Foreclosed Properties May Offer Bargains, but There Are Risks

As some homeowners get squeezed by higher mortgage rates and a cooling real-estate market, many house bargain-hunters are turning their attention to foreclosures.
By: Aleksandra Todorova: The Wall Street Journal Online
They hope to get good deals by buying from homeowners who are falling behind on their mortgages or by buying after the lenders have seized such properties.

Confirming the trend, online Web sites such as Foreclosure.com, Foreclosures.com and RealtyTrac.com, which list foreclosed properties and charge subscription fees, all report an increase in listings.

"For the right buyer, foreclosures are an excellent opportunity to buy a house at a lower than market-value price," says Tim McCloud, an agent with Kelley Realty in Green City, Ohio, who specializes in selling foreclosed properties on behalf of the lenders.

Needless to say, buying foreclosure properties is more complicated - entails more risk - than going the regular home-buying route. Here's what you need to know:

Tapping Pre-Foreclosures

Buying property in a pre-foreclosure stage - the period between when the owner receives a Notice of Default from the lender and the day the lender puts the property up for an auction - may offer the best bargains, but it's also the most difficult. "Pre-foreclosures tend to be more for the seasoned investors," says Brad Geisen, CEO of Foreclosure.com.

For starters, you have to deal directly with the owner of the house, who may not even be aware that the house was made public in a foreclosure listing.

"These people don't ask for their properties to be listed on our Web site," says Alexis McGee, founder of Foreclosures.com. Rather, foreclosure Web sites get their listings from county recorders' or clerks' offices, since notices of default are public records.

Even if you come to an agreement with the owner, you may have very little time to complete the transaction.

Depending on which state they call home, the owners may have only a month before the bank puts the home up for auction.

Auction Risks

If buying pre-foreclosures is tough for the regular home buyer, buying at an auction can be downright impossible. For starters, you have to pay cash, since financing auctioned properties isn't allowed. You're also expected to buy the house sight unseen. And on top of that, you're not allowed to get title insurance: If the house has a $100,000 tax lien attached, the new owner will have to pay it off. "The auction is the most risky way to buy," says Foreclosure.com's Mr. Geisen. "We don't recommend it."

Foreclosed Deals

If no one shows up on the courthouse steps or there are no bids high enough to cover the outstanding loan, the bank will take ownership of the property and put it up for sale. This is the easiest way to buy foreclosed properties, but you are also least likely to get a discount, as the bank will typically put houses up for sale at or close to market value.

Bank-owned properties, also known as REO or "real estate owned" properties, are usually sold through real-estate brokers. To find an REO broker in your area, try REONetwork.com

Government Homes

When homes that were bought with loans guaranteed by the Federal Housing Administration or Department of Veterans Affairs go into foreclosure, they're put up for sale by the government itself. The listings at www.homesales.gov/homesales/mainAction.do are free and updated every Friday, but you can only bid through a government-registered broker.

For the first 45 days, a listing is available only for homeowner occupancy, which means you don't have competition from seasoned foreclosure investors, explains Dick Esposito, owner of ADR Properties in Maryland, who specializes in buying and flipping HUD foreclosures. "You get the first chance at all the good properties as a homeowner," he says.