How to Buy Foreclosed Property

Fannie Mae and Freddie Mac have extended the suspension of foreclosure sales and evictions through the end of January, reports the Associated Press. When the hiatus ends it is likely that thousands of properties will come on the market, beginning this spring.

After reading an article saying foreclosed houses were selling in Detroit, Cleveland, and other locations for less than $3,000, I conducted hands on market-by-market searches of the MLS (multiple listing service) in 25 cities around the country. These are markets I have followed for several years. While I didn’t find many properties that cost less than a used subcompact car, I did find a surprising number of listings between $35,000 and $50,000 in cities where that price range surprised me.

Beware: Do not fall for any scheme where you purchase a property in a city that is not easily accessible to you. Don’t buy without inspecting a property and the neighborhood. Most very low priced foreclosures are located in run-down, sometimes unsafe, areas. If you’re purchasing to refurbish and rent, the neighborhood may not be as important to you as it will be if you are looking for your residence or business location. However, you need to know the neighborhood where you own property to avoid a potential disaster.

When you move up to prices higher than the bargain basement range, in most cities you will find an assortment of foreclosures from small starter homes and offices to large buildings and palatial estates. Property owners at every economic level have been savaged by the mortgage meltdown.

If you see a listing at a price that seems too low for the neighborhood and you’re interested in it, inquire about the reason for selling. The owners could be attempting to beat the foreclosure clock. You may be able to make a deal that is a win for you and for them since selling before foreclosure makes a huge difference to a credit history.

I have watched attractive properties in desirable areas sit on the market for many months. This just happened with a classic 1920s gem a couple of blocks from a prestigious country club. I presumed its below market price was due to a need for updating and its close proximity to a busy street. Then the listing changed to reflect bank ownership. It’s now a foreclosed property. With many foreclosure auctions resulting in no buyers, banks in most communities have grown more flexible about negotiating sale prices and other details.

Every state has unique laws governing foreclosure and rights of redemption. In many states, the previous owner can pay the amount their property sold for plus fees and redeem it within a legislated timeframe. If you buy a property in a state where owners have a right to redemption and you spend money refurbishing, you could lose any money you’ve invested if the previous owner provides the necessary funds to redeem the property during the legal timeframe. This is the greatest risk, when purchasing foreclosures. In states without simple redemption rights, such as California, Florida, Nevada, and Texas, this risk is eliminated. However, it is always wise to check with a real estate attorney before a major property investment.

In a state that provides right to redemption, the best time to buy is prior to foreclosure. The transaction proceeds as a normal sale; you have clear title to the property. Although the seller may reduce the price greatly to avoid foreclosure or a mortgage holder could agree to a short sale, the previous owner has no legal recourse after you close.

If you are interested in foreclosed properties for your home, business, or as an investment, search foreclosures on your local area MLS. Research the last sale price of the property and the current value of comparable properties in the neighborhood on Zillow.com. And determine whether you are eligible for HUD (U.S. Department of Housing and Urban Development) funds to refurbish the property or for other purchase expenses. 

If you’re going to bid at a foreclosure auction, know that the lender will bid the balance due on the property plus outstanding fees. When there is no interest in a property, bid a little higher than that amount to own the property. If you know the property value is less than the amount due or this lender is holding many foreclosed properties, you could wait until after the auction to buy directly from the lender. A workout officer, who needs to move properties, will be more willing to make a deal in the privacy of a bank office than on the courthouse steps. Buying directly from the lender, after they’ve purchased a property during a foreclosure auction, will mean you can have property inspections done before committing to a purchase.

There are excellent values in pre-foreclosure and foreclosed properties on the market throughout most of the country. With mortgage interest rates dropping, more liberal FHA (Federal Housing Administration) lending programs, and banks wanting to rid their books of real estate, you could find some sweet deals during 2009.