Buying Foreclosures: Are They Really Great Deals?

When people want a bargain, they think “foreclosure” and while it’s true you can get great deals that is not always the case.

To really understand foreclosures, you must first realize that the term "foreclosure" is used generically to represent all three types of foreclosure properties, all of which have their own advantages and disadvantages and are purchased differently.

Below I briefly discuss the three types of foreclosures. 

Pre-Foreclosure

Once the homeowner has received a Notice of Default (NOD)  the foreclosure process has begun but can still be averted. The NOD informs the homeowner that they are delinquent on the repayment of their loan and the lender has initiated the foreclosure process. 

This is the best time to buy a foreclosure, if you know how to do it, but it's also the most work. You would have to find the properties that have received a NOD, contact the owner and make a case that they should sell to you.  It sounds simple but the sellers are typically not receptive and can be quite hostile as they are already getting harassed by the bank and now people are calling or knocking on their door trying to buy their property.  Many are in denial that their home is in foreclosure.  A homeowner who has received a NOD can still exit the foreclosure process by bringing their loan payments current.  They can also list the home for sale using the normal process using a real estate agent, or they can sell the home themselves.  Buying a pre-foreclosure means buying directly from the seller and this is where the biggest profit potential  exists for foreclosure properties.  However, you must do your homework.  With property values down sharply, you can't assume that there is still equity in the property even if you pay off the loans.

If the property is listed by an agent, the profit potential is reduced since the seller must pay a sales commission, but the disclosure process is in effect and the risk of purchase is greatly reduced.

Courthouse Auction

When the home makes it all the way to foreclosure, the home is sold at a courthouse auction.  Once the foreclosure period has expired, assuming no last minute efforts are made by the homeowner to bring the loan current, the property is sold at auction, literally on the courthouse steps just outside the entrance to the courthouse. This type of sale requires cash or a no-contingency loan (i.e. you fail to get the loan you don’t get the property and you lose your down payment). You must do your own research on the property and you can’t get any contingencies on the property condition.  You need to understand property values and all the liens against the property.

This method of purchasing entails the highest risk.  And although great deals are possible, as an individual investor you will be bidding against deep-pocketed investors who make a living out of buying and selling these properties.  

REO (Bank Owned)

Most foreclosures receive no bids at the auction and are taken back by the lender. These homes are referred to as REOs, as in Real Estate Owned by the bank.  The bank typically hires someone to get the home ready for sale and then has a real estate agent list it on the MLS.

Lenders don't want to hold onto these properties, yet their strategies differ.  Sometimes they will offer the property below market value to get rid of it quickly while other times they will try to sell for fair market value.  You must evaluate these properties as you would any non-foreclosure properties.  Just because it's a foreclosure doesn't mean it's a great deal.  

Educate Yourself About Foreclosures

If you think buying a foreclosure may be an opportunity for you, you need to fully understand the process.  Fortunately, that's easy to do.  Go to Amazon.com or your favorite bookseller and search for books on foreclosure.  I'm sure you'll find some useful information.  One that has been recommended to me is:

FREE Foreclosure Lists

I'm sure you've seen signs and ads promoting foreclosure lists and you may have an interest in getting such a list.  But before you even think about a foreclosure, I want to set you straight.

Here's the reality: the free foreclosure lists real estate agents provide, if indeed they even have such a list, will be almost useless to you.  And agents provide these lists with only one thought in mind - to attract you as a client.  They have no intention of helping you buy a foreclosure unless it's already been listed for sale in the MLS.

If you've read the discussion of the three types of foreclosures, you'll probably already have an idea what I'm talking about.  Your free foreclosure list will include properties that have received a Notice of Default, a Notice of Trustee's Sale, or real estate owned (REO) by the bank.  

Buying a foreclosure is not what you may have been lead to believe.  It's easy, at least in principle, but more difficult in reality to find super bargains and close the deals. 

For pre-foreclosures, it requires a lot of work to personally visit and talk with the people being foreclosed, and do your own research on the property, including the condition and whether there are any liens against the property.  

Buying at auction is not possible for most people because they don't have the cash, or are unwilling to take the risk of getting financed in a short time period with no loan contingency.

That leaves REO properties that have been listed for sale on the MLS.

Better Than a Free Foreclosure List

You can search for foreclosures quickly and easily right here. 

My company has put together a website where you can search for all the available foreclosures available for sale through the MLS.  This is essentially a free foreclosure list with a built in search feature!

You can gain access to the site by filling out the form:

Are You Foreclosure Curious?

If you are one of those people who likes to figure things out for yourself, I've gathered a collection of foreclosure websites for you to visit.  Some offer free foreclosure database access, although most only give a 7-day period before they start charging a monthly fee.  As stated above, for most people the foreclosure lists will not be particularly helpful.

These sites are provided as a public service:

http://en.wikipedia.org/wiki/Foreclosure

http://www.realtytrac.com

http://www.freelistforeclosures.com

http://www.foreclosurenet.net

http://www.freeforeclosuredatabase.com

http://www.foreclosures.com

http://www.countyrecordsresearch.com

http://www.hud.gov/homes/homesforsale.cfm

http://realestate.yahoo.com/Foreclosures

http://www.foreclosuredata.com

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Broker/Agent does not guarantee the accuracy of the square footage, lot size or other information concerning the conditions or features of properties provided by the seller or obtained from Public Records or other sources as presented in this website.  Interested parties are advised to independently verify the accuracy of all information through personal inspection and with appropriate professionals.  Information herein deemed reliable but not guaranteed.