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Get started investing in real estate foreclosure properties with this in-depth guide that includes instructions, examples, and statistics.
Find out whether foreclosure investing is right for you with information that explains:
- What exactly are real estate foreclosure properties?
- How foreclosure properties are bought and sold?
- What risks are involved in foreclosure investments?
- How you can lower your risk when buying foreclosure properties?
- How much money can you make selling foreclosure properties?
- Where can you find or browse real estate foreclosure listings?
- Should you hire a real estate agent, lawyer, or title agent — or is it better to save money by doing it alone?
You’ll find all the answers below in this complete investors’ guide to real estate foreclosure properties.
Real Estate Foreclosure Investing For Beginners:
- What Are Real Estate Foreclosures?
- How Real Estate Foreclosure Properties Work
- How To Find The Best Foreclosure Deals
- How To Protect Yourself When Buying Foreclosures
- 8 Steps To Buying A Real Estate Foreclosure Property
Real estate foreclosure is a phrase that refers to a property that has been repossessed or seized, by a lender or by the government, due to unpaid mortgage loans, taxes, or utilities.
When properties are seized the entity turns around and resells them to the public, usually at a very steep discount.
Foreclosed properties present opportunities for people willing to fix up a property and restore it to market value or above.
- Lenders (banks) seize property if the owner defaults on the mortgage.When a bank sells a foreclosed property, they try to sell it for as much money as possible.
- The government seizes property if a home or land bought with a government loan isn’t paid or if the owner neglects to pay income or property taxes. When the city sells a property, they’re usually only trying to recover their losses (such as property taxes).
- Seized properties typically go immediately to auction where anyone can bid on them. If a property doesn’t sell at auction, the entity typically moves them into local real estate listings. Occasionally, banks wait to list a property with the hopes that its value will increase over time.
Foreclosures present unique opportunities for investors who hope to earn higher-than-average profits from buying and selling real estate.
However, they do come with a drawback:
All foreclosure properties are sold “as is,” and most require significant repairs and restorations before they can be resold at market value.
Why Buy Real Estate Foreclosures?
People buy foreclosure properties for a variety of reasons. Some are looking to buy a cheap home they can fix up and live in, while others are seeking an investment that generates better average profit.
The most common reasons people buy foreclosures properties are to:
- Save money when buying their first home. People willing to put in the work of fixing up a house in exchange for saving some money sometimes turn to real estate foreclosure properties. They buy at a lower cost and invest their time and money to fix it up (often doing it themselves). In a perfect world, the results are a beautiful home appraised at market value, and they save thousands (or tens of thousands) of dollars in the process.
- Buy their first rental property. Investors who want to buy properties to rent out to tenants, such as apartment buildings or multi-family homes, may turn to foreclosure properties for a (hopeful) savings on their investment.
- Flip the house for a profit. “House flippers” are people who buy homes then renovate them and sell them for more than what they paid. House flipping, even with a team of people in place, is typically more of a job than an investment. It takes a lot of work to fix up distressed properties and often requires more labor and money than expected. Because of the need for hands-on work or supervision, house flipping is more like earned income than an investment.
- Generate income to help them buy more real estate. One of the greatest challenges beginner real estate investors face is coming up with the money to buy their first property. Some hopeful investors turn to real estate foreclosures as their first property, so they can buy a property for a lower cost, then fix it up and sell it. Then, they use the profits to help them purchase their next property.
There are many reasons why people buy foreclosure properties. If you’re hoping to invest in foreclosures, it’s critical to understand how the process works and what you’ll be getting into before you start.
How Much Money Can You Make From Real Estate Foreclosures?
On a @$250,000 home, for example, you might hope to earn $25,000 – $35,000 or more.
Average profits are what people hope for, but foreclosures come with a wide range of variations when it comes to repairs and reselling.
Some people make a significantly higher profit on the properties, while others lose more than what the home is worth.
- The New York Times reports that, in 1996, one woman bought a Southhampton house for $151,000 at a foreclosure auction, and by 2006 the home was worth $1.6 million. Another man bought a Brooklyn apartment building with 157 units in 1997 for $2.5 million, and nine years later it was worth $25 million.
- Houzz reader Anne Pratt and her contractor husband purchased a foreclosure house for $105,000 and put $50,000 into it (keep in mind that, as a contractor, the fees and labor were probably much less costly for them). A few years later, the home sold for $230,000, earning them a $95,000 profit.
