Buying Foreclosure

There are three different ways to buy a distressed property and each method has a number of advantages and disadvantages.

1. Pre-Foreclosure Purchase (purchase directly from the owner)

Buying a pre-foreclosure property from a private homeowner is the best option for a typical buyer.

Some of the best deals can be negotiated with sellers who typically are very motivated to get out from the mortgage without destroying their credit rating.

The buyer gets a below-market price on a home and has time to research the title and condition of the property.

2. Bid at the Auction

Foreclosure auction sales are typically the domain of the professional investor. These properties are formally in default, and sold to the highest bidder at an 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 in advance. Buyers will be competing against savvy professional investors and the lender, who also participate in the auction, in order to prevent the property from selling for a low price that would cause the lender to lose money.

A public auction often offers some of the best bargains and avoids the unpredictability of dealing directly with the owner.

3. Buy directly from the Lender (buy after the auction)

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. A property owned by a lender is also known as REO (Real Estate Owned).

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. The advantage of purchasing directly from the bank is the elimination of all title risk.