STEP 1. Find a Property
Search for property. Use your local real estate agency or realtor to search by county, city or zip code. I recommend starting with a broader search (like county or city) and narrowing the search later if necessary.
Decide the status of foreclosure for which you want to search.
- Select a Pre-Foreclosure for Default Notices or Lis Pendens.
- Select a Auction for Trustee Sales or Sheriff’s Sales.
- Select a Bank Owned or Government Owned for REOs (repossessions).
See Step 4 in this guide for more about the different property statuses.
You may also look for other search criteria, such as price range and number of bedrooms and bathrooms. I recommend that you leave all those other criteria at “no minimum” to “no maximum” when you first search to get the best results. Also it is recommended you don’t change the Recording Date Range when you first search. This will give you a more comprehensive list.
Property Details
The Property Details information should always include the address of the property and the name of the owner, trustee or lender involved with the foreclosure, depending on the property status. Also included should be an estimate of the unpaid loan balance, which will appear either as the Balance, Opening Bid or First Loan Amount. The Estimated Property Market Values provided are based on comparable sales.
The Trans Date and Trans Value represent the date and purchase amount the last time the property changed ownership.
The Balance or Opening Bid provides a good estimate of the amount owed on the loan in foreclosure. The Default Amount (usually only relevant for Pre-Foreclosure properties) is the amount the owner/borrower is behind on payments. The Recorded date is the date when the document with the foreclosure information was recorded with county records.
STEP 2. Get Financing
Finding financing is critical to investing in foreclosure properties. Few sellers will consider you to be a serious buyer unless you have your finances in order. That means buyers need to be pre-qualified before engaging in discussions with a seller. Sellers want to make sure that a buyer is in strong financial position to purchase the property. So secure financing early. Work with a lender who understands the foreclosure process, and can guide you through certain steps, such as ensuring that a property is FHA-compliant. Not all lenders finance foreclosure properties, so you may have to shop around for a lender who does. This is yet another reason why pre-qualification early on is a good idea.
Obtaining financing not only gives you an estimate of what you can afford, it also enables you to move quickly once you locate a property that interests you. When you approach a borrower/owner or a foreclosing lender about a property, secured financing will demonstrate that you are a serious buyer and are ready to buy quickly.
Determining How Much You Can Afford Figuring out how much you can afford to spend doesn’t have to be difficult. Basically, how much you can afford is dictated by the amount of cash you have on hand plus the amount a lender is willing to loan you. There are two rules of thumb to keep in mind in this area. First, you can afford a home that is up to 2.5 times your annual gross income. Second, your monthly principal and interest payments should equal one-fourth of your gross pay, or one-third of your take-home pay.
Of course, this is dependent on your lender’s approval and your own comfort level. From the lender’s standpoint, your credit rating, income and related factors will determine how large a mortgage you can support. You will need to take a few more factors into consideration to establish your own comfort level with the mortgage amount. For example, if you are young and upwardly mobile, you may feel more comfortable stretching to afford a bigger home, knowing that eventually your increasing income will make the payments easier. On the other hand, if you’re older or plan on retiring soon, you may want a lower mortgage payment that won’t tie up as much of your income.
You can apply for financing with The FlipBoard’s financing partners. The application is free. Subscribers can click on the Get Financing tab on the home page or click on the Lending Tree banner links on any page. You will be able to apply online or by phone.
We will discuss vehicles for Real estate investors , such as hard-money loans, with more in-depth training knowledge at a later time.
STEP 3. Contact an Agent
If you’re a first-time homebuyer and you’ve never purchased a home, let alone a foreclosure property, it is beneficial to contact a local real estate agent who can guide you through the process of buying a foreclosure. If you work with an agent, make sure they know your priorities. Ask any potential agents if they have experience with foreclosures. Especially for first-time buyers, a good agent can be a comforting and helpful resource.
STEP 4. Contact Owner
Depending on the property status, the seller will be the owner in default, the trustee or the foreclosing lender.
Buying a property in pre-foreclosure involves approaching the borrower/owner and offering to buy the property. The borrower/owner can walk away with something to show for any equity in the property and avoid a bad mark on his or her credit history. The buyer has time to research the title and condition of the property and can realize discounts of 20 percent to 40 percent below market value.
If the loan is not reinstated by the end of the pre-foreclosure period, potential buyers can bid on the property at a public auction. Buyers often are required to pay in cash at the auction and may not have much time to research the title and condition of the property beforehand; however, a public auction offers some of the best bargains and avoids the unpredictability of dealing directly with the borrower/owner.
If the lender or government agency takes ownership of the property, either through an agreement with the owner during pre-foreclosure or at the public auction, the lender usually sells the property to recover the unpaid loan amount. The lender typically clears the title for any buyer, but the potential bargain is often less than a pre-foreclosure or auction property.
