Having worked in mortgage servicing and mortgage field services for over eight years and helping buyers find great deals in foreclosures over the last 5 years, I have acquired and intimate knowledge of the market for foreclosed homes.  Buyers often ask me if foreclosures are a good deal and my answer is...they can be.  I say that because buying foreclosures can be complicated.  Properties can be purchased prior to foreclosure directly from distressed sellers.  Properties can also be bought from the Trustee at the foreclosure sale or after the foreclosure sale from the winning bidder at the foreclosure sale.

There are pluses and minuses for each of these strategies.  Here are some of them:

Buying Properties Pre-Foreclosure

Here in Texas, foreclosure sales take place on the first Tuesday of every month on the court house steps or at a place appointed by the county of jurisdiction.  Lenders who wish to foreclose must post notices of their intent to foreclose 30 to 45 days prior to the foreclosure sale.  They usually do this in the local newspaper.  There are companies that sell lists of these homes, but they are collecting this data from the newspapers and merely republishing it.

The plus side of dealing with sellers who are about to be foreclosed is that they are considered "motivated" sellers, meaning they have a definite reason to sell quickly.  If the seller has equity in the home, you can often negotiate very favorable terms.  On the down side, if the seller has little or no equity in their home, they will likely have to obtain their lender's approval for a "short sale" where their lender agrees to accept the balance of the sale proceeds as their payment in full.  Lender approval for a short sale can be difficult to obtain as the seller may owe back taxes, may have racked up significant penalties such as late fees, interest since the last payment was made, and may owe for expenses paid by the lender for seller.

Buying Properties at Foreclosure Sale

Buying properties at foreclosure sale can be tricky as you will need to do your homework and be very cognizant of the property's condition.  Once again, you can often find out about the foreclosure sale by looking in the Notices section of your local newspaper. 

Once you have identified a property you are interested in, it is wise to drive by the property to evaluate the property condition and contact a real estate agent to get an approximation of the property's value and decide how much you are willing to bid on the property as the foreclosure sale is conducted as a live auction.  You will need to identify the trustee (usually an attorney) who will be auctioning the property and be willing to wait for him or her to show up at the courthouse.  You will also need to have your funds available in the form of certified funds.  They don't take checks or IOUs.  If you need a loan, you will need to have the loan in place prior to the foreclosure sale and bring a cashier's check to the sale.  I highly recommend that just prior to the sale, you drive by the property again to make sure the condition of the property has not significantly deteriorated.

Again, if the owner had significant equity in the property, you may be able to obtain the property at a bargain.  If the owner did not have significant equity, you will likely be bidding against the bank.  In order to protect their position, the bank that is foreclosing will be bidding the total debt of the debtor including but not limited to the unpaid principal balance, accrued interest, attorney's fees, penalties, and fees to cover any property preservation expenses.  The debtor may owe more than the property is worth; therefore, it is vitally important to determine how much you are willing to pay and pay no more than that.

Another downside to buying properties at foreclosure sale is that often the properties are still occupied by the previous debtor which means now you have to deal with evicting the person from their former home.  Also, if the person who is occupying the home is vindictive, they may do significant damage to the property when they move out lessening the value of the property.  I encourage people who buy properties at foreclosure sale to offer the occupants cash for keys to give the occupants incentive to vacate the property and leave the property in good condition.  The money also helps them get back on their feet by enabling them to use it as a deposit on an apartment. 

Buying Property After the Foreclosure Sale

Buying properties after the foreclosure sale is often a lot less stressful than the other two methods.  After the foreclosure sale, if the bank was the winning bidder, the bank usually lists the home for sale with a real estate agent who specializes in foreclosed properties in that particular area.  At this point, the lender now owns the property and is looking to get a fair price for the home in its present condition. 

Aside from maintaining the utilities and mowing the lawn, lenders are reluctant to put any more money into a foreclosed property; therefore, they usually sell the property "as is."  This means that the buyer is left to do his own due diligence and must purchase the property is in its present condition.

 

For the bank, the sale of the property is not an emotional decision, it is a financial one.  The bank is looking to sell the property and use the proceeds from the sale to reinvest in new mortgage loans.  The longer the bank has the property in their inventory, the more willing they are to negotiate.  If the bank can sell the property for an amount reasonably close the amount of the debt they will usually make the deal.

As most homebuyers these days purchase their properties with little equity in their homes, banks often end up retaining the properties.  Eight times out of ten, you can probably do better by waiting for the property to hit the market as a foreclosure after the foreclosure sale.  You also have the ability to inspect the property to determine its true condition.  A real estate agent who knows the market can direct you to the better deals and help you determine a fair price based on the condition of the property.