- Houzz reader Gardenarian says they bought a second-home cabin for $150,000 whose value appreciated to $500,000 over the years. They currently rent out their cabin, when not in use, through Airbnb to help cover expenses.
However, some foreclosed properties sell for 50% or more beneath market value.
Realtors say they typically put somewhere between $25,000 – $35,000 into a home before it’s ready to sell, but if you buy a home that ends up needing major repairs or has extensive leans, your costs can total more than the property itself.
Additionally, if you’re looking for the best deals on foreclosed properties (selling for more than 20% below market value), you’ll be competing with agents who do this for a living and know how to snatch up the best deals quickly.
That doesn’t mean you can’t buy a massively discounted property, but to keep up with expert buyers you need to understand the ins and outs of bidding on and buying the best foreclosure deals.
One excellent way to find foreclosure properties as soon as they hit the market is by visiting Foreclosure.com. The site lists properties fast, giving you a chance to keep up with competitive buyers.
For many people, foreclosure properties end up costing more money and consuming more time than they ever imagined because foreclosure properties are sold “as is.”
We can’t emphasize the “as is” strongly enough!
Sellers typically often have no idea what condition the property is in when they put it up for sale.
They provide no contingencies or refund policies to people who purchase foreclosures, and if you buy the property at an auction, you usually have the added burden of a “cash only” purchase.
People frequently warn of real estate foreclosure nightmares in online DIY and investor forums.
One risk unique to foreclosed properties is that it’s not uncommon for disgruntled homeowners to strip the house or damage the property before it’s repossessed.
Referring to a foreclosure home purchase, they commented that a previous owner had “sawn through some of the water supply lines, so when we had the water turned back on water came out of various pipes all over the place.”
The problems didn’t end there.
Referring to the previous owner, tsudhonimh reported, “He also had removed some thin supply lines and faucets and squirted caulk in them and reinstalled them.”
When investors don’t know how to protect themselves, purchasing a real estate foreclosure can become a nightmare.
For example, the Hankins family purchased a foreclosure house in Oregon for $35,000, excited to fix it up as their family home.
However, a few weeks into his DIY renovations, Jonathan began feeling sick.
“We knew there were a couple of broken windows. We knew the furnace was probably on its way out,” he said. “Overall, the house had great bones,” he explained. “Little did we know that those bones would be contaminated and poisonous.”
After some investigation, the Hankins family discovered that months earlier, the house was used as a meth den (a place where the illegal drug meth is made), and the chemicals used in that process had seeped into the floors and ceiling.
When they checked into hiring a company to clean out the chemicals, the Hankins family learned that the process could cost more thancost than the home was worth.
“It’s like a nightmare, you know, a home buyer’s nightmare,” – Jonathan Hankins, Houzz
Had he known in advance, Jonathan could have paid for a $50 test to check for meth residue before they purchased the house.
When you buy a foreclosure property, it’s a done deal. You can’t return it or pursue court action to recoup losses from the seller.
If you purchase a foreclosure without understanding how to research and plan for it (before you buy), you could end up losing more money than the home is worth.
Another common expense attached to real estate foreclosure properties is whether you’re buying a home with liens on it. Sellers are up-front about the liens, and in some cases they pay them off before selling. However, the property could have liens that you and the seller are unaware of — until collectors come knocking.
The new property owner is responsible for debt attached to the home through liens, even if they aren’t the ones who incurred the debt.
If you don’t pay the liens, the home could get repossessed all over again.
Fortunately, there are things you can do to protect yourself when buying foreclosure properties.
You can dramatically reduce the risks associated with real estate foreclosures by understanding how to protect yourself before you buy.
To understand how to reduce your risks when purchasing foreclosed properties, you’ll need to first understand how the process works.
While you can purchase foreclosed properties at a (sometimes significant) discount, they also come with risks and responsibilities that other properties don’t.
Should you buy a foreclosed property from an auction? Or, is it better to go through a real estate agent?
Understanding the various types of foreclosure sales and how the selling process works will help you determine a strategy that works best for you.
How The Sales Process Works
Foreclosed homes typically go straight to auction, then to real estate agents if they don’t sell at auction.
Step #1: The bank (lender) forecloses on the property. Repossession of a home is a lengthy process that technically gives homeowners 6 – 9 months or more to catch up on their mortgage payments.
However, the actual time it takes to complete a foreclosure in the U.S. is much longer. Based on a Statista report from data between 2007 – 2018, the average foreclosure process took 713 days.
