Understanding Foreclosure Sales

There are issues to be aware of when buying a foreclosure.

Foreclosures are easy to find, prices are low and buying conditions are good as of May 2010. In many cases, buying a foreclosure can give you the best bang for your buck, but you have to understand the process. Foreclosure sales can be complicated, so it's best to know what you're getting into before you get started.

Types

Included under the umbrella of "foreclosure sales" are REO (real-estate owned) and bank-owned properties, pre-foreclosures (short sales) and foreclosure auctions. Pre-foreclosures are not yet owned by the bank and in many cases, banks are quite willing to negotiate on price so they can avoid having to take on the responsibility of taking ownership of the home.

Pricing

Foreclosures are priced below market value; in some cases, they may be 30 percent or more lower than what they would sell for in a healthy economy, although this varies depending on geographic area. This helps the bank unload the home and get it off its books as quickly as possible. The prices of foreclosures sometimes reflect the prices of the surrounding area, so research the neighborhood before you make any buying decisions. If home values are low in the area or if foreclosures are abundant, chances are the foreclosure you plan to purchase may further drop in value.

Timing

Because the bank has to approve the price for which the home is sold, it can take a bit longer to buy a foreclosure or pre-foreclosure. It's not like negotiating with another homeowner in your local area. The bank may take several bids at once and accept the highest. If a house is not moving quickly enough, banks will hold a foreclosure auction where the home is sold to the highest bidder. Banks sometimes will hold an auction before taking ownership to try to move the property quicker, so an auction can happen at several different stages. Foreclosure auctions move at a much faster pace than the standard buying process. As with any home purchase, having your loan pre-approved can speed up the process.

Financing

It may be hard to get financing to buy a foreclosed home if you go the auction route, since you must have a down payment at the time of the sale. This is usually where investors have the advantage. However, a home that is listed on the Multiple Listing Service usually can be financed through a traditional lending institution.

Buyer Beware

In some cases, foreclosed homes will need renovating. If the previous homeowner was unable afford his mortgage, he may not have been able to afford repairs either, or perhaps he stopped caring about the condition of the home after defaulting on the loan. You will inherit any problems there are with the property or the legal status of the property (including any code violations and sometimes, liens).

References

• Byying Home: Bank Foreclosures-Government Foreclosure Homes for Sale
• Hillsborough County Clerk of Court: Foreclosure Sales
• CNN Money: How to buy a foreclosure