Buying Foreclosed Houses Not a Slam-Dunk Deal

Hardly a day goes by without more bad news about mortgage woes across the country. Nearly 447,000 properties went into foreclosure in the third quarter of 2007, up 30% from the quarter before, and up almost 100% from the third quarter of 2006, according to RealtyTrac®.

Bright spots seem nonexistent in this dark cloud�except possibly for one. Some consumers looking to buy a home are wondering: Could I find a good deal on a foreclosed house?

The answer is "a most definite maybe," quips Jim Gaines, research economist at the Real Estate Center at Texas A&M University in College Station. "It depends on the locale, the quality of the property being foreclosed, and the willingness of the owner or lender to negotiate."

Proceed with caution

Good deals on foreclosure properties do exist, agrees Gary Painter, director of research at the Lusk Center for Real Estate at the University of Southern California, Los Angeles. "Then there are other properties that, once you factor in the costs of needed upgrades, are not good deals," he says. "In general, a foreclosed property may need more work than a nonforeclosed property."

That's not to say foreclosed properties are necessarily in bad condition, Painter emphasizes. For instance, some homeowners and building contractors got into subprime mortgages they eventually couldn't afford and ended up in foreclosure. These houses could be in excellent shape, even brand new. "But because these are nice properties," Painter says, "they might not be great deals from a price standpoint."

Failure to meet mortgage payments is not the only cause for foreclosure. Others include property abandonment, probate settlement after a death, income tax seizures, and nonpayment of property taxes. Procedures vary by type of foreclosure sale and locality, so check with the appropriate government authorities.

In the case of mortgage foreclosures, you can buy a property in four ways:

Through a preforeclosure sale At a foreclosure auction From a lender who has taken back the property From the U.S Department of Housing and Urban Development (HUD)

Generally speaking, the first two methods in this list are best left to highly experienced property buyers. "You have to do your homework," Gaines says. "You have to become familiar with your state's foreclosure laws, your rights, and how the process works." Mortgage foreclosure laws and procedures vary by state.

To find out about foreclosure properties, you can sign up for any of several online tracking services for a monthly fee. Or for no charge, you can search local public records, which is where the tracking services get their listings.

1. Preforeclosure sales

Here the buyer purchases the property directly from the current property owner. The transaction takes place during the preforeclosure stage�that is, after the owner receives the default notice and before the lender puts the property up for auction.

A preforeclosure sale can be a touchy situation. The owner is going through a difficult time, so a buyer must be tactful and patient�and cautious. Be sure to check out whether there are existing liens or tax debts on the property, and inspect it for needed repairs.

As a buyer, you may or may not get a bargain in a preforeclosure sale. You might be able to negotiate a price that covers what the owner owes the lender, but is still less than the market value you'd ordinarily pay. On the other hand, if the owner owes more on the mortgage than the house is worth in the market, you're unlikely to get a price discount.

2. Foreclosure auctions

At a foreclosure auction, prospective buyers must plunk down hefty cash deposits to be eligible to submit bids on a property. Usually the lender that foreclosed the property sets the level of the opening bid. The winning bidder has to come up with the entire purchase price amount quickly.

Often bidders get no opportunity to inspect the house. You buy it "as is," and that translates into risks. The owner, knowing that a foreclosure was coming, may have stopped maintaining the property�or even damaged it deliberately out of spite.

"Those are the dangers in going to an auction to buy a foreclosed property," Gaines cautions. "It's not totally a pig in a poke, but you have to be careful and know what you're doing."

Here again, you need to find out if there are liens or taxes owed. Is the property occupied? Will you have to evict the occupants? Is the owner trying to take legal steps to keep the home, under redemption laws that exist in some states? In that case, even if you submit the winning bid, you may not get the property in the end.

3. Buying from a lender

This is a much less risky way to buy a foreclosed home. When the property doesn't sell at auction, the lender takes it back and sells it through its "real estate owned" department. Hence, these are known as REO properties. The lender refers these properties out to REO brokers. See the REO Network for a nationwide listing of brokers.

With an REO, the lender usually has paid off any taxes or liens owed on the property, and handled any necessary evictions. As a prospective buyer, you get to inspect the property. You're much less likely to encounter the nasty surprises that can spring up after a preforeclosure sale or foreclosure auction.

You also can negotiate with the lender on price. But that doesn't mean you'll walk away with a great deal. It depends on how eager the lender is to sell. A lender with only a few foreclosed properties on its hands can afford to wait to sell for the highest price possible. But once foreclosed properties start to accumulate, a lender may be more inclined to sell at discounted prices.

"My guess is that you'll find the better deals going forward, more so than right now [in late 2007, early 2008]," Painter says. "We're seeing the first wave of foreclosures on the market. A lot of people are holding back to see if things will get worse or better before they make a move. If things do get worse�and in some markets they probably will�I think you'll find better deals."

4. Buying from HUD

Published February 11, 2008