Contact Owner: Pre-Foreclosure
Buying property in the pre-foreclosure process – the period between receiving a Notice of Default from the lender and the day the lender puts the property up for an auction -typically offers investors and homebuyers the best bargains, but it is also the most difficult stage to purchase a distressed home. During this stage, buyers need to deal directly with the owner of the house, who may or may not know that their home is being foreclosed. Homeowners in foreclosure are also under a lot of stress, making it difficult to negotiate a mutually beneficial deal. Moreover, there may be very little time to complete a transaction, so buyers need to be very careful during the pre-foreclosure period and also be very knowledgeable of how to navigate the foreclosure process.
When a property is in pre-foreclosure (NOD, LIS), the owner still has a chance to stop the foreclosure process by paying off what is owed or by selling the property. The pre-foreclosure period can last several months, so you may need to be patient when trying to contact the owner in default.
If you haven’t done it already, you’ll want to evaluate the property’s value and check for any additional loans or liens encumbering the property so that you can make an informed decision about whether the property is a wise investment.
If the trustee confirms the property is still in foreclosure, and you believe the property could be a wise investment, you should contact the owner in default as soon as possible. The quickest way to make contact with the owner is to send a postcard to the owner. You can choose pre-written wording for the postcard or type your own wording. There are many sources on the Internet for this verbiage.
If the owner does not respond to a postcard you can try to send another postcard (the owner may have a change of heart as the end of the pre-foreclosure period approaches) or you can wait to see if the property is scheduled for auction and attend the auction. One option is to call the owner if you can track down the phone number. Another option is to go to the property and try to contact the owner in person, as long as you recognize the ownership rights of the owner. We don’t recommend either of these options if you don’t have previous experience.
Contact Trustee: Auctions
One of the most challenging stages of buying foreclosures is buying foreclosures at the courthouse steps. First of all, you are competing with seasoned investors who track the auctions daily. Secondly, you will likely have to pay cash for the property because financing an auctioned property isn’t possible in many states. And if there is a money encumbrance attached to the property – a tax lien, a mechanics lien or a second or third mortgage – you, as the new owner, will have to pay it off in full. These are a few of the reasons why the auction is the most risky way to buy foreclosures.
Before the auction, you may have a chance to work out a last-minute deal with the owner in default. Usually a property is scheduled for auction just a few weeks before the auction occurs, so you may have to move quickly if you want to contact the owner.
Auctions can be postponed or canceled anytime, so no matter what the auction date is (even if it’s in the past) it’s always a good idea to contact the trustee or attorney to confirm. I recommend you call when you first locate the property and the day before the property is scheduled for auction. The trustee/attorney has the most up-to-date information if the auction has been canceled or postponed. The trustee/attorney cannot answer other questions about the property.
If you believe the property could be a wise investment, you can attend the auction to bid on the property. The auction date, time, location and opening bid are of public record and be acquired relatively easy. If any of this information is missing, you can often get it from the trustee or attorney. If you’ve never bought at auction before, then you should attend several auctions just to observe before you attend an auction to bid.
Contact Owner: Bank Owned
If the property is Bank Owned (REO), your first step is to contact the lender, whose information is usually on RealtyTrac’s Property Details page. You should contact the lender directly and ask for their REO or asset management department to find out how you can view and possibly make an offer on the property. REO means “Real Estate Owned” by the lender. It’s another way to say the property has gone through the foreclosure process and has now been repossessed by the foreclosing lender.
If you have trouble finding a phone number or address for the lender/bank through the Internet or otherwise, you can contact the local property assessor to find out the owner’s name and mailing address. Since the property is bank owned, the property assessor should have the bank or lender listed as the owner. Go to statelocalgov.net to find the local property assessor in your area.
Contact Owner: Government Owned
Many homebuyers get government-guaranteed financing. When homes that were bought with loans guaranteed by the Federal Housing Administration (FHA) or Department of Veterans Affairs (VA) go into foreclosure, they are repossessed by the government and then put up for sale by brokers that work for the government. Buyers who are interested in purchasing government-owned foreclosures need to use government-registered brokers to write the purchase agreement.
Many government-owned properties are already listed with a real estate agent, and you should see a link to contact that agent in the Contact section of the property details page. If the listing agent’s information is not available, you can contact a local agent at any large realtor. Or you can try to contact the government agency listed directly.
STEP 5. Make an Offer
If you have never purchased a foreclosure property before, I recommend that you have a real estate agent help you prepare and make an offer.
To get an estimate of the potential bargain for any property, you need to find out the estimated market value of the property, how much is owed on the property and if the owner has any other loans or liens encumbering the property.
Add together any outstanding loans and liens and estimated repair costs and subtract that total from the estimated market value of the property.
Based on your research of the potential bargain, you can make an offer. Usually the offer amount is somewhere below the market value but above the total outstanding liens and estimated repair costs. If the property is a pre-foreclosure or bank owned, you could prepare an offer similar to a typical purchase offer, contingent on a full inspection and title search.
If the property is selling at auction, you will need to make your offer, or bid, at the auction. In many states, bidders are required to pay in cash in the form of a cashier’s check at the auction. You probably won’t be able to conduct a full inspection and title search when you buy at an auction, so it’s important to do careful research before attending an auction.
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