- Foreclosure is the term that describes the legal process in which a lender takes back a home when the homeowner does not make the agreed mortgage payments. Foreclosure sales are the sales of these homes. Often the homes are sold at discounts, because the bank's main goal is to get back as much as possible of what they is owed on the property, which is usually less than its current value. Investors often purchase these properties in order to fix them and then resell them for a profit.
- There are two common misconceptions about foreclosure sales, however. The first is that banks do not profit off from foreclosure sales. Many times, the bank does make a profit. The second misconception is that all foreclosure sales are good deals. Many are, but some homes may have a lot of debt against them that has to be accounted for at the sale.
- There are different types of foreclosure sales, and the type of sale used varies from state to state. In some states, the bank will repossess the property and sell it as "real estate owned" (REO). This is sometimes known as a "strict foreclosure." Another type of sale is a judicial foreclosure. This type of foreclosure is handled by the courts or the county clerk's office. The property is placed up for auction and is bid on by banks and lenders. The final type of foreclosure sale is a public auction, known as a statutory or nonjudicial foreclosure. This is the type of auction that anyone can bid on and is a favorite of real estate investors.
- Real estate investors and new homebuyers can benefit from foreclosure sales by getting more property for their money. For example, at a foreclosure auction, an investor can determine how much he can afford to bid for the property and still make a profit on the resell. If no one bids higher than that figure, the investor can purchase the property, fix cosmetic flaws and sell it for a profit. Foreclosure sales can also help people buy a home for the first time.
- Foreclosures are not always a good deal. Many homeowners who are facing foreclosure will do physical damage to the property out of anger. Some counties that do foreclosure auctions do not open the home prior to auction, so you may not know what it looks like inside. Homeowners who are facing foreclosure may not care about the home they are about to lose, so even if they do not damage the home, they may not keep it up or fix any problems that occur before they are evicted. By buying a foreclosure, you could be buying a home that needs a lot of work.
- Buying foreclosures requires some expertise and fortitude. There is risk involved, as you could end up buying a money pit instead of a profitable investment. Before you decide to purchase a foreclosure, make sure you are comfortable with the fact that you will be benefiting from someone else's misfortune. While there is little you can do to help the distressed homeowner, many buyers feel remorse for taking advantage of someone who is in a difficult situation, so make sure you are comfortable with the process before you proceed.
