The basics of buying a foreclosed home

The current market conditions make it a great time for investors to purchase a foreclosed property for private residence, rental or flip. Buyers can save anywhere between 10% and 40% off the market value, but some homes need repair. 

Foreclosure numbers are growing every day. There are about 120 million homes in the U.S., and 4% of them, or 4.8 million, are facing foreclosure. Of course, some of these homeowners are able to get out of debt, however, according to MBA there were about 500,000 homes that went through foreclosure last year. 

What is a foreclosure?

Foreclosure is a process in which the estate becomes the absolute property of the lending institution. It begins when the homeowner fails to make mortgage payments at the appointed time due to unemployment, divorce, new terms of the loan, etc. The defaults give the lender the right to repossess the home and sell it in order to cover the debt.

In today’s uncertain economic climate, more and more upscale homes go into foreclosure. So it is not true that foreclosed homes are only available in crime-ridden areas. You can also find nice houses in a good condition located in different parts of the country.  

Find a foreclosed property  

There are many places to browse when you are looking for a foreclosure home. First of all, consider the Internet. There are dozens of websites that specialize in foreclosed properties, such as foreclosures.com, foreclosure.com, realtytrac.com, foreclosurepoint.com, etc. They charge monthly subscription fees for access to their databases.

You can also find foreclosed properties in newspapers, newsletters, real estate agents, lis pendens lists, seminars, direct mail, word of mouth, friends, and lending institutions just to name a few.

Three ways to buy

Basically, there are three ways to buy a foreclosed property: in a presale (before the home goes into foreclosure), at a public auction or directly from the bank. All ways require homework, patience and often some luck. 
•    Presale
A presale, or pre-foreclosure, involves just you, the homeowner, and in some cases the lender. Even though the discount can be very attractive – from 20% to 40% off the market value, a presale is considered a high-risk way to purchase a foreclosed home: deals often fall through or the buyers face title problems. And you also need to take into consideration additional costs like a property inspection.
•    Auction
Buying at a public auction is the most popular way to purchase a foreclosed house. The property is sold to the highest bidder. Typically, you can get from 10% to 25% off the market value. However, if you buy a foreclosed home at an auction, you'll have to put up the entire purchase price the same day and you usually can’t inspect the property beforehand. 
•    Buy from a bank
If nobody buys a property at the public auction, it usually ends up back with the lending institution. Banks have a lot of foreclosed properties in their portfolios and are actively trying to sell them through real estate agents. Buyers can often get highly competitive mortgage loans, with low down payments and attractive interest rates. Plus, when you buy a bank-owned property, you can inspect it beforehand. 

However, banks aren't necessarily selling foreclosure properties at low prices. Some homes are listed at market value, so be prepared to haggle. The bigger the inventory of foreclose the bank has and the longer the property is on sale, the more chances you have to get a significant money-saving discount.