Overview of Buying a Foreclosure

In this article, we'll give you an overview of buying a foreclosure at the different stages of the foreclosure process. 

First, let's answer the most basic question you might have about the process: "What is a foreclosure?"

A foreclosure occurs when a home loan borrower goes into default. That means, for reasons as far-ranging as job loss to medical illness, the borrower can no longer make payments to the bank. Since the bank isn't making any return on investment from their loan, they go into the legal process of taking back the house.

When banks foreclose, this offers a unique opportunity to prospective buyers since they might have the option to buy a property at a steep discount. First, let's look at how an investor might go about doing that before the house even officially goes into foreclosure.

Step 1: Pre-Foreclosure: Buy Before a Notice of Default

A pre-foreclosure is when a borrower miss a few payments before the bank goes through the costly process of foreclosure. Naturally, the bank tries to work with lenders by pushing back payment due dates and even lowering their monthly costs.

After approximately three months to half a year, though (depending on the lender), the borrower will officially go into default.

If you're an investor, contacting a distressed owner at this step to buy the house outright might be the perfect win-win-win scenario -- for you, for the owner, and the bank. Once the borrower goes into default and the bank officially begins the foreclosure process, that event will negatively affect the borrower's credit history for seven years until it's deleted from the report. Knowing this, the owner might give you an excellent deal, and the bank will undoubtedly be happy to avoid all the paperwork and headache of sending the house to auction.

Step 2: Foreclosure Auction: Competing with Other Investors for Foreclosed Homes

The longer the bank holds on to the property, the more costly it becomes for them. The bank is dealing with large numbers of homes, so the more property taxes they incur, the more money they lose. Naturally, this means the bank wants to get rid of the property fast.

What does this mean for you? If you're looking to buy a home at a public auction, you'll need to qualify before you can even bid on certain homes. Most auctions will be all-cash, so the bank wants to know that you have the necessary capital to close the deal.

What happens if no one buys the property at auction? That brings us to the next step.

Step 3: Real-Estate-Owned Properties (REOs)

If you've ever looked through RealtyStore.com or your local MLS for REOs, it means that the home has been foreclosed upon and is now owned by the bank. The bank contacted a realty company to sell the house, and now an agent is working through that process.

Out of the three possible options for buying a foreclosed property, buying REO properties will likely require the most repairs. Think about it this way: if no one was able to contact the distressed owner in pre-foreclosure to work out a deal, the house was foreclosed upon, sent to auction, and still no one bought it, then there's probably something seriously wrong with it (but not always!)

Conclusion: Overview of Buying a Foreclosure

In conclusion, you can buy a foreclosure in three primary ways:

You can buy a foreclosure during pre-foreclosure after the borrower has received a notice of default before the house is sent to auction.

You can buy a foreclosure at a public auction. If you do this, you're going to need to qualify before you can bid.

And, finally, you can buy an REO, which is a bank-owned property that's been foreclosed upon.