How to Buy a Home in Foreclosure

Recent economic problems have led to numbers of homeowners losing their homes to foreclosure. While this is sad for them, it can be a great opportunity for someone looking to buy a home for less than market value. Banks that foreclose on homes don't want to keep the homes standing empty and are willing to sell them for up to 25 percent below full market value. However, you still need to watch out for pitfalls when buying a home out of foreclosure.

 

The first thing you need to do is a title search on the home you are interested in buying. Also check carefully for liens against the property. If the home is in foreclosure, there's a good chance the people who owned it had other financial woes as well. If there are tax liens or mechanic liens against the property, you may find yourself liable for those as well.

 

Because foreclosure sales are handled differently than conventional sales, you may not have a chance to actually inspect the home before buying. Again, there's a good chance the people who were foreclosed on didn't have the resources to make necessary repairs. You may be buying someone else's plumbing, electrical, or structural problems. And, sad as it is, some people in foreclosure take out their anger on the home by damaging it deliberately before leaving.

 

There are three ways to buy homes in foreclosure. The first is to buy the home prior to the foreclosure, directly from the family who is being foreclosed on. This is the best option because you can inspect the home and know what you're getting. The homeowner transfers the property to you by signing a deed and you take over the mortgage and any back payments. Be sure to make the sale "subject to mortgage" as the mortgage owner has to agree to the sale.

 

You can also buy homes at auction. You can't inspect these homes so you don't know what condition the home is in. You will also be bidding against other prospective customers, many of whom are investors hoping to get a bargain they can turn around and resell. Auctions usually require that you pay with a cashiers check so you will need to be pre-approved for a mortgage or have cash on hand. You may be required to have documentation that you have the money to buy the property. But if you buy at auction, it may be hard to get a mortgage before the sale because the bank inspector cannot inspect the home. Also, if the foreclosed on owners refuse to move out, it becomes your responsibility to evict them.

 

The third way to buy foreclosed homes is through REOs or Real Estate Owned properties. Mortgage banks and companies usually sell foreclosed properties through brokers. This adds an extra layer of costs, but you can inspect the property and be fairly certain the home is in good condition and has a clear title. This is the least risky, but it also nets you the least profit. Some states have laws that allow the original homeowner to buy back the property by paying the money he owed. In some states, homeowners have two year to do this. You could end up losing money if this happens.