The process is designed to give people time to catch up on their mortgage payments so their homes don’t get repossessed in the first place.Up until nearly the last minute, the property owner still has up to five days before the property goes to auction to get caught up on their payments and avoid repossession.
Step #2: The bank determines an opening bid on the property and lists it in a public foreclosure auction.
Opening bids are usually determined by totaling the loan balance, any liens or unpaid taxes, and the cost of the sale itself.
Step #3 if the property sells at auction:
- The purchaser of the foreclosed property becomes the owner and is given a trustee’s deed or a “quitclaim deed,” which provides absolutely no guarantee or warranty on the condition of the home.
- Once the sale is complete, the original owner (borrower) typically has three days to vacate the property.
- If the borrower refuses to move out, the new owner can begin eviction proceedings.
Step #3 if the property does not sell at auction:
- It becomes bank-owned property, also referred to as “real estate owned” property (REO).
- The bank asks the previous owner (borrower) to move out and begins eviction proceedings if they refuse.
- The bank tries to sell the property through a real estate agent or broker, REO asset manager, or by listing the properties online.
Foreclosure auctions happen all over the country, all the time.
To find foreclosure auctions, type your state or county, plus “property foreclosure auction” into Google search.
To view bank-owned (REO) properties, you can check with a real estate agent or a foreclosed properties website.
We recommend Foreclosure.com because it grants you access to more than a million foreclosure property listings — often before they hit the real estate market.
Its sophisticated (yet simple) search filters help you find exactly what you’re looking for more quickly — providing property pricing, images, details, and data that help narrow your search in a fraction of the time it might otherwise take.
Types Of Foreclosure Sales
There are several ways to buy foreclosures, but most are sold through short sales, auctions, or real estate agents.
- Short sale: A short sale is when the owner sells the property for less than what they owe on the mortgage loan. This usually happens when the owners are too deep in debt to get caught up and avoid foreclosure. Short sales can provide investors with a safer and sometimes less expensive alternative to buying a foreclosure property, but they can be a bit complicated. At the least, the owner will need approval from their lender before the sale is complete. Like foreclosure properties, short sales are “as is” purchases, but you’ll typically be allowed to order a home inspection before you buy.
- Auction: A foreclosure auction is a public auction where all properties are sold “as is” with no inspections or contingencies given. Auctions are usually the quickest, cheapest way to buy a property once the foreclosure is complete, but they carry a bit more risk and, in most cases, you’ll need to pay in cash for your purchase. When you buy from an auction, you won’t usually have permission or the time to do an appraisal or home inspection before buying. After you buy the property, you can give the residents three days to vacate it. If they refuse, you may have to go through eviction proceedings to get them off of your new property.
- Real estate agents: REO properties are listed with real estate agents. When a property doesn’t sell at auction, it becomes a “real estate owned” (REO) property and banks often put them into general real estate listings as foreclosure properties.REO properties give investors a couple of advantages. For starters, the bank typically clears the title and evicts the tenants before the home is put on the market. More importantly, they grant you permission to do a walkthrough and home inspection before you buy.
When looking at foreclosures, keep in mind that the type of sale affects many factors, including the price and risks involved.
How To Find The Best Foreclosure Deals
There are many ways to find good deals on foreclosure properties.
You can contact a real estate foreclosure agent, check through your local newspaper classifieds, browse properties on bank and government websites, contact auction houses, or even search through public records.
By far the easiest way to find properties, though, is to browse a dedicated online service that lists them.
For example, Foreclosure.com updates its database twice daily for the latest listings. It targets low-priced, distressed deals of:
- Bank-owned homes
- Government foreclosures (including Fannie Mae, Freddie Mac, and HUD)
- Real estate owned (REO) properties
- Foreclosure auctions
Finding property deals in your area is simple with its search engine, and you additionally can narrow your search with several filters, including:
- Listing type (HUD, $100 down, Sheriff sales, short sales, and more)
- Property type (single-family, multi-family, condo, mobile home, commercial)
- Number of bedrooms and bathrooms
Foreclosure listing sites are helpful because they can save you a massive amount of time and help you find the best deals fast — even if you’re new to buying foreclosed properties.
When foreclosure properties are put on the market or into auction, the sellers (bank or government) often have no idea what the true condition of the house is.
Sellers aren’t required to do repairs or inspections before listing the property for sale, and most sales will not include buying contingencies.
When you buy one of these properties, be prepared to do the work it takes to make the residence livable.
For some homes, this means doing a bit of cleanup and giving the place a new coat of paint.
