Buying foreclosed property offers opportunities for investors and potential homeowners. These properties usually sell below market value. This means that investors may be able to realize a greater return on investment, and potential homeowners may get more house for the dollar along with equity right from the start. However, there are several factors to consider before purchasing a foreclosed property.
Purchase Opportunities: Preforeclosure, Auction and REO
Properties can be purchased at different stages of the foreclosure process. Some properties are on the cusp of foreclosure, and they are being offered for sale below market value or even below the loan balance. A purchase at this point is known as a preforclosure sale. You can also purchase property at a foreclosure auction, where the property will go to the highest bidder. Finally, you can purchase property that is owned by the lender, which is known as real-estate owned, or REO, property.
Preforclosure Sale Considerations
A lender must provide notice to the borrower of default, and then a notice of sale. This process usually takes three to six months. Sellers will be particularly motivated during this time to sell the property, and buyers may be able to get the property below market value. Complete a title search to ensure there are no unexpected liens. Check for late taxes and bankruptcy filings. The seller needs the lender's consent to accept a purchase price that is less than the loan balance -- called a short sale. Short sales can take a long time for approval and it is best to hire a real estate agent with experience in this type of purchase.
Auctions: Opportunity and Risk
You can often obtain property at auction below what you may pay during a typical real estate transaction. You may be bidding against the lender who may bid on the property to protect the value of its lien -- called a credit bid. A bank has the right to make a credit bid at or below the loan and foreclosure-associated costs, such as legal and inspection fees. When buying a property at auction, you will not know much about the property except what you can gather by looking at the exterior features. Properties at auction are usually sold "as is," for cash and with no right of inspection. Be careful and reserve some cash to take care of problems with the property. If you have no experience with this type of purchase, hire a real estate agent to help you.
Compared to foreclosure auctions, purchasing a bank-owned property is a safer proposition for a potential homeowner who is not experienced with real estate purchases and investments. You will be able to make offers and counteroffers like a normal real estate purchase transaction. You will also be able to finance the purchase and can make the purchase contingent on financing and a successful inspection. The process takes longer than a traditional real estate sale, but sometimes you can get REO properties cheaper than you can at auction.
Shawn M. Grimsley holds a bachelor's degree in political science, master's degree in public administration and a Juris Doctor. He practiced law for 10 years, focusing on general business law, securities law, real estate and civil litigation. Grimsley now serves as a teacher and writer.