Most Americans have seen ads on television for get-rich-quick seminars that teach novice investors the secrets of making money from housing foreclosure sales. In spite of the hype, successfully buying and selling foreclosed real estate requires research, money, knowledge, experience and time.
Furthermore, buying foreclosed real estate is not without risk.
If you plan to try your hand at this type of investing, you need to be well-versed in foreclosure basics. Foreclosure is the legal recourse lenders or governmental agencies use to recoup money owed when a property owner fails to make payments; the lender or agency can take the house and sell it to satisfy the debt.
Common reasons for foreclosure
- Non-payment of a mortgage or home equity loan.
- Inability to meet a balloon payment.
- Failure to pay property taxes.
- Inadequate insurance coverage for the property.
- Inability or failure to maintain the property.
Foreclosure process
- Pre-foreclosure – the period between when the homeowner stops making payments and when the land is put up for sale at auction; investors often contact homeowners during this time.
- Auction – the property is taken from the homeowner and sold to the highest bidder; either the county sheriff or a trustee handles this phase, depending on state law.
- Real estate owned (REO) – if no one buys the property at auction or the lender is the high bidder, the home becomes real estate owned by the bank and is usually sold on the open market through a real estate agent or a third-party marketing company.
The most common method of buying a foreclosed property is at a sheriff's auction or trustee's sale. These auctions are typically held on weekday mornings, bidders must provide a sizable deposit or pay the full amount on the spot, and payment methods are restricted; credit cards and personal checks are usually not accepted.
Typically, potential buyers are not allowed inside the house before bidding begins. The only information prospective buyers have for making a decision often comes from public records searches and curbside appraisals.
A second risk at sheriff's auctions and trustee's sales is that the homes may not come with a clear title, which makes a thorough title search critical. If a previous owner with a valid claim surfaces later, you could lose the property and your investment.
Some foreclosed homes carry liens that foreclosure did not remove, such as unpaid taxes or federal debts, and these can affect potential profit. Procedural errors and court rulings may also halt a foreclosure sale after you have invested time and money, and some states have a statutory redemption period during which the original homeowner can repay the debt and regain ownership.
Homes foreclosed by reputable lenders who are first lien holders tend to present less risk; when a deal is completed properly and you obtain title insurance, the chance of getting a good title is higher. For properties marketed by banks or managed professionally, consider resources like Real Estate Property Management Insurance as part of evaluating ongoing ownership costs.
Properties foreclosed by government agencies, such as those marketed online, typically allow buyers to inspect homes in advance, conduct inspections, and obtain title insurance, but supply is limited and competition is often high, so discounts off market value may be small.
If you are considering investing in foreclosed properties, prepare by learning the process, researching legal issues, and gathering as much information as possible about the property and parties involved. Also consider how property-specific insurance needs may affect your decision; for example, business or storage properties may require specialized coverage such as Warehouse Property Insurance.
Careful preparation and realistic expectations can help minimize the risks inherent with this type of investment.
Frequently Asked Questions
How do sheriff's auctions work?
Sheriff's auctions are public sales where foreclosed properties are sold to the highest bidder, usually with limited inspection access and strict payment requirements at the time of sale.
Can I inspect a foreclosed property before buying?
Inspection rules vary: auction properties often cannot be entered in advance, while bank-owned or government-foreclosed homes usually allow inspections before purchase.
Should I get title insurance for a foreclosed purchase?
Title insurance is generally advisable because it protects against many title defects and claims that could arise after purchase, though it may not cover all issues depending on the policy.