actual market value rather than the amount needed to pay off the loan.  In this stage, properties are often listed by agents who work with banks and know the ins and outs.  If you see an REO home you like, make sure you’re working with a knowledgeable agent.  Often, because of the parties involved, this type of foreclosure sale is best for buyers.  You may not be able to brag to your friends about the killer deal you snagged, but at least you will be able to sleep at night knowing the bases have been covered.

The bottom line? 

The basic rules of real estate apply to buying on foreclosure:  do your homework and research the properties in which you are interested.  Know your budget and the costs involved with these types of transactions.  If you’re unsure of the next step seek assistance, and realize no deal is worth your losing your sanity.  Are there deals to be had?  Of course, but only if you keep your eye on the big picture.