Buying a Home in Foreclosure

You may be able to purchase a home at a major discount if you are buying a home in foreclosure. Keep in mind that there are potential downsides, so be sure to do your homework.

According to RealtyTrac.com, an informational website about foreclosures, a homeowner can save from 20 to 40 percent off the market price by purchasing a home that is in foreclosure. The home is for sale by the bank or lender to recoup the money that is still owed on the property.

If an owner defaults on their home loan they usually have two to three months between when they are notified that their payments are in default and when the foreclosure actually happens. During this timeframe, called pre-foreclosure, the owner may be interested in selling the home to avoid having the negative impact of the foreclosure on their credit report.

You can find these "pre-foreclosure" houses on many foreclosure lists. These lists are compiled from public information filed by the lender and then recapped into searchable websites such as RealtyTrac.com and from the local office of the National REIA.

The advantage of purchasing a pre-foreclosure property is that you can usually finance the purchase with a home loan – no need for a cash sale. Another advantage is that you can inspect the house before you make your offer.

The location of the auction varies from state-to-state. Usually the auction is held either at the courthouse or outside the property being auctioned.

Auctions have higher risks when buying a home in foreclosure because:

• You cannot inspect the inside of the home before you make your bid
• You have to pay in cash
• You may have to evict the previous owners if they refuse to move out

Buying a home from the lender is usually less risky than an auction because:

• You can inspect the inside of the property
• You can pay for the house with a mortgage
• You can demand a title search before the sale is closed

Buying a home with a big savings can be very appealing. Before you consider this as an option for home buying you should also review the negatives to this type of transaction:

• You may not be able to finance the home. You may be required to pay cash.
• Some states allow the original homeowner to buy back the property by paying whatever money they still owe. For example, in Tennessee the buyer has two years to buy back the home.
• You usually buy the home "as is" so you could end up purchasing a home that requires a lot of costly repairs.
• If you don't check the title, you could end up buying a property on which loans or liens need to be paid.

The key to a successful purchase of a foreclosed property is to follow some key steps.

The two best sources for foreclosures are the foreclosure websites and the newspaper for the city in which the property is located.

The lender or owner will often try to tell you the market value of the home. They may not know the true value or they may be inclined to overestimate the value. To get an accurate value, hire a professional appraiser. They can do a drive-by appraisal if you are not able to get into the house. The drive-by appraisal, combined with the recent sales prices of comparable homes in the area, will provide you with an accurate appraisal.

When you buy a home in the pre-foreclosure or foreclosure process you will probably be responsible for paying off any outstanding loans or liens that exist on the property. It is important to know the total cost of paying off these loans or liens so that you can consider this expense when you are deciding what to offer on the property. You don't want to buy a home with a $300,000 market value for just $15,000 and then find out that you also have to pay off a $295,000 second mortgage before you can take ownership!

You can identify outstanding loans and liens by searching the title records of the property at the county courthouse.

Usually the seller of a foreclosed home will require the buyer to either be pre-qualified for a loan for an amount equal to, or more than, the price of the home. To buy at an auction, you will need to have cash for the full price of the home.

Buying any home can be confusing if you don't have any experience in purchasing real estate. Buying a foreclosure can have added difficulties. A Realtor or broker can be very helpful and will help you identify the questions to ask and will make sure that your interests are protected. The Realtor will charge you a commission for services rendered. The commission is negotiable, so talk with your Realtor about commission before you sign a contract. Be sure to find a Realtor who has experience in foreclosures since the paperwork and processes are more complex than a regular property purchase.

The seller could be the owner, a trustee or the foreclosing lender.

If you are interested in buying a home directly from the owner while it is in pre-foreclosure status, the property owner may or may not be represented by a Realtor. It is usually best to have your Realtor contact the owner since Realtors have experience in dealing with the often-emotional issues encountered when dealing with an owner facing foreclosure.

If the home is in foreclosure, the contact information for the property will be contained in the public information that is released about the property.

A foreclosed home is sold "as is," but you will probably not be able to inspect the interior of the house before you make your offer. Be sure to consider any potential repair costs when you determine the amount of your offer.

If you are interested in purchasing a pre-foreclosure home, you will make your offer to the homeowners. If they are using a Realtor, your offer will be delivered to the homeowners by their Realtor. Your initial offer should be somewhere between the base purchase price (amount owned on the home plus any loans or liens that need to be paid off plus any repairs that need to be made) and the market value.

If a home has already gone into foreclosure, the home may be sold at an auction. Oftentimes these auctions are held outside of the courthouse in the county where the property is located. You, or your agent, may be bidding against several bidders for the same property. You will need to have a certified check for at least the amount of the sale. If you have never purchased a home at an auction, it might be wise to attend several auctions to get an understanding of the process before you start bidding.

If the home is owned by a bank or lender, but it is not being sold at an auction, you will need to contact the banker or lender directly. The bank may have assigned a listing agent for you to contact or you may have to contact a specific individual or department.

Homes that received government-guaranteed financing can also be foreclosed if the owner does not make the monthly payments. A local real estate agent will probably be aware of any homes in the area that have been repossessed by the government due to non-payment of the loan. The government requires a government-approved broker to write the purchase agreement.

Be sure to make a full title search a requirement before the deal is closed. You don't want to be surprised and find out that the house, or part of the property, is owned by someone else!

Enjoy your new home and your savings.

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