Purchasing and Investing In Foreclosures

When it comes to today’s home-buying and lending markets, there isn’t much in the way of good news. However, there is a flip side to the unfortunate current situation in which many homeowners have found that they no longer can afford their mortgage payments: foreclosures on homes may allow current potential homebuyers access to great home-buying deals.

Individuals who consider purchasing a foreclosed home do so because substantial money can be saved in comparison to buying a home more conventionally. Three of the most common ways to obtain a foreclosed home, either for yourself or for investment purposes are: (1) as a “short sale”, (2) at an auction of a home, and (3) during the “real-estate owned” period.

Short Sales

Short sales are the most common and practical way for people who want to buy homes for themselves to purchase houses in foreclosure. However, this method also works for individuals who want houses for investment purposes. Short sales pertain to homes that have not yet been foreclosed upon, but that are attached to mortgages that are in default with foreclosure imminent.

Selling a home pre-foreclosure allows a seller (the homeowner who cannot afford the mortgage payments) to get rid of the house and the mortgage before having to go through with foreclosure. This also saves lenders the headache of having to try to sell the home after the fact. Individuals who wish to purchase a short sale home will have to come to an agreement with the seller, subsequently approved by the lender, to buy a home.


You might spot a potential short sale rather easily by looking through home listings. If there is a listing that seems significantly cheap in comparison to similar homes, then ask an agent to find out for you if you if it is a short sale. In general, you can save up to 20-35% off the market price of a home by going with a short sale, since lenders are much more interested in obtaining the remaining balance of the mortgage than in owning a home.

To pursue a short sale, it is crucial that you work with an agent who has had experience in this area, because time is of the essence and your role as buyer will not be as traditional as usual. Once you express interest in a home, your agent can find out issues pertaining to the title and whether or not there already is a foreclosure notice, so that you can decide what type of an offer to make on a property.

One drawback to purchasing a home in the pre-foreclosure period is that the lender, who is not a real estate agent, probably will leave it up to you to pay for home inspections, etc. You have a right to home inspections before your purchase, so definitely pay for these and make sure that they are completed.

If you make an offer and the seller accepts it, then it is up to lender to agree or not -- after all, the seller does not stand to gain anything anyway. Your chances for approval will be better if you get pre-approved for your own mortgage. You can reasonably expect a decision within about 2 to 3 weeks, but it might be a good idea to ask for a decision within a certain timeline.

Homes at Auction

Once a house have been foreclosed upon, there is another opportunity to make a purchase -- at auction. Because of the risky nature of purchasing at auction, this option generally should be reserved for those individuals who want to purchase homes as investments, or at least individuals looking for their own homes who have had plenty of experience and/or guidance.

Auctions on foreclosed homes happen all the time, and if individuals do their homework and bid properly, they can save up to 45% off the market price of a home. With such great benefits, however, you can expect great costs too. In this case, costs come in the form of risks.

At an auction, potential buyers all bid against one another in a very fast process that declares the winner the person who has made the highest bid. It is not possible to have the property in question inspected ahead of time. You never quite know what you are getting as far as condition, so it is important when deciding how much to bid on a particular property that you compensate for any potential losses due to repairs.


Additionally, it is up to the winning bidder (new homeowner) of an auction to evict anyone who might be renting (or just living in) the property. While rare, this is a big responsibility and hassle for which anyone bidding at an auction must be prepared.

That said, there are some steps that one can take before an auction to prevent from going blindly into bidding. Once an auction announcement is made, you can have a title search performed on the property. While this may be somewhat expensive, it definitely should be done if you are serious about bidding. If you end up winning at auction, a down payment will be required very quickly -- sometimes that same day -- so you should have a certified check prepared ahead of time.

Probably most importantly, you should have a concrete amount that you are willing to bid to which you will stick. Careful research on the market values of similar properties, and on the amount of profit you may be able to make through investing, can help you to come up with this figure.

REO

The third way to obtain a foreclosed upon home is during the real estate owned, or “REO” period. This is the time period after the foreclosure during which the lender is in possession of the home. The lender’s goal is not to have the home, of course, but to have money, so individuals who purchase these homes may be able to save up to 15% off the market value.

Generally these homes have a clear, lien-free title so they are a relatively safe option. However, the money-saving results will not be nearly as significant as they would be with the other foreclosure-buying options. Purchasing during the REO period usually is done by buyers hoping to invest in homes rather than living in them themselves.