The House Was a Steal, But Is It a Deal?

by Center for Personal Finance editors

There have been a record number of foreclosures in the past few years. And you've probably heard that you can buy foreclosed real estate (and other foreclosed items) at bargain prices. Sometimes you might even strike gold and find a real winner. But before you jump in the foreclosure game, consider these cautions.

While foreclosed homes often can be purchased at discounted prices, don't be fooled. Many of these homes will need a lot of repair.

Furthermore, you often can't get in the house or inspect it before you buy it. So you'll have no idea what state the home is in on the inside until after you purchase it. And many lenders won't give you a loan unless they can get in and appraise the property.

If, after considering the possible pitfalls, you still want to purchase a foreclosed property, there are three possible routes: preforeclosure sales, foreclosure auctions, and real estate owned sales. Auctions are the most common.

Preforeclosure sales involve purchasing the home from the current owner. If you use this method, the current owner's debt responsibility will shift to you, so make sure you research what is owed on the property before you buy.

If you buy at an auction, you typically will have to pay advertising and lawyer fees. In addition, you'll be responsible for evicting anyone currently living on the property. However, homes that go to auction typically sell in a lower price range.

If a property does not sell at auction, the lender may fix it up and sell through a real estate agent. There is little risk in this option, but there also is little savings.

Caution: A number of Web sites sell lists of foreclosed properties. Many of these sites are scams. Work only with well-established companies.

A good place to start is the U.S. Department of Housing & Urban Development (HUD) Web site. In addition to providing information about foreclosures and buying foreclosed property, HUD's Homes for Sale page provides links to the various government agencies selling property. Not all of those agencies sell homes, however.

April 26, 2004