Buying Foreclosures

Buying Foreclosures

Updated over a week ago


There are many ways to buy foreclosures: from the no cash, no credit methods taught on late night TV, to billion-dollar bulk purchases. There are significant discounts available on foreclosures, but buying a foreclosure is not a get rich quick proposition. For those willing to work, and in some cases, take some risk, foreclosures represent a unique opportunity for acquiring real estate at discount prices.

Choose a Stage of Foreclosure

The first step towards buying a foreclosure, is to determine which stage of foreclosure to focus on. Each of the 3 stages has its own advantages and disadvantages, and each requires a slightly different approach. Here is a brief overview of each:

  • Preforeclosure: Prior to the completion of the foreclosure process and the owner losing the home, you can purchase the property from the owner. Today, many owners in foreclosure owe more on the property than it is now worth. In these cases, known as short sales, you will also need the approval of the bank. In some cases, preforeclosures will be listed with a Realtor® and be available for sale through the MLS. If the property is not listed, you can approach the owner directly, or preferably using a Realtor®. Preforeclosures are much like any purchase of real property and you typically have the opportunity to get inspections, title insurance, and financing prior to completing the purchase. It is also possible to purchase the property Subject To the existing loans; which is similar to assuming those loans, but does not necessarily require cash or good credit—this is the method often taught by late night promoters, and has risks that should be carefully considered.

  • Auction: If the owner is unable to sell the property, refinance, or otherwise resolve the problem, the property is taken to auction. These auctions are referred to as Trustee Sales, or Sheriff Sales, depending on the state. The process for the auction varies by state, but typically properties are sold as-is, where-is, subject to existing loan and liens, and require payment in full and in cash, at the time of sale. Properties are also typically sold while the owner or renter is still living there, which means there is no opportunity to inspect the property, and you may have to do an eviction after purchase. By far the riskiest method of purchasing foreclosures, buying at auction can also offer the deepest discounts due to these risks and the limited number of buyers willing to take them.

  • Bank Owned or REO: If an investor fails to bid at auction, the property is essentially sold to the bank and becomes bank owned. Within the banking industry, these properties are referred to as R.E.O., which is an abbreviation for Real Estate Owned. Most REO properties will be listed with a Realtor® whom the banks refer to as an REO Broker. These real estate agents often handle the eviction and cleanup of the property, in addition to listing it for sale. Buying an REO is very similar to buying any home that is listed with a real estate agent, and you have the opportunity to do inspections, get title insurance, and get financing. Most banks, however, do require that the property is purchased "as-is", and may also impose other non-standard terms, so it is especially important to work with an experienced Realtor® that can explain these terms.

Find Foreclosures

Now that you know which foreclosure stage or stages you want to focus on, and your desired outcome, you are ready to start looking for foreclosures. The foreclosure process starts with a notice being filed at the County Recorder's office, and you can typically browse these recorded documents at the county for free. If you value your time, we certainly hope you will consider using our service, which provides not only the information on these foreclosure filings, but also combines it with other public records, maps, and tools that can save you time searching, tracking, and managing the foreclosures you are interested in.

Determine Your Offer or Bid

One of the most difficult parts of buying real estate, foreclosure or not, is determining what price to pay. We have two suggestions. First, be sure to review the entire market, not just what is in the multiple listing service used by Realtors®. Other sources you should consider include foreclosures, new home projects, for sale by owner listings including Craigslist, and even local rental data. Second, you need to know your desired outcome. Frankly, I'll pay a premium to get exactly the right house if I plan to spend the rest of my life there; but I need a certain discount if I plan to flip it for profit; and I'll want a certain return on my capital if I plan to keep it as a rental. Too many buyers focus too much on a handful of comparable sales, and miss the big picture. When determining your bid, know the whole market; and to the extent possible, make sure it makes sense for your goals, no matter where the market heads next.

Make Your Offer or Place Your Bid

This will vary a lot depending on the stage of foreclosure, and whether or not the property is listed for sale. We'd just encourage you to be patient, and not to worry too much about missing a deal. There is a saying among the auction pros: "Sometimes the best one, is the one you didn't buy". Bottom line, is that it better to have no deal, than a bad deal. So, take your time, stick to your numbers, and if a deal is getting too difficult or pricey, just walk away. There will always be another one.

Close Your Deal

Your work is not done when the offer or bid is accepted, it may just be beginning. This is especially true for preforeclosures, and REOs if you need financing—the lending markets have never been crazier. So, stay on top of everything: financing, inspections, escrow & title, and never assume anything will go as planned. If you are buying a preforeclosure, pay extra attention to the auction date if scheduled, since many properties are sold at auction despite being just days from closing escrow. If there is a sale date scheduled before your escrow is set to close, be sure you get the bank to agree to postpone the sale in writing.

We hope this brief overview helped you gain an understanding of how to buy foreclosures, be sure to read our Real Estate Investing Guide for more detailed explanations.

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