Buying a foreclosure can be a smart move. There’s no better way to get a rock-bottom price for a new home unless your favorite uncle leaves one to you or you’re being absolutely swindled. You can buy a home in pre-foreclosure, at a foreclosure auction, or from the mortgage lender. But even if you are able to take advantage of the opportunity, buying a foreclosure requires some extra effort, research and patience.
First of all, what is foreclosure? It’s a situation where the bank, a mortgage company or other lien holder takes a property from the owner to satisfy a debt. The bank or lender takes ownership of the property and usually sells it immediately to pay off the debt. The owners lose all rights to the property, including any and all of the investment they’ve put into it. Foreclosure tanks your credit report and is usually the result of whoever owned the property being in a very bad financial situation. So, if you’re dealing with the people being kicked out of their own house, try to be nice. This is probably one of the worst times in their lives.
However, if you’re dealing with the lender, the foreclosed property is probably one of many on the books, so you may be dealing with an officer who knows nothing about the property and doesn’t consider selling it a high priority. This may drive you crazy, but just remember, aggressiveness and patience are the keys to getting through this.
Here are the 3 situations you can buy a foreclosure:
Stage 1: Pre-foreclosure
At this point, the property owner has been given legal notice that the foreclosure process is about to begin. If the owner can’t cure the default and get the loan back into good standing, the only way to avoid foreclosure is to sell the property before the mortgage holder takes it away.
Buying a property in pre-foreclosure involves approaching the owner — usually before the property is listed for sale — and offering to buy it outright. The right buyer at the right time can salvage a terrible situation, giving the owner something to show for his equity and saving his credit score from that foreclosure hit. Time, and a smooth transaction, are of the essence. Read more about buying a pre-foreclosure property.
Stage 2: Foreclosure auction
If the owner can’t manage to hang on to the property, it will probably go up for sale in a foreclosure auction next. Successful bidders usually have to pay in cash at the time of purchase, and there’s not much time or opportunity to research the property beforehand.
A foreclosure auction offers some tempting bargains — but the buyer assumes all risk of anything going wrong with the title, condition or any other aspect of the property. It’s a big bet to make, and not for the faint of heart. Read more about buying at a foreclosure auction.
Stage 3: Bank-owned property or real estate owned (REO)
In contrast to the urgency of the earlier two stages, patience is essential for buying lender-owned properties. Once the mortgage holder takes ownership of the property, their eventual goal is to sell it to make back the unpaid loan amount.
Eventual is the key word here. Between clearing the title, performing necessary repairs, following the complexities of state-to-state foreclosure regulations and dealing with the many other foreclosed properties on their slate, lenders can move maddeningly slowly from a buyer’s perspective. If you’re in a hurry to buy, this might not be for you.”