How to Buy A Foreclosure – A Guide for Investors and Homebuyers

Real estate investors who know how to buy foreclosures are among the best-positioned individuals in the industry when it comes to getting good deals on great properties. When investors refer to “foreclosures,” they usually mean properties in the foreclosure process, or properties that have been through a foreclosure process and now belong to the creditor (often the bank) and are being sold to recoup losses.

Understanding how to buy foreclosures is important if you want access to great deals below market value.

In this guide you will learn how to buy a foreclosed home and the information you need to decide whether investing in foreclosure is for you.

What Is Foreclosure?

Let’s start with the definition of a foreclosed property. Foreclosure is a process that allows a lender to recover the amount owed on a defaulted loan by selling or taking ownership (repossession) of the property securing the loan. The foreclosure process begins when a borrower/owner defaults on loan payments and the lender files a public default notice. The foreclosure process can end one of four ways:

1. The borrower/owner pays off the default amount to reinstate the loan during a grace period known as pre-foreclosure.
2. The borrower/owner sells the property to a third party during pre-foreclosure, allowing the borrower/owner to pay off the loan and avoid having a foreclosure on his or her credit history.
3. A third party buys the property at a public auction at the end of the pre-foreclosure period.
4. The lender takes ownership of the property, usually with the intent to re-sell. The lender can take ownership through an agreement with the borrower/owner during pre-foreclosure or by buying back the property at the public auction.

Judicial vs. Non-Judicial Foreclosure

There are two types of foreclosure procedures; judicial foreclosure and non-judicial foreclosure. In California, for example, non-judicial foreclosures are more common than judicial foreclosures (lawsuits in court). A non-judicial foreclosure begins with the recording of a “Notice of Default” and ends with a “Trustee’s Sale” where a third party, known as the trustee, sells the property at a public auction to the highest bidder. The Trustee’s Sale is held like a public auction. The property goes to the highest bidder. If no one bids at the public auction, the property reverts to the foreclosing beneficiary (lender). Foreclosed properties are referred to as Bank Owned or REOs (Real Estate Owned by the lender that foreclosed).

In judicial foreclosure states like Florida, borrowers sign two separate instruments: the note (or bond), which is evidence of the borrower’s promise to pay the debt; and the mortgage, which is the legal instrument that creates the lien on the property as security for the debt. If the borrower cannot pay the mortgage, the lender hires an attorney, who begins legal action to protect the lender’s interest.

The attorney files several documents: a summons directing the borrower (defendant) to appear in court, a complaint describing the lenders (plaintiffs) allegations of entitlement to relief and the relief sought, and a lis pendens, the legal document that gives notice to the world that there is a legal action pending on the property. Lis pendens is Latin for “lawsuit pending.” The documents are filed with the clerk of the court in the county where the property is located.

If the borrower fails to respond to the notices within the statutory time limit, the attorney submits a report to the court requesting that the court appoint a referee. The referee reviews the facts and circumstances in the foreclosure action and renders a report to the court. Then a judge issues a Judgment of Foreclosure and Sale in favor of the foreclosing lender. The judicial auction is advertised and the property is sold at the auction to the highest bidder.

Foreclosure Buying Opportunities

The foreclosure process offers three bargain-buying opportunities at each step of the foreclosure process:

1. Buying during pre-foreclosure (NOD, LIS)
2. Buying at public auction (NTS, NFS)
3. Buying bank-owned properties (REO, GOV)

Each of the three opportunities has advantages and disadvantage. Below is a brief overview of the three stages.

1) Pre-Foreclosure (NOD, LIS)

Buying a property in pre-foreclosure involves approaching the borrower/owner and offering to buy the property outright. The borrower/owner can walk away with something to show for any equity in the property and avoid a bad mark on his or her credit history. The buyer has time to research the title and condition of the property and can realize discounts of 20-40 percent below market value.

2) Auction (NTS, NFS)

If the loan is not reinstated by the end of the pre-foreclosure period, potential buyers can bid on the property at a public auction. Buyers often are required to pay in cash at the auction and may not have much time to research the title and condition of the property beforehand; however, a public auction often offers some of the best bargains and avoids the unpredictability of dealing directly with the borrower/owner. More about how to buy a foreclosure home at an auction.

3) Bank Owned or REO

If the lender takes ownership of the property, either through an agreement with the owner during pre-foreclosure or at the public auction, the lender will usually want to re-sell the property to recover the unpaid loan amount. The lender will then typically clear the title and perform needed maintenance and repair; however, the potential bargain for these REO homes is typically less than a pre-foreclosure or auction property.

