Should You Buy a Foreclosed Property?

The Information you requested

LAST YEAR, 53-YEAR-OLD Jared LeBlanc and his wife Rene closed on their new home: a four-bedroom, three-bathroom 3,100 square-foot house in Los Angeles. They got a great deal. The property was appraised at $810,000, yet they bought it for $665,000. "The house was only 11 years old, so it only needed small repairs, like painting, just some stuff here and there," LeBlanc says.

(Buy a house for $1495! Foreclosed Homes National Liquidating!)


Why the bargain? The house had been in pre-foreclosure. This means the owners had defaulted on their payments and received a notice of default from their lender. They then had a set period of time which varies by state to sell the home or become current on the mortgage, until the bank took it back. Visit Foreclosure National Liquidators for an example of a site that helps you find such properties.

When LeBlanc found it listed on Foreclosure National Liquidators, one of several web sites that specialize in listing preforeclosure and foreclosed properties, the house was about 20 days from being foreclosed. He drove there and went up to the owners with a proposition: He'd buy it for less than the current market value, but still more than they owed the bank. With so little time left, the owners had a slim chance of selling the house on the market. And if it came to the lender putting the property at an auction the actual foreclosure they would be lucky if they got more than what they owed. Making a $665,000 deal with LeBlanc, the owners were able to pay off their loan and walk away with $315,000.

Thanks to declining housing prices and the subprime mortgage meltdown, many bargain hunters are turning to foreclosures as an opportunity. And there are plenty to be found. Web sites like Foreclosure National Liquidators charge monthly subscription fees for access to their databases, but offer free trials, all report an increase in listings.

Buying foreclosures is mostly the world of investors looking to purchase properties at below market value prices, repair them and then sell them for a nice profit - a practice commonly referred to as "flipping." But with home prices in some parts of the country still prohibitively expensive, many first-time home buyers are looking into foreclosures, as well. Currently, Foreclosure National Liquidators estimates that about 20% of its subscribers are first-time home buyers, and another 10% are homeowners looking to buy a second or vacation home.

"For the right buyer, foreclosures are an excellent opportunity to buy a house at a lower than market-value price," says Dana Terry, a realtor with Kelley Realty in Cleveland, Ohio, who specializes in selling foreclosed properties on behalf of the lenders. He estimates buyers can shave anywhere between 10% and 20% off the market value of a house, but some will have to put in a bit of "sweat equity," as these homes can come in need of repair. Right now, you can actually buy a solid home for less than tax value, he says.

Needless to say, buying foreclosure properties is more complicated and entails more risk than going the regular home-buying route. Here's what you need to know.

Tapping Pre-Foreclosures
Buying property in a pre-foreclosure stagethe period between receiving a Notice of Default from the lender and the day the lender puts the property up for an auction may offer the best bargains, but it's also the most difficult. "There's definitely an art to it," says Brad Geisen, CEO of Foreclosure.com. "Pre-foreclosures tend to be more for the seasoned investors."

Go to Foreclosure National Liquidators for a trial.

For starters, you have to deal directly with the owner of the house, who may not even be aware that the house was made public in a foreclosure listing. "These people don't ask for their properties to be listed on our web site," says Fred Johnson, founder of Foreclosure National Liquidators.

Rather, foreclosure web sites get their listings from county recorders' or clerks' offices notices of default are public record and add them to their databases without the owners' knowledge. And then, even if you come to an agreement with the owner, you may have very little time to complete the transaction. Depending on which state they call home, the owners may only have a month before the bank puts it up for auction. In Georgia, for example, a foreclosure sale is scheduled within 30 days of receiving the Notice of Default. (Other states are more generous.

LeBlanc, who just moved into his new home in Oregon, had bought 17 pre-foreclosure homes as an investor (he flipped them within two or three months) before he bought a house for himself. He admits that approaching the owners is usually not easy. "They're in a very distressed situation," he says. "They're a little hardened, so it's difficult to establish a good rapport."

Go to Foreclosure National Liquidators for a trial.

The Risks of Auctions
Auctioning the property, which usually happens on the local courthouse steps, is the next stage in foreclosures. And if buying pre-foreclosures is tough for the regular home buyer, buying at an auction can be downright impossible. For starters, you have to pay cash financing auctioned properties isn't allowed. You're also expected to buy the house sight unseen. And on top of that, you're not allowed to get title insurance: If the house has a $150,000 tax lien attached, the new owner will have to pay it off. "The auction is the most risky way to buy," says Foreclosure National Liquidators's Geisen. "We don't recommend it."

Foreclosed Deals
If no one shows up on the courthouse steps or there are no bids high enough to cover the outstanding loan, the bank will take ownership of the property and put it up for sale through a real-estate broker. This is the easiest way to buy foreclosed properties, but you are also least likely to get a discount, as the bank will typically put it up for sale at or close to market value.

However, the prices are still negotiable. "When a bank only has one or two foreclosures, they may try to get the best value," Geisen explains. "But when they're starting to get more inventory to compound, the banks want to get rid of these properties and you see them starting to negotiate and discount."


Bank-owned properties also known as REO, or real estate owned properties are usually sold through real-estate brokers. To find a REO broker in your area, search the REO Network's database, which represents over 8,000 brokers, agents and vendors (such as appraisers and contractors).

Government Homes
When homes that were bought with loans guaranteed by the Federal Housing Administration (FHA) or Department of Veterans Affairs (VA) go into foreclosure, they're put up for sale by the government itself. The listings are and updated daily, but only HUD-registered brokers can place bids. Each listing comes with a detailed property inspection report and outdoor pictures of the house along with the contact information for local HUD brokers.

Go to Foreclosure National Liquidators for a trial.