Buying a Foreclosure
by Nick Gromicko and Rob
Purchasing foreclosed homes in desirable areas at
below-market values can be a sound investment strategy.
Appreciation on their original prices may be tax-free.
Buying foreclosed rental properties can provide positive cash
flow, as well as valuable tax deductions. On the other hand,
buying a foreclosure involves homework, patience, and a certain
amount of luck. For those wishing to get a bargain house through
the foreclosure process, it’s best to learn the
Four Ways to Buy a Foreclosed Home
- A presale is when the prospective
buyer negotiates with the current owner before the house is
foreclosed upon. Presale discounts can be considerable, but
communicating and reasoning with the owner isn’t always
easy; they might have legal problems, lost their phone service or
electricity, or greet you with suspicion, having already been
hounded and threatened by creditors. And after time and
energy have been invested, the deal can fall through if the
owner comes up with the money to repay their debt, or for any
number of unexpected reasons. With persistence, however, the
seasoned real estate investor can profit from presales. To find
out about presales, you can try one of the following avenues:
- Ask your local county court how to search new notices of
- Find out if the County Recorder has data available
- Look in the "legal notices" section of the
newspaper for properties that are coming up for sale at public
auction. Take note of the address, the property owner’s
name, the tax ID, and whatever other information is contained in
- A foreclosed home may be sold at a public
auction, in which buyers can expect a discount of
10% to 25% of market value. Interested bidders are generally
required to show proof of financing, and must have a minimum cash
deposit before they are qualified to bid. It might be impossible
to gain entry to inspect the interior, too, which makes this type
of purchase risky. The local building department may have permit
records that can clue you in to the building’s layout and
- A real estate-owned (REO) sale is a
transaction where a foreclosed house is purchased directly
from the bank. These properties typically wound up in the
bank’s portfolio after failing to sell at auction. REO
investments are relatively safe, as there are no tenants to evict
or hidden liens and, unlike properties sold at public auction,
buyers can usually receive a mortgage to pay for them.
And purchasers might even get an unused house; the slow
economy has left many builders at the end of their
construction-loan periods without finding buyers for the homes,
in which case the bank will foreclose on the brand new homes.
Unfortunately, REOs are usually offered at near-market prices to
recoup the costs of property taxes, maintenance and legal fees.
To find REOs, try the following:
- Check lenders’ websites, as they may have a list of
their REOs, along with contact information for the appropriate
real estate agent.
- Call lenders and ask to speak to someone who handles their
- Check newspapers.
- The Department of Housing and Urban Development has tens of
thousands of HUD homes whose previous owners
defaulted on federally issued loans. After a period during
which local governments gain exclusive buying privileges, they
become available to individual buyers who pledge to live in the
property. After another 10 days, investors may bid on the
property. It’s difficult to make a profit on these houses,
as HUD releases them at near-market values.
Tips for Foreclosure Purchases
- Invest time in research and preparation. Those new to the
field should spend some time learning the variables of
foreclosure investing before making any purchases.
- Budget carefully to prepare for the unexpected. The house may
require unforeseen repairs, such as a leaky roof or unstable
deck. The price tag of the home itself is often just the first of
a series of fees. What if you planned on rental cash flow to
cover the mortgage, but you can’t find a tenant?
- Avoid buying a foreclosure sight-unseen. Try to see the
house yourself before buying it, or hire someone to evaluate at
it in your absence. Distant investors are buying up properties
unseen in bulk, and they’re often unpleasantly surprised at
how much they’ve been misled.
- Evaluate the neighborhood. If the foreclosure is rife with
problems, but it’s in a desirable area with high
property resale values, it may still be worth it to make a low
offer. An area with several foreclosures or a high crime rate
can undermine an otherwise good deal, however.
- Consider how long the house has been vacant. Building damage
– and the costs required to make the house livable -
generally increases with the time that has lapsed since the
last tenant vacated. Pests are a particular issue in houses that
have been empty for a long time, and plumbing defects and leaks
increase in likelihood in such homes, as well.
- Examine the landscaping. Left unchecked, trees can send their
roots into the foundation, and vines can creep into the
- Has the house been professionally inspected by an InterNACHI
inspector? Foreclosures can be notorious for damage
suffered at the hands of past tenants, through both inadvertent
and intentional vandalism and theft.
In summary, there are a number of ways to go about buying a
foreclosed home, and buyers should exercise patience, persistence
and careful planning before buying foreclosed properties.