What To Know When Buying A Pre-Foreclosure

When it comes to buying a home from a financially-distressed homeowner, many people conjure up the image of vultures swooping in on their helpless prey. And, sadly, there are more than a few unscrupulous opportunists looking to take advantage of homeowners who find themselves in foreclosure.  In these situations, the homeowner often loses everything, while the homebuyer reaps a windfall.

But there’s an opportunity for a much more positive transaction — one in which everyone wins.

Buying a pre-foreclosure property from a homeowner in default can be a very attractive option because it has the potential to create a win-win scenario for everyone involved.

In an ideal transaction, the seller is able to get out from under a defaulted mortgage without destroying his or her credit rating, the lender is saved the time and expense of foreclosing on the property, and the buyer gets a below-market price on a home.

A property enters pre-foreclosure when the lender files a default notice against the owner. When you browse our website you will have access to the nation’s largest database of pre-foreclosure properties — updated daily.

Pre-foreclosure properties can often be purchased for prices well below market value because the owner is very motivated to sell and has a limited timeframe in which to sell.

When a property is in the pre-foreclosure period, the owner still has an opportunity to pay off what is owed or to sell the property, thereby stopping the foreclosures process. If the owner doesn’t stop the foreclosure process, the property will be sold at public auction.

The sensitivity associated with these sales is important to note when making offers on properties in pre-foreclosure. More so than with any other real estate sale, it’s critical to present an offer that benefits all parties.

5 Steps To Buying A Foreclosed Home

There are five basic steps to follow when buying a foreclosure. Although the details may change from deal to deal, the basic process remains the same.

Step 1: Find A Property

Buying a home in foreclosure starts with you creating an account with RealtyTrac and deciding where you want to search for property.

On our website you can search by county, city or zip code. We recommend starting with a broader search (like county or city) and narrowing the search later if necessary.

After searching for a property, you can select the status of the property on our search results page:

1. Select Pre-Foreclosure for Default Notices or Lis Pendens
2. Select Auction for Trustee Sales or Sheriff’s Sales
3. Select Bank Owned for Bank or Government REOs (repossessions)

Bank foreclosures can become government foreclosures if the loan is backed by a government agency such as the Department of Housing and Urban Development (HUD) or the Department of Veterans Affairs (VA). In that case the government agency would be responsible for selling the property.

Our filters allow you to reduce your results using other search criteria, such as price range and number of bedrooms and bathrooms. Start by leaving these as “Any” when you first search to get the best results.

On the search results page, you can sort your results by a number of criteria such as price or number of bedrooms or bathrooms.

How to Use Property Information When Buying Foreclosures

On the property details page, as a member of RealtyTrac, you will have access information about the property that will help you evalue the opporinity as a potenital investmnet

• The address of the property
• The name of the owner, trustee or lender involved with the foreclosure, depending on the property status
• An estimate of the unpaid loan balance
• The estimated property market value based on comparable sales
• The dates and purchase amount the last time the property changed ownership
• The balance which provides a good estimate of the amount owed on the loan in foreclosure
• The default amount (usually only relevant for pre-foreclosure properties) which is the amount the owner/borrower is behind on payments
• The transaction history chronicles the ownership change over time

If some fields of information are missing it is because the field is not relevant to the status of foreclosure. For instance, you will never see a sale date on pre-foreclosure properties because the auction date has not been scheduled yet. When the sale date is set, the property will appear with auction status.

In other cases, information is missing because it was not available from the recorded document that has the foreclosure information. This usually applies to property details such as photo, year built, bedrooms and bathrooms and square footage.

Step 2: Get Financing

Getting financed not only gives you an estimate of what you can afford, it also enables you to move quickly once you locate a property that interests you. When you approach a borrower/owner or a foreclosing lender about a property, secured financing will demonstrate that you are a serious buyer and are ready to buy quickly.

Step 3: Contact an Agent

If you’re a first-time homebuyer and you’ve never purchased a home, let alone a foreclosure property, it is beneficial to contact a local real estate agent who can guide you through the process of buying a foreclosure. If you work with an agent, make sure they know your priorities. Ask any potential agents if they have experience with foreclosures. Especially for first-time buyers, a good agent can be a comforting and helpful resource.

Step 4: Contact the Owner

Depending on the property status, the seller will be the owner in default, the trustee or sheriff, or the foreclosing lender. To determine the property status, look at the foreclosure contact details

Buying a property in pre-foreclosure involves approaching the borrower/owner and offering to buy the property. The borrower/owner can walk away with something to show for any equity in the property and avoid a bad mark on his or her credit history. The buyer has time to research the title and condition of the property and can realize discounts of 20 percent to 40 percent below market value, depending on market conditions.

