How to Buy a Foreclosure Home or Tax Lien Property

Foreclosures and tax-lien properties can be bought for less than market value.

A foreclosure property is referred to as REO, or Real Estate Owned property, by the banking and real estate industries. It is a property on which the borrower defaulted on his loan and the lender repossessed the collateral property. A tax-lien property is one that is confiscated by a local government for unpaid property taxes or by the federal government for unpaid income taxes and sold at auction. Each differ slightly in the purchasing process.

Instructions

1. Locate suitable properties. Both foreclosures and tax-lien properties are likely to be in a state of disrepair, because if the borrower could not meet his loan or tax obligations, odds are he could not properly maintain the dwelling. You can find foreclosures and tax-lien properties by looking through the real estate section in your local newspaper's legal-announcement section. The IRS maintains a list of tax-lien properties. Or visit the county court or county collector's online office to search for tax-lien properties and foreclosures. Additionally, lenders and government guarantors such as HUD and Fannie Mae list foreclosure properties online.

2. Estimate the value of the foreclosure or tax-lien property. Visit each potential property in person to inspect it for damage. Then read the local newspaper's real estate sales section to find comparable properties. You can also visit websites such as Realtor.com and Zillow.com to find comparable properties that are currently on the market or have been recently sold. The comparable properties should have the same number of bathrooms, bedrooms and square footage as the property being considered. Make a list of comparable properties' asking and selling prices, then add the prices and divide by the number of comparable properties--this will yield the average comparable price.

3. Visit your bank and inquire about getting preapproved for a mortgage. In order to put an offer on a foreclosed property, you must have a qualification letter from a lending institution or bank statement that reflects enough cash-on-hand to purchase a property. Tax-lien properties, however, typically require cash only on the day of auction.

4. Make an offer. If you are buying a foreclosure, banks will negotiate the price based on the balance deficiency owed by the defaulted borrower. For example, if the home is worth $150,000 and the borrower owed $75,000, the bank generally will not sell the home for less than 70 percent to 80 percent of the market value, which is $105,000 to $120,000.

   However, tax-lien properties are sold at auction, with the highest bidder winning the right to purchase the property. You should therefore know the market value and be prepared to pay near-full market price.

References

• Foreclosure: Tax Deed Sales
• Real Estate ABC: Buying Bank Owned Properties (REO)
• Realty Trac: Checklist for Buying Bank-Owned REO Property