Foreclosures

A home in foreclosure can be purchased at three different stages. We will take a look at each of these stages and the pluses and minuses of buying a foreclosure at each stage.

• Prior to the actual sale (pre-foreclosure).

• At the time of the actual sale ("on the court house steps").

• After the lender takes title (Bank REO - "real estate owned").

Pre-Foreclosure

If the seller, however, owes more than a good price to you would bring, than the seller is "up-side-down" in the property. In other words, the seller owes more than they can sell the property for.

There are two options at that point: First, you could increase your offer price so that you give the seller enough so they can pay off all liens on the property. By all liens, I am referring to the first mortgage, any second liens - such as an equity line of credit, judgments, unpaid real estate taxes, and any income tax liens.

Second, you could attempt a "short sale". In essence the seller is "short" of having enough money from your offer to pay off what is owed against the house. Today, banks and other creditors are considering reducing the amount owed in order to avoid a costly foreclosure process. So it is possible to buy at your price under the terms of a short sale. See our section on Short Sales for more detailed information on buying a foreclosed home using a short sale.

How do you find such a deal? Sometimes the property will be listed with a Realtor and is being marketed as "need a quick sale", "motivated seller", "short sale opportunity", or other advertising message that indicates the seller may be in trouble and is willing to sell below market to move the property quickly.

Another way to find such a property is to look for "for sale by owner" advertisements. Many sellers in a potential "up-side-down" situation may attempt to sell on their own to avoid the cost of a real estate commission. You will find these ads in local newspapers, pennysavers, and on craigslist.com.

At the Foreclosure Sale

Often, such a sale actually takes place, "on the court house steps". Someone announces that the sale is about to take place at the prearranged and published time and place. They then start taking bids. Generally it is an open auction with the property going to the highest bidder.

If the bids don't exceed a certain minimum amount that the bank has determined ahead of time, the bank itself bids. If no one out-bids the bank, the bank ends up owning the property. If you are the lucky bidder, you now complete the transaction and you then own the property.

CAUTION: Here are two things to keep in mind and watch out for:

• Other liens - It is possible that the property has other liens on it besides the first mortgage. Some of these will automatically get extinguished as a result of the foreclosure sale. These liens would include second mortgages, equity lines of credit, mechanic liens, and judgments.

  Other liens aren't extinguished and you are taking title subject to them, meaning that you now will owe them as they remain as valid liens against the property. These liens include real estate taxes and federal or state income tax liens.

  You need to have a title company run a title report against the owner and the property to see what other open liens there might be. Or, you need to go to the local County Clerk's Office, where legal documents are recorded, and check on the status of other liens yourself. Most County Clerk's Offices are very helpful and will be able to guide you through the process so you can easily find the information yourself.

• Bid Requirements - Be sure you find out exactly what the bid requirements are.
  • You may have to register before-hand if you are contemplating bidding.

  • You need to know what the down payment requirements are and how long you have before the balance of the money has to be paid.

  • You need to also understand that you are taking title subject to certain liens as noted above. Know what liens will still be on the property. For example, there may be real estate taxes still due on the property. Know how much they are and figure that into your cost.

  • You need to understand that you are taking title to the property "as is". Your bid won't be subject to a home inspection or repairs of any kind.

  • Chances are you won't be able to inspect the home before bidding. Technically, until the foreclosure sale is completed the previous owner is still in title and controls the property. If they have moved out the bank may have access to the property and thus the ability to allow pre-inspections. So you are buying somewhat in the dark. The property could have frozen pipes, missing fixtures or heating units, or other items requiring major repairs. Often, when people lose their homes or are about to, they remove items and damage the home on their way out in anger.

After the Foreclosure Sale

However, with that said, it sometimes doesn't appear that way when a reasonable offer is made and the lender ignores the offer or comes back with a ridiculous counter-offer. None-the-less, the lender does have some motivation and you should be able to buy such a property below market value.

Most banks will list their REO's with a local real estate agent so that it gets marketed through the MLS, Multiple Listing System. That gives the property the greatest exposure to the marketplace. So, generally, you will find bank owned property in the local MLS. Ask your agent to search specifically for bank owned property in the MLS.

Keep in mind that the property may be in terrible shape and for the most part you take it "as is". As noted above, the original owner may have done a lot of damage as they moved out. They are angry at their misfortune of losing their home and sometimes take it out on the home itself. I saw one home where the prior owners stripped a home of all its plumbing, electrical and lighting fixtures; all the kitchen and bathroom cabinets and counters; the heating and A/C systems; all the appliances; and a lot of the landscaping - trees and shrubs.

Generally the lender will allow you to make an offer subject to getting a mortgage. You may not be able to get a conventional mortgage if the home needs too much work. You may have to consider a special FHA 203K loan that gives you money for the purchase as well as for the costs to fix the home up.

You also should be able to make the offer subject to having home inspections. However, do not expect the bank to make any repairs or give you a repair credit. You are buying the property "as is". The home inspection contingency should allow you to cancel the contract if the home needs too much by way of repairs.

Click here to return from the "Foreclosure" page to the "Buying a Foreclosed Home" page.