If the loan is not reinstated by the end of the pre-foreclosure period, potential buyers can bid on the property at a public auction. Buyers often are required to pay in cash at the auction and may not have much time to research the title and condition of the property beforehand; however, a public auction offers some of the best bargains and avoids the unpredictability of dealing directly with the borrower/owner.

If the lender or government agency takes ownership of the property, either through an agreement with the owner during pre-foreclosure or at the public auction, the lender usually sells the property through a real estate agent or online auction to recover the unpaid loan amount. The lender typically clears the title for any buyer, but the potential bargain is often less than a pre-foreclosure or auction property.

Contact Owner: Pre-Foreclosure

When a property is in pre-foreclosure (NOD, LIS), the owner still has a chance to stop the foreclosure process by paying off what is owed or by selling the property. The pre-foreclosure period can last several months, so you may need to be patient when trying to contact the owner in default.

The first step is to call the trustee or attorney listed on the property details page to confirm if the property is still in foreclosure. The trustee or attorney has the most up-to-date information if the owner has sold or reinstated the property. The trustee or attorney cannot answer other questions about the property.

If you haven’t done it already, you’ll want to evaluate the property’s value and check for any additional loans or liens encumbering the property so that you can make an informed decision about whether the property is a wise investment. Click on the Similar Homes Nearby section to view a report that evaluates the home’s market value based on comparable sales in the neighborhood. Click on the See More Market Trends to view general trends in the zip code.

If the trustee confirms the property is still in foreclosure, and you believe the property could be a wise investment, you should contact the owner in default as soon as possible.

If you’d prefer to contact the owner yourself you can send a postcard or mail a letter yourself to the owner’s mailing address listed in the Ownership Information section on the property details page. It’s important to send the letter to the mailing address as the owner may not live in the actual property.

If the owner is not willing to list the property, you can wait to see if the property is scheduled for auction and attend the auction to purchase it.

Contact Trustee/Sheriff: Auctions

Before the auction, you may have a chance to work out a last-minute deal with the owner in default. Usually a property is scheduled for auction just a few weeks before the auction occurs, so you may have to move quickly if you want to contact the owner.

Auctions can be postponed or canceled anytime, so no matter what the auction date listed on RealtyTrac (even if it’s in the past), it’s always a good idea to contact the sheriff, trustee or attorney to confirm. We recommend you call when you first locate the property and the day before the property is scheduled for auction. The sheriff, trustee/attorney has the most up-to-date information if the auction has been canceled or postponed. The sheriff, trustee/attorney cannot answer other questions about the property.

Some auction properties on RealtyTrac allow you to bid online for the property. If this is the case, you’ll see a “Bid Now” button on the search results page and “Bid Now” links on the property details page. Just click on any of those to be taken to a bidding page where you can see more details about the bidding and submit a bid if you wish.

If you believe the property could be a wise investment, you can attend the auction to bid on the property. RealtyTrac usually has the auction date, time, location and opening bid. If any of this information is missing, you can often get it from the sheriff, trustee or attorney. If you’ve never bought at auction before, we recommend you attend several auctions just to observe before you attend an auction to bid.

Contact Owner: Bank Owned

If the property is Bank Owned (REO), your first step is to contact the lender, whose information is usually on RealtyTrac’s Property Details page.

You should contact the lender directly and ask for their REO or asset management department to find out how you can view and possibly make an offer on the property. REO means “Real Estate Owned” by the lender. It’s another way to say the property has gone through the foreclosure process and has now been repossessed by the foreclosing lender.

If you haven’t done it already, you’ll want to evaluate the property’s value and check for any additional loans or liens encumbering the property so that you can make an informed decision about whether the property is a wise investment.

Some bank-owned properties on RealtyTrac will give you the option to contact the property’s listing agent directly. You’ll see a link to do this either at the top of the property details page or in the Contact section of the property details page.

RealtyTrac usually has the name of the lender/bank listed on the property under the Foreclosure Parties section. But if you have trouble finding a phone number or address for them through the Internet or otherwise, below are suggestions for tracking down the lender.

