Real Estate Basics: How to Buy a Foreclosure

The recent downturn in the economy and housing market has left many homes on the verge of foreclosure. Many have already lost their home, and the evidence can be seen on every block in every neighborhood. Vacant, foreclosed homes can be found everywhere. If you've ever wanted to buy a foreclosure, now is the time to do it. You can literally find any type of house you want, and the competition is low due to the prevalence of foreclosures.

There are several different ways to buy foreclosures. Or should I say, there are several different times that you can buy foreclosures. The foreclosure process is a slow one, and there are money-saving ways that you can buy a home each step of the way. The following are three phases during which you can buy a foreclosure:

• Pre-foreclosure - The pre-foreclosure phase is a time during which the homeowner still has control of the home. The foreclosure process has begun, but the homeowner still can avoid it by selling the home or forking up some cash for past due payments.

• Auction - The auction phase of foreclosure is just what it sounds like. This is when the foreclosed home is sold for a fraction of what it's worth on the auction block.

• Bank Owned - After a foreclosure occurs, the bank that financed the home can take control of the house and sell it.

There are benefits and drawbacks of each type of transaction. Below we will talk about each type of transaction and see how they differ from one another. We will also talk about how you can start the process of buying a foreclosure in each of these stages.

Pre-foreclosure Phase

Buying a home during the pre-foreclosure phase involves a lot of legwork. First, you have to find out who is in a pre-foreclosure state. You can do this by obtaining a list from a pre-foreclosure listing agent, a bank or from some other government entity such as HUD (housing and urban development). Once you obtain the list, you will have to approach home owners individually and make an offer.

Buying during the pre-foreclosure phase allows you to purchase a home for well under what it's worth. Many times the homeowner will let the home go for what they owe on it. You can also perform inspections, apply for mortgages and proceed with the transaction much like you would any other real estate transaction.

Auction Phase

Real estate auctions are posted in local newspapers before they occur. To buy a foreclosed home at auction, all you need to do is be present at the auction and place the winning bid.

Buying a house at auction is the cheapest way to buy a foreclosure, but there are some drawbacks. You will have to have a substantial down payment (20 to 30%), and you will need to pay off the remaining balance within a short amount of time, usually 30 to 60 days. There is also no opportunity to have a home inspection performed. All sales are AS IS.

Bank Owned Phase

Buying a foreclosure during the bank owned phase is much like buying a home any other time. Savings at this phase can be substantial but are not as great as they are during the pre-foreclosure and auction phase. To purchase a bank owned home, you will need to contact a real estate agent or the bank owning the home. The transaction will proceed just like a regular real estate transaction.

As you can see, there are benefits and drawbacks of each strategy. Buying a foreclosure can be stressful, especially if you buy during the pre-foreclosure phase. Auctions attract a lot of competition; so there is no guarantee that you will be able to "win" the home. With all of the variables that come along with buying a foreclosure, is it really worth it?

The answer is a resounding YES! At no other time can you save as much money as you can when you buy foreclosures. In many cases you can purchase a home for up to 50% less than what it's worth. This equals instant equity and a strong foundation for the future. Who wouldn't want to buy a foreclosure?