Many home buyers associate buying a foreclosure with getting a deal.  This can be true, but there are potential pitfalls. Foreclosure is a process with four distinct phases.  The terms and length of each phase vary by state and sometimes by lender.  The pros and cons of buying a home involved in foreclosure vary with the phase of foreclosure the property is in when purchased.

 

Phase One:  Motivated Seller (missed mortgage payments)

Buyer Advantages:

• • Financing available for purchase
• • Due diligence inspections included in process
• • Seller obligated to provide full disclosure

Buyer Challenges:

• • Seller may have little, if any, ability to negotiate price depending on their outstanding obligations on the home

 

Phase Two:  Short Sale: Pre-foreclosure Notice of Default

Buyer Advantages:

• • Motivated seller
• • Financing available for purchase
• • Due diligence inspections included in process
• • Seller obligated to provide full disclosure

Buyer Challenges:

• • Lender must approve purchase price and terms of sale including any closing cost credits
• • Purchase may take between 45 - 90 days to close

 

 

Phase Three:  Foreclosure Auction

Buyer Advantages:

• • Property sold for outstanding mortgage balance owed to foreclosing mortgage holder and therefore the price for the property may be very low
• • No commissions or attorney's fees paid

 

Buyer Challenges:

• • Auction price must be paid in cash; generally no mortgage financing is accepted
• • As-is sale; no inspections and no disclosures given to buyer
• • Liens, back taxes and other obligations may be acquired by buyer
• • Buyer must research title prior to auction

 

 

Phase Four:  Bank Owned Property/REO (Real Estate Owned By Lender)

Buyer Advantages:

• • Title will be clear and buyer will not assume any liens, mortgage or back taxes of prior owners
• • Mortgage financing available
• • Inspections may be conducted
• • House is vacant
• • Property listed on Multiple Listing Service (MLS); bank will pay real estate agent commissions
• • REO sales close within normal escrow timeframe

Buyer Challenges:

• • As-is sale; no repairs
• • Banks usually require additional paperwork
• • Banks cannot provide disclosures on property history or condition

 

Many ERA^® agents and brokers who specialize in foreclosure properties routinely negotiate with banks and can help you navigate through the process of purchasing a foreclosed home. To learn more, contact your local ERA Real Estate Agent.