1. Contact an agent to find a local real estate agent in the RealtyTrac Agent Network who can help you contact the lender and who can check if the property is already listed on the market with a real estate agent.
2.  Check out the Transaction History section of the details page to check if RealtyTrac has any further information on that property. This section will give you a list of historical records RealtyTrac has for the property. Other records may have more information, such as the lender name, address and phone number that was missing on the original property record.
3.  You can contact the local property assessor to find out the owner’s name and mailing address. Since the property is bank owned, the property assessor should have the bank or lender listed as the owner. Go to statelocalgov.net to find the local property assessor in your area.

Step 5: Make an Offer

If you have never purchased a foreclosed home before, we recommend that you have a real estate agent help you prepare and make an offer. Contact an Agent to find a local real estate agent in the RealtyTrac Agent Network.

To get an estimate of the potential bargain for any property, check the estimated value on the property. Since the bank will be looking to break even by getting back the outstanding loan balance, you should be focusing on properties where the Equity (estimated market value – outstanding loan balance) is positive. This means if you buy the property for the outstanding loan balance, you will have instant equity in the property. Even if the bank wants more than the outstanding loan balance, you can have equity in the property as long as you pay less than the market value of the property. If the property has negative equity, where the owner owes more than the property is currently worth, then getting a deal is still possible but may be harder to come by unless you’re an experienced investor.

Based on your research of the potential bargain, you can make an offer. If the property is a pre-foreclosure or bank owned, you could prepare an offer similar to a typical purchase offer, contingent on a full inspection and title search.

If the property is selling at auction, you will need to make your offer, or bid, at the auction. In many states, bidders are required to pay in cash in the form of a cashier’s check at the auction. You probably won’t be able to conduct a full inspection and title search when you buy at an auction, so it’s important to do careful research before attending an auction.

Building A Foreclosure Buying Strategy

There is a lot to take in, especially if you are new to the concept of foreclosure investing and home buying.

Now, if you don’t know where to start, we put together a list to help you decide on your foreclosure-buying strategy.

• Prepare your resources. Start a foreclosure list file to organize all the documents and research that you’ll accumulate during the process of searching for and buying a distressed property.
• Decide whether you want to use an agent. As mentioned above, if you’ve never purchased a foreclosed property, it may be beneficial to contact a local real estate attorney or consult an agent experienced in buying foreclosures. If you work with an agent, make sure they know your priorities. Ask any potential agents if they have specific experience with foreclosure sales.
• Make a list of what you’re looking for in a home. Include as many factors as you can and then prioritize them. You may not ever get the perfect home, but a checklist will help keep focus so you’ll know when you find a property that will work for all your needs and wants.
• Find properties that match your criteria. Start out with a broad foreclosure listing search and then narrow it down to a few foreclosure property listings if you end up with too many properties. Experiment with different searches to see what you get in different areas, price ranges or square footage. Save the homes listings that spark your interest. Make a habit of continuing to check for new foreclosure property listings or have the listing service notify you when a property is added that matches your criteria.
• Narrow the focus. Start checking your shortlisted foreclosed properties. You can try to call the trustee to confirm the status of the property, although not all trustees are as helpful. Or you can easily narrow down your foreclosure search to a city. For example, you can use a foreclosure search tool to find Santa Barbara foreclosures. Foreclosure properties may not offer the opportunity to view the inside at first, but just looking at the house and the neighborhood will allow you to scratch some off your list and highlight others. Take a list of questions to try to evaluate the foreclosed home for sale based on your checklist.
• Calculate the bargain. The purpose of all your real estate foreclosure research is to decide whether a given distressed property offers a good bargain-buying opportunity. To the outstanding unpaid loan balance you need to add all the liens against the property and any estimated fixing costs and then subtract that total from the market value of the foreclosed house. If the difference is a strong positive number, you can approach the owner armed with your calculations and begin negotiating a possible sale.
• Get a loan pre-approval. Gather financial information the lender will request and apply for pre-approval. Educate yourself on the lending process and what steps will be required. Check your credit and correct any credit problems you may have before the lender gets your credit report.
• Pass on the details to your agent. Take your short list of properties and hand it over to your agent. Many experienced buyers and investors prefer to buy foreclosure properties without the help of an agent, but if you’ve never done this before, it’s a good idea to enlist the expertise of an agent who has knowledge and experience in buying distressed property. Good agents can scout out your picks and help you with the next steps in buying a foreclosure: researching property title documents, contacting the owner and making an offer. You will need to sign a buyer/broker agreement with the referral agent so they can work on your behalf.

Foreclosures are perhaps less straight-forward compared to a traditional home for sale, but these homes offer an opportunity to not just save money but to earn a good markup, whether you fix and flip or sell the homes wholesale, as-is.

Good luck and make sure to read our other real estate investment guides for more tips.