How to Buy Foreclosures

Foreclosures occur when the homeowner defaults on mortgage payments or when he is unable to pay taxes imposed by the federal and the state government. People generally buy a home by obtaining a mortgage on the house. The borrower or the owner of the house, is expected to make principal and interest payments on a regular basis. In case, he defaults on the payments, the house which acts as the collateral, reverts to the lending institution. The house which is repossessed by the lending institution, is said to be under foreclosure. When the home is repossessed by the government due to the homeowner's inability to pay taxes, the foreclosure is known as a tax-lien foreclosure.

How to Buy Foreclosures

Buying a home which is under foreclosure can be an attractive investment. Sometimes, it is possible to buy the property for as low as 30% below its market value. Easy financing may also be available for people with a good credit history.

Buying from the Bank/Lending Institution: Every bank tries to sell off the property under foreclose at an auction. In case, the attempt is not successful, a buyer can directly approach the bank or the lending institution that has seized the property from the homeowner. Once the bank seizes the property, the house is referred to as REO (real estate owned). Since the bank provided finance to the owner, who in turn defaulted, the bank might be willing to sell off the property at a price that might just cover the remaining mortgage balance on the house. Buying bank foreclosures are better for the first time buyer, since the buyer does not have to deal with evicting the occupants of the house. Moreover, when a bank initiates the foreclosure proceedings, it negotiates with the other creditors and generally manages to get rid of liens and taxes. There are no appraisal costs, since the bank has already appraised the property. The buyer should contact an agent, who would in turn make an offer to the bank on his behalf.

Buying Government Foreclosures: There are two types of government foreclosures. If the borrower defaults on the mortgage provided either by a government agency or by a government sponsored agency, the property is auctioned off by the U.S. Department of Housing and Urban Development. In case of such foreclosures, the buyer has a low profit margin. The other type of government foreclosure is the tax-lien foreclosure. Tax-lien foreclosure is the result of the homeowner not paying property or income tax. Nowadays, tax-lien foreclosures have become common because of recession. A person can buy the home for as low as 60% below its market value, because the sale is just meant to cover the taxes that are due to the government.

Buying at an Auction: A buyer can buy a foreclosure at an auction that is conducted by the government or the bank. The disadvantage of buying at an auction, is that the buyer is expected to pay the entire money the very same day, without even inspecting the house. Generally, auctions inflate the value of the property and the buyer ends up overpaying.

Buying Pre-Foreclosures

In this case, the buyer approaches the homeowner before the foreclosure proceedings are initiated. Pre-foreclosure sales are allowed during the grace period, when the lending institution allows the homeowner to sell the house and prevent a foreclosure on his record. A foreclosure has a negative impact on his credit history and can reduce his credit score. Hence, the homeowner is generally willing to sell off the home for less than the balance remaining on the mortgage before the foreclosure proceedings are filed. The lender may also be willing to accept a lower payment to avoid the hassle of foreclosure.

Before buying a home under foreclosure, the buyer must be aware of the loans and the liens on the house, since these encumbrances result in lowering the buyer's return on investment. He should also have an idea about the market value of the house. Most of these issues evaporate, when the buyer purchases the house from the bank. Foreclosures are a good investment vehicle for people who are aware of the risks involved in buying a property under foreclosure and are willing to take adequate measures, in order to protect themselves from being scammed.