How to Buy a Foreclosure Home The Right Way

There’s no cheaper way to buy a house than through a foreclosure auction. But foreclosure buying is also the riskiest and if you do not know what you do, it will cost you a lot of money and headaches.

For the typical home buyer, the process of buying a house entails driving a neighborhood with a real estate agent, visiting houses, getting pre-approved for a mortgage, negotiating a price, paying for a home inspection, termite inspection then signing a big pile of paperwork.

Now imagine buying a house in less than a minute. No home inspection. No mortgage. No real estate agent. No formal closing meeting and not much paperwork. That’s what it looks like when you buy a foreclosed property at auction from your local sheriff, county treasurer or other governmental agency.

As the number of foreclosed properties nationwide surpass anything we've seen in decades, investors and other home buyers are finding what they consider the bargains of a lifetime. But while the prospect of eliminating real estate agents and lenders may seem an attractive proposition, buying a foreclosure is not for anyone.

If you’re going to attempt to buy at a genuine government-sponsored foreclosure auction (as opposed to the heavily advertised but completely different types of auctions from companies like Auction.com) be prepared to do a lot of homeowrk.

The first question you should ask yourself: Is a foreclosure really right for you? One major drawback for those seeking a foreclosure (REO - Real Estate Owned) is that buying this way requires a lot of cash. You typically have to make a 5% to 10% deposit on a property before you can actually bid on it. Then, if you’re the successful bidder, you’ll be required to pay the entire purchase price within 24 hours of the auction. No mortgage allowed. You will also have little, if any, opportunity to inspect the property before you bid on it. Finally, you have to be especially careful that the property you’re bidding on doesn’t have hidden mortgages or other liens that take priority over the one you’re bidding on.

So how do you do it right? The important things to remember when buying foreclosed property at auction include:

1. Make sure you understand exactly what liens are secured by the property you’re bidding on. This generally requires paying a title company to do a complete title search on the property. Only then can you be sure that the price you’re paying will leave you holding good, free-and-clear title to the property. Title searches can cost from $100 to $350. That’s money you’ll need to spend before you bid.
2. Look at the property you want to purchase. While you’ll almost never be able to obtain a professional inspection of a foreclosed property (the people who are losing their home might very well still be living there) you can at least drive by and see the conditions of the hosue from the outside. It’s not the very best, since any property could contain major structural defects you can’t see from the outside, but it’s better than nothing.
3. Avoid overbidding. As with any auction, it’s easy to get caught up in the heat of the moment and pay more than you should. Now that you understand the rules for buying foreclosures, here’s something that might blow you away: With the exception of avoiding overbidding, many foreclosure professionals totally ignore them. You should purchase a foreclosure list in your county you reside which gives a brief summary of every property coming up for auction both on paper and online. The cost is for the list will vary depending on where you reside.

So how does an amateur compete and win at this game? By learning to do it right. Unfortunately, there’s not someone offering free classes on buying foreclosures in most cities. But there are people with experience. Wherever you live, the information you need is both available and free.

The bottom line of foreclosure buying? It’s certainly not for everyone, and it’s not for anyone without cash or unwilling to take at least some degree of risk and some training. If that’s not you, then look for a foreclosure that’s for sale by either one of these foreclosure pros or a bank. Those REOs are available through regular real estate agents.