A foreclosure is often the way to buy properties when the homeowner does not keep up payments on a mortgage. This legal process allows the lender to sell the property that has been used as collateral for the loan, and the buying public has the opportunity to purchase it at a somewhat reduced rate. Buying foreclosures is often a business itself, attended by professionals who are adept at digging out the best deals. Either an individual or a group will purchase properties at an auction that has been set up by the lender, or they can purchase directly from the lender through a real estate agent.

The average homebuyer, who bought a foreclosure to re-sell at a profit, should take care not to become so excited at the prospect at getting a good deal that they forego common sense strategies. Buyers may purchase a foreclosed home only to find that it has more out-of-sight problems than they can realistically repair and still make a profit. At many auctions, properties are not available for inspection prior to the purchase. This should be a red flag to wannabe investors. This is no place for newbies. If you plan to make buying foreclosures a career, perform a complete risk assessment before you invest time or money in the venture. 

If you want to wade into the murky waters of foreclosures at auctions, be aware of a few drawbacks:

• You may have to evict the occupants.
  
  
  

• Occupants may not take kindly to being evicted.
  
  
  

• Homes are purchased “as is.”
  
  
  

• Competition from professional bidders may be fierce. 
  
  
  

• Auctions are “cash only” transactions.
  
  
  

The two principal ways to buy a foreclosure are:

• Auction - These homes are repossessed by the lender after the homeowners have stopped paying the mortgage.
  
  
  

• Lender - These bank-owned properties are sold through real estate agents. 
  
  
  

If you purchase a foreclosed home as your primary residence, and proceed without the advice of a good Realtor, you may have more problems than you expected. After securing a preapproval letter from the lender, a real estate agent will check the comparable prices of homes in the area before you make an offer. Understand what you are getting into before going this route. The fact that the home is sold “as is” should be carefully considered because, once you purchase the property, lenders will not make any concessions. They offer no guarantees. 


A good Realtor will help you through the process and advise you for or against a property. A house that you cannot inspect beforehand is not a good investment, and the agent will tell you that. Listen to him or her. 

Do not simply walk through the home and fall in love with the layout or the design. Hire a home inspector to evaluate it, and walk through it with him or her. If it needs serious repairs, you can decide whether to go forward with the purchase. You may lose any savings on the sales price of the home if the repairs needed to make the home livable are considerable. 

Based on the “comps” in the neighborhood and the home inspector’s report, make an offer, and the real estate agent will present it to the lender. If it is lower than they want to accept, they will make a counteroffer. You decide, at that time, if you want to counter their counter offer or withdraw from the process. You still have options at this point, unlike purchasing the property at auction. 
Although any Realtor can represent you in a foreclosure sale, it may behoove you to find an agent who specializes in real estate owned (REO) properties. Not all REO properties are listed under market value. An REO agent can help you determine which are priced just right for you to consider it a bargain and those that are priced too high. If you are a first time home buyer, having an experienced REO agent representing you will give you the best chance of successfully navigating the foreclosure procedure. 

To find an REO agent:

• Ask others who have recently purchased a home for a referral. 
  
  
  

• Check online blogs of REO agents.
  
  
  

• Search online for REO or short sale properties that have sold or are for sale, and take note of the agent.
  
  
  

• Search closed REO and short sales.
  
  
  

• Interview potential representatives, and do not be afraid to ask specific questions. 
  
  
  

Bank- owned properties can offer substantial savings, just as auctioned properties, but you have the added protection of a home inspection and the professional advice of a Realtor. The fact that these properties are often listed below market-rate is a great incentive. However, because the bank wants to recover as much of their money as possible, they may list it above its value, expecting to lower the price after a time on the market. Just because you see “price reduced” is not an indicator of a bargain. 

You may have to take a few extra steps when purchasing an REO, but if you can purchase it at the right price, it will be worth it. You can make an offer contingent upon a home inspection. The discovery of a leaky roof or safety code violations may help determine the price you offer for the property as you take into account the cost of making the necessary repairs or renovations. Some REO properties will not need repairs, but the majority will. Major repairs, like a leaky roof, versus minor aesthetic fixes, like paint or flooring, should be a no brainer if the price is right. 

Banks can do whatever they want regarding how long they will keep a property on the books before listing it. It costs them money to hold a foreclosed property, so they sometimes bundle them and sell them to investment groups. It becomes a liability if they fall into disrepair, and the city may fine them for code violations. 

It may take longer to close a bank-owned property if the asset manager has a backlog of properties to handle, but it could just as easily take the traditional amount of time. This may make it difficult for you to make move-in plans, but if you are flexible, the inconvenience may make it worthwhile. 

If you purchase an REO, you are free to secure a mortgage with any lender. It does not have to be the one who owns the property. As the buyer, other banks may offer you various incentives to do business with them, such as low or no origination fees, free appraisals, or home warranties. To the real estate agents, who steer business to them, they may offer monetary rewards. Be prepared when you present an offer to the bank. A preapproval letter from a lender may put you ahead of an offer that does not have one, unless the other offer is for cash. 

All-in-all, buying a foreclosure can be your best move or your worst nightmare. Making prudent decisions in the beginning will prevent you from making mistakes that can do irreparable damage to your finances and cause untold hours of stress and strain. If you are an individual who wants to play in the “big boys” league, prepare well in advance. You either have to have access to large amounts of cash yourself or have financiers in place before attempting to go forward. If, however, you simply want to find a good bargain as a primary residence, you are more likely to be successful with the assistance of a real estate agent who is experienced with REO properties.