With home prices dipping to all-time lows, it's a good time to buy, and an even better time to buy foreclosed properties. However it is not as easy as just going on a few tours and picking out a home.
"Foreclosure" is the term that describes the legal proceedings that take place when a lender has notified the courts of a borrower's default on their mortgage loan, which may ultimately result in an attempted foreclosure sale of the property. At any point during the foreclosure process, from when the borrower first defaults on the loan to after the foreclosure sale, you may be able to purchase the home at substantially less than market value. Although it is a process, much like buying any other home, it is a little different with plenty of pitfalls to avoid along the way.
Where you can buy in the foreclosure process
There are 4 points during and after foreclosure that you might be able to scoop up a good deal:
- From the homeowner in default. This is often the most desirable point to purchase a foreclosure, because you'll be dealing directly with the homeowner at this stage. This time period is also referred to as "pre-foreclosure".
- As a Short Sale. When the homeowner is in default, the bank is often willing to sell the home for less than the remaining amount of the current mortgage only if the purchase will be more cost-effective than the foreclosure proceedings and resulting resale.
- At a foreclosure sale or auction. Once a home has reached the official foreclosure date (as established by the court or power of sale), it will be put up for sale in a foreclosure auction. People will be allowed to bid on the property which may result in a great deal on the price. However, you'll run risks that a proper home inspection prior to the sale will not occur.
- As a Real Estate Owned (REO) property. If the foreclosure did not result in a sale, the property then gets labeled "Real Estate Owned", basically meaning there is no longer a mortgage involved and the bank or lender is the official owner of the defaulted property.
The 2 types of foreclosure sales
There are two types of foreclosures, which is generally determined by whether the loan was a mortgage loan, or involved a power of sale or deed of trust. The type of foreclosure determines how the property will be sold, and may also be influenced by the state's foreclosure laws.
- Judicial Foreclosure: Depending on your state's laws and the type of mortgage involved, the property may be put up for sale in a Judicial Sale. A Judicial Foreclosure means that the court is involved in supervising the sale. A Judicial Sale may also go by the name of a Sheriff's Sale. The highest bidder that meets court approval will become the owner of the property, with proceeds going to satisfy the mortgage first, then lien holder and finally, borrower if any is left over.
- Non-Judicial Foreclosure: If a power of sale (a clause that allows the lender to sell the property if it the borrower defaults) or deed of trust (mortgage involving 3 parties: lender, Trustee and borrower) is used in the mortgage, the foreclosure can then be handled outside of the court system, by the mortgage holder or Trustee (then called a Trustee sale). The auction will be open to all bidders, and typically the highest bidder who can also meet all the requirements established by the lender/Trustee will become the new property owner.
About the foreclosure auction
A foreclosure auction is just that - an auction for foreclosed homes. It's as fast-paced and difficult as an auction for antiques. Whether the auction is a judicial auction or non-judicial auction, they function basically the same.
When preparing to join in the splendor of a foreclosure auction, you need to make sure your financial documents and records are all prepared and in order. Many times pre-qualification mortgage approval letters are required to gain access into an auction. Remember, these homes already went into foreclosures once and banks are not interested in the next round of owners repeating the cycle.
Before the foreclosure auction, research the properties you are interested in thoroughly. Leave no stone unturned when it comes to investigating the comparable prices of neighboring properties, the school districts, the closest fire department and hospital. You should also consider any developments that may be going up in the neighborhood you are interested in, as well as know the condition of the surrounding area.
How to succeed at foreclosure auctions
The key to being successful at a foreclosure auction is knowing the properties you are interested in, sticking to your budget, and rolling with the punches. You are more likely to have access to inspecting the property if it is a non-judicial sale than a judicial sale.
Pitfalls of buying foreclosed homes
If you are getting the itch to invest in foreclosure, please consider the following dangers:
- Ending up with "money pits" that require a never-ending stream of cash to repair
- Having to evict tenants who do not plan on leaving without a long, tiresome battle
- Non-savvy consumers new to the foreclosure process may unwittingly purchase homes that are saddled with substantial tax burdens that they will become responsible for
- Home-buyers are finding it increasingly difficult to secure home loans, thus increasing the time you will need to be saddled with your foreclosure investment property
- Potentially buying the property unseen and without an inspection
- The defaulted owner may have retaliated and damaged the interior of the home before vacating
The bottom line
Getting a home that has been foreclosed is tricky. You could find a diamond in the rough or just find yourself saddled with a home that is not livable. Take the process slowly and make sure to do as much research as you can.
