Take Caution When Buying a Foreclosure

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 all 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 have to recoup money owed them because a property owner failed to make payments. The lender/agency can take the house and sell it to satisfy the debt.

Generally, the reasons for foreclosure include:

Non-payment of a mortgage/home equity loan.
Inability to meet a balloon payment.
Failure to pay property taxes.
Inadequate insurance coverage for the property.
Inability/failure to maintain the property.

The foreclosure process involves three stages:

Pre-foreclosure - This is the period between the time the homeowner stops making payments and when the land is put up for sale at auction. Investors typically deal with the homeowner during this time.

Auction - This is when 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 the state.

Real estate owned (REO) - If no one buys the property at auction or if the lender is the highest bidder, the home becomes "real estate owned" by the bank. Banks usually sell REO properties on the open market through a real estate agent or third-party marketing company.

The most common method of buying a foreclosed property is during a sheriff's auction or trustee's sale. These auctions are held on a weekday morning. Investors cannot pay with credit cards, personal checks or IOUs, and they must make a sizable deposit or pay the entire sum for the property on the spot. Typically, potential buyers are not allowed inside the house before bidding begins. The only information prospective buyers have on which to base a purchase decision is what is available through public records searches and a curbside appraisal.

A second risk in sheriff's auctions and trustee's sales is that the homes are not guaranteed to come with a clear title. This makes the title search a critical, necessary part of your public records research. If a previous owner with a valid claim surfaces at a later date, you can lose everything you invested.

Also, homes sold at auction sometimes have liens that weren't erased by foreclosure, such as an IRS debt, that could wipe out any profit you thought you would see from the resale of the property. Procedural errors and court rulings also could stop a foreclosure sale after you have invested time and money. Furthermore, some states have a statutory redemption period, during which time the original homeowner can repay what is owed, regain ownership and leave you with nothing.

Despite all of these potential drawbacks, buying an auctioned home isn't always a perilous undertaking. Homes foreclosed by reputable lenders who are the first lien holders can be a fairly safe investment. If the deal is completed properly, and you have title insurance, there's an excellent chance of getting a good title. Properties foreclosed by a government agency, such as the Department of Housing and Urban Development or the Veterans Administration, present less risk. These auctions are conducted online through a marketing company.

Buyers are permitted to examine the homes in advance, conduct inspections and obtain title insurance. The biggest drawback to government auctions is the limited availability of homes. Consequently, available properties attract a large number of interested buyers, which makes it a very competitive market with prices only slightly discounted off current market value.

If you are considering the idea of investing in real estate through buying foreclosed properties, prepare yourself by learning the ins and outs of the process and legal issues, and gathering whatever information you can on the property and parties involved. In doing so, you'll help to minimize the risk that is inherent with this type of investment.
Need insurance for You, Your Family or Your Business?
We can match you to a qualified, local insurance expert!
Further Reading
When considering Life insurance, many consumers believe term insurance is the best option. However, this assumption is not always accurate. It is true that term Life insurance, which covers you for a specified amount of time, such as 10, 20 or 30 yea...
Severe weather can strike at any time of the year. It is not always possible to avoid driving during dangerous weather conditions. However, being a cautious driver can mean the difference between getting home safely and standing along the side of the...
Severe weather can strike at any time of the year. It is not always possible to avoid driving during dangerous weather conditions. However, being a cautious driver can mean the difference between getting home safely and standing along the side of the...
If you are looking for your dream home and working on pre-qualifying for a loan online, be careful not to submit too many applications to multiple lenders. Many people are not aware that many inquiries can hurt your credit score. As you shop for the...
In our modern world, just about everyone comes in contact with solvents on a daily basis. At work, you might be exposed to solvents when you come in contact with glues, paints, thinners, degreasers, or cleaners. As a result of this widespread contact...