Most Americans have seen television ads for get-rich-quick seminars promising the secrets of making money from foreclosure sales. In reality, successfully buying and reselling foreclosed real estate requires research, capital, legal knowledge, experience and time.
Foreclosure is the legal recourse a lender or government agency uses to recover money owed when a property owner fails to make required 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.
The foreclosure process and the buyer’s options differ by state and by the party holding the loan, so local rules matter a great deal.
The foreclosure process
- Pre-foreclosure – the period after payments stop and before the property is scheduled for sale; investors often contact homeowners during this time.
- Auction – the property is sold to the highest bidder at a public sale conducted by a county sheriff or a trustee, depending on state law.
- Real estate owned (REO) – if the property doesn’t sell at auction or the lender is the winning bidder, it becomes REO and the bank or agency usually markets it for sale.
The most common way investors buy foreclosed properties is at a sheriff’s auction or trustee’s sale. These auctions are often held on weekday mornings and require immediate payment or a large deposit from the winning bidder.
At auction you usually cannot inspect the interior before bidding, and buyers must rely on public records and a curbside appraisal to estimate value and condition.
Title problems are a major risk at auctions. Homes sold at foreclosure sometimes do not clear all prior liens, so a careful title search is essential before bidding. If a prior owner or creditor with a valid claim surfaces later, you could lose your investment.
Other risks include liens that survive foreclosure (for example, certain tax liens or other encumbrances), procedural errors that can invalidate a sale, and in some states a statutory redemption period during which the original owner can reclaim the property by paying what is owed.
When a reputable lender who holds the first lien forecloses, the transaction can be safer if handled properly and if you obtain title insurance. For properties that will be rented or managed after purchase, you may want to consider Real Estate Property Management Insurance to protect against property-management risks.
Properties foreclosed by government agencies such as HUD or the VA typically carry fewer title concerns and are often sold through marketing companies online. If you’re evaluating commercial or larger properties, consider whether specific coverage like Warehouse Property Insurance is appropriate for the asset type.
Government-held foreclosed homes often allow inspections, formal title reviews and title insurance, but available inventory is limited and competition can keep prices close to market value.
If you plan to invest in foreclosed real estate, learn the process and legal issues, gather all available information on the property and parties involved, and get professional help when needed. If you need specific assistance, talk to an agent before making a purchase.
Frequently Asked Questions
What is the difference between an auction sale and REO?
An auction sale transfers the property to the highest bidder at a public sale; REO means the lender owns the property after it fails to sell and then markets it through normal channels.
Can I inspect a house before buying at a foreclosure auction?
Often you cannot inspect the interior before auction; auctions typically allow only curbside inspections and public-record research before bidding.
How can I protect myself from title problems?
Conduct a thorough title search and obtain title insurance when possible to reduce the risk of undisclosed liens or claims.
Do government auctions pose the same risks as sheriff’s sales?
Government auctions generally present fewer title risks and allow inspections and title insurance, but they are often more competitive with smaller discounts.