When a homeowner fails to make timely mortgage payments, the mortgage lender -- typically, a bank -- can foreclose on the property. Foreclosure is a legal process in which the homeowner loses title to the home and the lender receives the property or a sum of money from selling the property. Lenders must publicly announce when they begin foreclosure proceedings, which is information you can use if you wish to buy the property. You can buy a foreclosed home before, during or after an auction.
Preparing to Buy
You'll need to make certain preparations if you want to buy a foreclosed property, including:
Identifying available properties: You can check an online multiple listing service, or MLS, for homes in the pre-auction stage of foreclosure, homes about to be auctioned or homes for sale directly from the lender. An MLS has search facilities that allow you to specify the status, location, type and price range of properties in foreclosure.
Arranging financing: You will need to secure cash to buy a foreclosed property. Auctions are always cash only.
Contacting the appropriate party: This can be the lender, the owner or the owner's agent. Make arrangements to inspect properties that interest you.
Buying Pre-Foreclosure Properties
Normally, several months elapse between a foreclosure filing and an auction. During the pre-foreclosure interim, you can purchase the home by making an offer to the owner. If the amount you offer is less than the remaining mortgage balance, the transaction is termed a short sale and must be approved by the lender. Short sale properties are usually sold "as is," which means you assume financial responsibility for any repairs that the property requires. Aside from getting the lender's permission for a short sale, a pre-auction purchase is similar to a regular home-purchase process.
Buying at Auction
When the foreclosure proceeding is complete, the home is put up for auction, usually by a local official such as a county sheriff. The lender usually sets a reserve amount -- the minimum amount it will accept for the property. When buying a foreclosed house at auction, you should:
Understand the bidding process used in your state. Some states require that you bring the full amount in cash or cashier's check, while others require only a small deposit in cash that may be nonrefundable. Research your state's foreclosure laws and observe an auction or two to get comfortable with the process.
Check county records on properties that interest you to find potential bargains. You can find out the property's estimated value and any mortgages, liens or back taxes owed. You may be responsible for paying some or all of the liens if your bid wins.
Verify the auction date with the property trustee for the property you want, as these dates can change for various reasons. You may have to register at the auction to be able to bid.
Set your bid limit, especially in states where you must bring the full amount in cash. Your research should inform your limit, and this should protect you from being swept up in the excitement of a bidding war that reduces or eliminates the bargain. RealtyTrac, an MLS listing agency, recommends you set your bid limit at 80 percent of the property's market value, including liens and necessary repair work.
If you're new to bidding, take your cues from experienced bidders, but don't be intimidated by them. Stick to your bid limit.
If your bid wins, the auctioneer will provide you verifying documents. Verify the procedure for taking ownership. Some states allow immediate possession, while others may require days or weeks. Find out if you are responsible for having the sheriff evict the current occupants.
When the Auction Fails
If the top bid on a home fails to meet the lender's reserve requirement, the bank becomes the owner of the home, now classified as real estate owned, or REO, property. The bank can hire an auction house and put the property up for auction again, and online bids may be accepted. You can inspect the property before the auction to help set your bid limit. You must register to bid at an REO auction and provide the deposit amount -- usually 5 to 10 percent -- immediately if your bid wins, although you might live in a state that requires full payment at once. Be aware that the property is sold "as is," and you may have to evict uncooperative occupants. Alternatively, the bank might put the REO home up for sale as a conventional property through a real estate agent.