More often, though, there are expensive repairs needed to make the home livable, such as:
- Roof repair or replacement
- Plumbing system repairs
- Electrical system repairs
- Walls and doors repairs and replacement
A well-maintained home typically needs about $500 to $1500 in repairs, but foreclosure properties can easily rack up $5,000 – $20,000 (or much more) in repairs before they become livable.
Additionally, your property may come with liens that you are responsible for paying that the bank may not even be aware of them at the time of sale.
The good news is that there are a few steps you can take to avoid buying a “nightmare” home whose expenses exceed its potential value.
How To Lower Your Risk When Buying Foreclosed Properties
Before you invest in a foreclosed property, put your money into a team of professionals that can thoroughly investigate the property and guide you through the process.
- Hire a real estate agent.
A real estate agent who’s experienced with foreclosures can help you find the best properties and offers. They will also guide you through the buying process, saving you a significant amount of time and reducing the possibility of errors.
- Hire a title agent.
Foreclosed properties can come with all kinds of title problems.
For example, the home may have liens attached that the new owner is obligated to pay, such as:
- Unpaid taxes
- Unpaid utilities
- Unpaid contractors fees
Hidden liens are not uncommon with foreclosures, and it’s not the seller’s fault. Finding them can be tricky, which is why it’s critical to hire an expert who can research the title for you before you buy.
Title agents are experts who know how to uncover liens. They can also pull property records that give you the full history of the property.If yours is a bank REO (real estate owned) listing, the title agent can also help you obtain title insurance that protects you in case of:
- Outstanding liens
- Property records
- Deed errors
- Other undiscovered issues or claims to the title
You’ll have to pay a fee to hire a title agent and conduct title searches, but the protection you get in return can save you tens of thousands of dollars when buying a foreclosure home.
- Hire a real estate attorney.
A real estate attorney can conduct a title search, advise you on negotiating a fair price, review all legal documents, and provide guidance on how to protect your interests throughout the sale process.
- Order a home inspection and get an appraisal.
When you buy through an auction or when you buy a tax-foreclosed home, it’s unlikely you’ll be able to get a home inspection or appraisal before you purchase.
If you’re new to foreclosure investments, consider buying a bank-owned foreclosed property through a real estate agent, so you can conduct an inspection, appraisal, and personal walkthrough before you buy.
If you’re taking out a mortgage loan or other type of loan to buy the property, an appraisal is a requirement because your lender needs to know that the property is worth the money they’re loaning you.
Why Inspections Matter
Inspections are critical when buying foreclosed properties. Otherwise, you could end up purchasing a house that costs more to fix than it will ever be worth.
If the home ends up being a “tear down,” in other words if it’s too damaged to repair, you can’t return it to the seller for a refund.
A home inspection will help you discover what you’re really getting into before you buy, so you can determine whether it will be a profitable investment.
Hiring professionals to help you investigate the home, guide you toward the best deals, and supervise the legal process will dramatically reduce the risks associated with buying foreclosed properties.
Investors can earn high profits from real estate foreclosure properties, but if you’re new to foreclosure-type investing, follow the steps below to help ensure that you earn a profit.
Beginner foreclosure investors can take the following steps to improve their ability to profit from foreclosure properties.
- Learn how foreclosures work.
- Browse foreclosure properties. Don’t buy anything yet, but do become familiar with the number of properties available and the price of listings in your area.
- Decide whether you’ll purchase from a short sale, auction, or real estate agent.
- Find a real estate agent, title agent, and attorney to guide you through the process.
- Determine how you’ll renovate the property.
- Talk to local contractors about their rates and scheduling, so you can estimate the cost of repairs or renovations.
- Determine what price range you can afford and what type of profit you expect to make from a foreclosure property.
- Browse listings and utilize your team to help determine what property holds the best profit potential for you.
If you approach foreclosure investing wisely, it can be a good investment. Your greatest asset, when buying, is the team of experts you put in place to help you through the process.
Are Real Estate Foreclosure Properties A Good Investment?
Buying foreclosure properties is a huge risk if you don’t know what you’re doing.
However, it can also be an excellent investment for people who are willing to put in the time and research it takes to succeed.
Put a team of experts in place – real estate agent, title agent, and real estate attorney — before you make a purchase, and you’ll be likely to make better choices that lead to significant profits.
Wondering where to find the latest foreclosure listings? Foreclosure.com has got you covered. The site makes it simple and quick to search for any type of property near you.