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Are Foreclosure Homes a Smart Buy?

Aug 5, 2008
The number of homes facing foreclosure continues to grow in many parts of the country. The consensus among ordinary citizens seems to be that a fortune can be made buying foreclosure homes. Is that true or false? The truth is - it's some of both.

Three and a Half Ways To Buy Foreclosure Properties

Buying real estate foreclosures only produces profits for those who have the knowledge required to recognize and negotiate profitable deals. With foreclosures that's not as easy as it might seem.


The preforeclosure period offers the greatest opportunity for the novice investor. Preforeclosure can be divided into two periods. The first is where a financially distressed home owner realizes he or she will soon be unable to stay current with their mortgage payments.

If you can reach the owner during this period you have a chance to buy the home in the normal way. That is, make your deal with the home owner, get a mortgage loan and go to the close.

Ah, but how do you reach that owner. You target a housing development that first began selling new homes about three years ago. You do that because many adjustable rate mortgages reset to a much high interest rate after three years. As that date approaches many home owners begin to realize they have a problem.

You blanket that development with flyers every 30 to 60 days advertising yourself as a home buyer . Once a week you spend a Saturday afternoon going door to door and asking "Are you the folks that are planning on selling your home? No? Let me leave my card in case you change your mind."

The second part of the preforeclosure period is at some point after the homeowner has stopped making mortgage payments and the lender has filed a notice of foreclosure (sometime called a notice of default). Now the clock is running and you must move quickly to make your deal before the lender takes the home.

The owner could be as much as six months behind in mortgage payments. You'll need cash to bring those payments current and stop the foreclosure.

The catch is that many of these homes were purchased as real estate values peaked. Now home values are falling and the home is worth less than the amount due on the mortgage loan. The owner is "up side down" and there is no equity and no profit for you.

If there is equity you have a chance to make a good buy. There is seldom enough time to apply for and qualify for a mortgage loan. You will either need cash or the ability to strike a deal using a lease-option or to buy "subject to" the existing financing. You will need a thorough understanding of those tactics to use them profitably.

Foreclosure Auction

Your next chance to buy is at the foreclosure auction sale. Auctions are cash-on-the-spot sales. Yes, you will need cash, but even more important is the ability to research the property being sold to determine if it would truly be a profitable buy.

Many foreclosure homes have been trashed and stripped. What will the cost of rehab be? How's the neighborhood? Is it safe to go in unarmed? Are there zoning or building permit issues attached to the property. Foreclosure auctions are not a game for the inexperienced investor.

Now we have listed the first two opportunities to buy foreclosure homes:

1. During just before a foreclosure.
2. At the foreclosure auction.

Bank Owned Homes

Opportunity number three is homes owned by the bank. These are often called REOs for real estate owned.

If there are no successful bidders at the foreclosure auction the home becomes the property of the bank. When there are many foreclosures banks end up owning thousands of homes they do not want. If you have the cash they will listen to offers. If the bank is eager to get those homes off of their books they may consider financing your purchase if you have a decent credit history. Often they want cash.

You can put together a group of investor who pool their funds to bid at foreclosure auctions or buy REOs.


I promised three and a half ways to buy foreclosure homes, so here's the half. In some states the owner has redemption rights. That means during a certain number of months after they have lost their home at the foreclosure auction they can regain ownership.

To redeem they must pay all money that was owed on the mortgage, pay all the costs of the foreclosure and pay any interest that accrued during the redemption period. It is sometimes possible to buy the redemption rights from the displaced owner, cover all the costs and own the home.

What about the investor who bought the home at the auction? He or she has our most sincere sympathy.

That's it, three and a half ways to buy foreclosure homes. There's money to be made, but you will earn every nickel!
About the Author
Mark Walters is a third generation real estate investor and founder of CreatingWealthClub.com. For a limited time Mark is offering his big guide to finding hard money loans for real estate investing free. Free guide to private money loans. http://www.FindPrivateMoney.info
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