Foreclosure Information

Buying Foreclosure Properties

The foreclosure market is ripe with opportunities. But before diving in, homebuyers and investors need to be aware of the potential pitfalls. Learn how to search for foreclosures, calculate a property’s income generating potential and protect yourself from falling into a money pit.

  1. Understand the Foreclosure Process

    Foreclosure is a process that allows a lender to recover the amount owed on a defaulted loan by selling or taking ownership (repossession) of the property securing the loan. It begins when a borrower/owner defaults on loan payments and the lender files a public default notice or a lis pendens (Latin for “lawsuit pending”), depending on the state.

    Ultimately, the foreclosure process can end one of four ways:

    • The borrower/owner pays off the default amount to reinstate the loan during a grace period known as pre-foreclosure
    • The borrower/owner sells the property to a third party during pre-foreclosure, allowing the borrower/owner to pay off the loan and avoid having a foreclosure on his or her credit history
    • A third party buys the property at a public auction at the end of the pre-foreclosure period
    • The lender takes ownership of the property, usually with the intent to re-sell. The lender can take ownership through an agreement with the borrower/owner during pre-foreclosure or by buying back the property at the public auction.

    Read the Advantages and Disadvantages of Buying a Foreclosure.

  2. Choose a Foreclosure Stage You’re Comfortable With

    video thumbnailThere are different stages in the foreclosure process, and each stage offers unique advantages and disadvantages for the buyer. For instance, some buyers prefer buying bank-owned properties because they’re uncomfortable dealing with distressed homeowners.

    Read more about the three bargain-buying opportunities:

    Read The Three Faces of Foreclosure Buying.

  3. Contact a Real Estate Agent

    If you’re a first-time homebuyer and you’ve never purchased a home, let alone a foreclosure property, a good real estate agent can be a helpful resource and guide you through the process of buying a foreclosure and drawing up a purchase agreement. Make sure they know your priorities.

  4. Find Foreclosure Properties

    The easiest way to find foreclosures is to subscribe to online listing services or work with an agent or lender. You can also look for notices of defaults and auctions in public records and local newspapers.

    • Look for notices of defaults and auctions in public records and local newspapers.
    • Research “foreclosure” on the Web and subscribe to online listing services like RealtyTrac.
    • Work with a real estate agent who specializes in foreclosures.
    • Market yourself as an investor offering “cash” for property.
    • To find bank-owned houses that aren’t listed with an agent, contact the lender for information.
    • Network with real estate investors in your area.
  5. Check the Property Liens

    A lien is a legal claim on a property by a lender or other entity that is owed money by the owner of the property. In addition to the outstanding mortgage balance, buyers need to be aware of other liens, which can drive up the purchase price. Examples include outstanding property taxes and unpaid repairs or remodeling done by a contractor. For tips on how to check liens, read how to check property liens.

  6. Do the Math

    Calculate how much you’ll need to sink into the property, outside of mortgage and tax payments. Necessary renovations, upgrades and other expenses can pile up and eat into your profit margin.

    Use the return on investment calculator to determine your potential IRR (internal rate of return) on a property.

  7. Research the Local State Foreclosure Laws

    California and Texas, for example, follow non-judicial foreclosure process, which means that lenders are not required to go to court or file a lawsuit to repossess a home. Other states like New York and Florida require the lender to sue the borrower and get a court order to sell the property.

  8. Find Financing

    Whether you use cash, a home equity line of credit, resources from other investors or mortgage products, secure the money for your purchase in advance. Sellers only want to work with serious buyers who are ready to buy quickly. You could miss an opportunity if you don’t have your financing in place.

    • Determine how much you can afford. How much you can afford depends on the amount of cash you have on hand and the amount a lender is willing to loan you based on your credit rating, income and other factors. Use this calculator to see if you can afford the property.
    • There are two rules of thumb:
      • You can afford a home that is up to 2.5 times your annual gross income
      • Your monthly principal and interest payments should equal one-fourth of your gross pay, or one-third of your take-home pay
    • Try our mortgage calculator.
    • Not all lenders finance foreclosure properties, so you may have to shop around for a lender who does.
    • Work with a lender who understands the foreclosure process, and can guide you through certain steps, such as ensuring that a property is FHA-compliant.
  9. Know Who to Contact and How to Approach the Owner

    Depending on the property status, the seller will be the owner in default, the trustee (the person or party who is filing the paperwork to initiate and carry out the foreclosure), or the foreclosing lender.

    Pre-Foreclosure Properties

    During this stage, you’ll need to deal directly with the homeowner, who may or may not know that their home is being foreclosed. Homeowners in foreclosure are also under a lot of stress, making it difficult to negotiate a mutually beneficial deal. There may be very little time to complete a transaction, so be very careful during this period. For tips, read working with distressed homeowners.

    Once you work out a deal with the homeowner, you have to convince the lender to do a short sale.

    If all goes well, the owner can walk away with something to show for any equity in the property and avoid a bad mark on his or her credit history, and you can realize discounts of 20 percent to 40 percent below market value.

    Read How to Buy a Pre-Foreclosure Property.

    Properties to be Auctioned

    Before the auction, try working out a last-minute deal with the owner in default. Usually a property is scheduled for auction just a few weeks before the auction occurs, so move quickly if you want to contact the owner.

    Auctions can be postponed or canceled anytime, so contact the trustee or attorney to confirm the auction details after you first locate the property and on the day before the property is scheduled for auction.

    Read How to Buy a House at a Foreclosure Auction.

    Bank-Owned Properties

    During this stage, a lender now owns the property and sells it to recover the unpaid loan amount. The lender typically clears the title for any buyer. You may not get a steep discount, unless the bank is motivated to sell because of high inventories of REO (Real Estate Owned) properties.

    Typically, a lender hands off its list of bank-owned properties to a real estate broker that lists it on the MLS. In these cases, contact the listing agent directly. If the house is not listed, contact the lender and ask for the REO department, bank-owned homes department or asset management department.

    Read How to Buy a Bank-Owned Property (REO).

    Government-Owned Properties

    Many homebuyers get government-guaranteed financing. When homes that were bought with loans guaranteed by the Federal Housing Administration (FHA) or Department of Veterans Affairs (VA) go into foreclosure, they are repossessed by the government and then put up for sale by brokers that work for the government. Buyers who are interested in purchasing government-owned foreclosures need to use government-registered brokers to write the purchase agreement.

    Many government-owned properties are already listed with a real estate agent. If you can’t find contact information for the listing agent, contact the government agency or a local real estate broker who specializes in REOs.

  10. Make an Offer

    Usually the offer amount is somewhere below the market value but above the total outstanding liens and estimated repair costs. If the property is a pre-foreclosure or bank-owned, you could prepare an offer similar to a typical purchase offer, contingent on a full inspection and title search.

    If the property is selling at auction, you will need to make your offer, or bid, at the auction. In many states, bidders are required to pay in cash in the form of a cashier’s check at the auction. You probably won’t be able to conduct a full inspection and title search when you buy at an auction, so it’s important to do careful research beforehand.

Information from HGTV’s Front