If you’re in the market for a new home, purchasing a foreclosure may look appealing. Although it may be easy to find a listing in a neighborhood that would otherwise be out of your price range, don’t be fooled by what may seem like a great deal. In 2012, a few San Diego homes for sale weren’t up to code but passed a permit check anyway. One home had mold and needed to be condemned after it was bought on foreclosure.

If you’re looking for some assistance in pursuing this process, here is a guide on how to buy a home in foreclosure:

There are three main ways to buy a home in foreclosure: pre-foreclosures, public auctions, and bank-owned sales.

1. Pre-foreclosures

There are both pros and cons in choosing this route when investing in a foreclosed property. If you can contact a distressed homeowner before or when their troubles become public knowledge, you will be ahead of the competition and in a place where you could work out a great deal.

However, you are still approaching a homeowner when they are at their lowest point, or even still in denial of the obstacles ahead. Many people facing foreclosure are warned to be cautious of strangers trying to approach them with quick fixes, which should be something to consider. Even though involuntarily selling one’s house can be extremely unsettling, a fair offer can at least create a path to financial recovery.

If you want to avoid direct contact with a distressed seller, you can also go the route of a short sale. Such homes are priced below what the owner owes on the mortgage and need to be approved by the bank. The benefit is that you have a good opportunity to make an offer without having to engage the seller directly. However, once the house is on the market, you are in competition with everyone else that is looking for a deal. To increase your chances of your offer being accepted, do a thorough market analysis of what comparable homes have sold for and bring proof of your research along when you make the offer.

2. Public Auctions

This can be a very irresistible option. You can find the house of your dreams, approach the courthouse steps, and bid whatever amount you think the home is worth.

Unfortunately, public auctions coming from the foreclosure process rarely present easy pickings. The general process is that the homeowner is sent a “notice of default” and is given a certain amount of time, which is usually 90 days, to “cure” the loan and bring payments up to date. If the homeowner fails to do so, the bank sues to repossess the house, and the court or a trustee auctions it off to the highest bidder.

The requirement in this process is that the highest bidder must offer at least one dollar above what the bank is owed on the property, then must make a nonrefundable deposit (usually between 10 and 15 percent) and arrange financing within 30 days.

In some cases, the owner may have one last chance to “redeem” the property, paying off the entire loan amount plus all of the fees and expenses. These types of situations are rare, but should be taken into consideration.

Some foreclosures also extinguish junior-level liens, such as second mortgages, credit card debt, etc. Others require the new owner to pay off mechanics’ liens, like the money still owed to the repairman that fixed air conditioning or heating appliances recently. Make sure to be prepared for any of these situations when attending an auction for a foreclosure.

3. Bank-Owned Sales

By the time the homeowner has been evicted and the house foreclosed, many would-be investors have already had and passed up their chance to buy the house. The bank then hires an outside real estate agent to put the house on the market, usually for slightly less than what was originally owed on the mortgage. The would-be investors then circle back, seeing a potential deal. Many will continue to low-ball the bank, considering now they are offered the freedom to tour the home and take all the steps necessary to make an informed decision.

Many abandoned houses will often sit on the market for months, or even years or more, until someone finally hits the bank’s target price. The best strategy for getting the bank to sell is to offer a fair price and back it up with evidence of all the research you’ve compiled to get there.


Robert Gombos

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