Foreclosed house with notices on windows

Buying a Foreclosed House – Part 1

Foreclosed houses are those on which the former owner defaulted on their loan, and now belong to the lender which held the mortgage. To take ownership, a lender has to go through a long formal process known as foreclosure.

You may have noticed houses sitting vacant, with paper notices on their front doors or windows, such as the house pictured here. These are usually homes which are on their way toward foreclosure, though they are not available for sale yet. People use the term “foreclosure” often to mean such houses. However, prior to completing the foreclosure process, these are almost always tied up in a huge mess of legal and financial problems. A house in pre-foreclosure would have to be sold as a “short sale”, which is something completely different, and a nightmare we cover in another discussion.

To acquire title to a house whose owner has fallen behind on their payments, the lender must go through the foreclosure process. The sheriff serves a notice of seizure, which is when the paper notices are affixed to the house. An appraisal may be done by the lender. After a length of time which can vary widely, the property is scheduled for auction at sheriff sale. Prior to the sheriff sale, the sheriff must publicly advertise the property a prescribed number of times. If the owner does not come forth and pay off everything they owe, the property is then sold at the sheriff sale on the scheduled date.

While anyone can bid at a sheriff sale, the terms typically require at least a 10% payment on the spot with the balance due in 30 days. Also, no inspections other than maybe an exterior viewing are allowed prior to the sale. In addition, contrary to popular belief, homes are not simply sold there for pennies on the dollar. Keep in mind that the lender wants their money back! Lenders send a representative to each sheriff sale, with instructions to bid up to a certain amount, roughly the amount they are owed. If someone outbids them, then that person buys the house, and the lender gets paid; otherwise the lender is the high bidder and gets the house. Only then does it belong to them, and they put it up for sale as a foreclosure, usually listing it with a real estate firm.

If a lender was not owed very much on a house, then it could indeed be quite a bargain when it finally lists as a foreclosure. Maybe the former owner only financed a small amount, or paid the mortgage for many years, leaving a small balance. However, this is often not the case, so the pricing of foreclosures can differ greatly.

Always remember that there is no “magic” or “secret” way to find out about foreclosures. We see websites and other advertisements claiming that you can buy foreclosures for ridiculously low amounts. These are scams, and usually consist of stuff like: “Buy our investor kit for only $69.95 and you too can learn how to find foreclosures for dirt cheap!” This is utter nonsense.

Until a house has been completely through the foreclosure process, it is not for sale. Once foreclosed, it will show up on the market just like any other house. We keep a close watch for these, but more importantly, also have a deep understanding of the potential problems which can arise with foreclosed homes. Our knowledge, experience, and attention to detail helps our clients avoid such issues.

In part 2, we’ll look at some of those potential problems.

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