Buying Homes In Foreclosure: An Introduction To Your Options

The 2008 recession continues to have at least one silver lining. Although real estate prices have begun to recover, foreclosed homes offer people a unique opportunity to find a good home at a very low price. More private individuals are turning to buying homes in foreclosure to capitalize on this chance at affordable, high-quality housing and property investment. But the process of picking up a foreclosed home is more complex than with a regular sale. So it’s important to understand the pros and cons of buying foreclosed homes and to have an idea of where to find expert advice about the process.

There are a few different types of foreclosure properties you can purchase, and each has its own advantages and disadvantages.

Government-owned Foreclosed Homes

These are often the most inexpensive options, especially relative to their value. Although these tend to be maintained by private banks, the Federal Government oversees the process and encourages banks to sell quickly, offering more flexible financing options to make these homes easier to buy.

On the other hand, the buyers of these homes take on many of the financial obligations to which the property remains tied, including hassles like IRS liens for unpaid property taxes. These obligations should be cancelled as part of the sale, but if another bank also has a claim to the property, it’s up to you to identify all these financial risks before you close on the deal. And because the Federal Government owns so many foreclosed homes, there’s no absolute guarantee that the bank will meet its maintenance responsibilities.

Foreclosure Auction

In an auction, you can get a home for a significant discount because the lowest price is usually the outstanding mortgage balance. Furthermore, high cash requirements mean you don’t face as much competition as for other foreclosed homes where anyone eligible for financing has a shot.

However, no inspection is allowed and the buyer certainly takes over all financial obligations tied with the home, such as back taxes. This makes researching a property essential before bidding on it at auction. And of course, you have to have a foreclosure auction expert represent you so you do everything right and comply with rules.

Pre-foreclosure Stage

Homeowners who have missed payments or received a notice of default (NOD) are called motivated sellers because they want to sell their house before going through foreclosure. This means it’s possible to get a home at a significant discount. The process is relatively similar to buying any home, where the buyer has some time to conduct due diligence before the deal closes and the seller is obligated to provide a property history. Some sellers even can be convinced to do repairs as necessary if there aren’t enough buyers.

But the outstanding mortgage balance usually determines the price floor, and sometimes the lender holding the seller’s mortgage has some say in the final sale price. Also, this kind of short sale typically takes more than a month to close, and then the seller has to move out before the buyer can utilize the property.

If you want to look into buying homes in foreclosure, you should investigate properties in these three categories. Of course, the stages and requirements for buying a foreclosed home are unique and complex. If one of these options is appealing, be sure to read more about the process for meeting these requirements and qualifications.

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Jeffrey Davidson is a writer with Reply!. He has more than 25 years of marketing research, public relations consulting and freelance writing experience and work in all areas of real estate. For more help, see his article on buying homes in foreclosure.