Home » Personal Finance » How to Buy a Foreclosure Three Stages of Foreclosure Sales

If you have cash on hand or good credit, you may be wondering how to buy a foreclosure. There’s never been such a good time to get into real estate investing. The bottom has fallen out of the market and there are far more sellers than buyers. Further, the real estate market should recover by 2011, so you will only need to hold on to your investment for a limited period of time before you can expect to make a sizable return. So, here’s how to buy a foreclosure.

The first step in how to buy a foreclosure is determining what stage of foreclosures you want to pursue. You can buy a home that is still owned by the mortgage holder which is known as pre-foreclosure investing. Immediately following the bank foreclosure, there is a sheriff’s auction where you can pick up homes. Then, if the home is not sold at that auction, it becomes part of the lender’s auction and is considered a bank foreclosed home. There are advantages and disadvantages for each step.

How to Buy a Foreclosure as a Short Sale

When you buy a home in pre-foreclosure, it is known as a short sale. A short sale provides a win-win-win situation. You get a home in good condition at a discounted price. The homeowner gets to walk away from the home without a deficiency judgment. The bank, while taking a loss on the overall price of the mortgage, gets a bad debt off the books and doesn’t have to take possession of the property.

Short sales look good on paper. But, in reality, they are more complicated. This is because so many things can go wrong. The bank may show initial interest in the sale and then back off when they realize how much they will have to discount the mortgage. The investor may find that they cannot come up with the financing. The homeowner may come up with another source of funding that allows them to stay in the home. Some studies have shown that as many as 85 percent of short sales initiated fall through.

Still, a successful short sale provides a lot of benefit for the investor. The homes purchased in this manner are usually in the best condition of any foreclosed properties. Also, it is possible to find short sale investments in areas where there aren’t too many vacant properties, a necessary feature for flipping a house.

How to Buy a Foreclosure at Auction

If the bank and the homeowner cannot come to any agreement, the lender has no option but to proceed with the foreclosure. One of the legal requirements in most states is that the house be put up for auction immediately. The bank can then sue the homeowner for the difference between what the house fetches at auction and what they owe. This is called a deficiency judgment.

When you buy a home at foreclosure auction, you probably won’t have much competition. In fact, most of the time, the bank simply purchases the home itself for $1 more than the amount owed.

How to Buy a Foreclosure from a Bank

When the bank buys the foreclosed house at auction, it becomes part of their inventory. They are not equipped to be real estate moguls. They want to get rid of the property. Because they have so many properties these days, they are beginning to work with private real estate agents who specialize in bank foreclosures, to help them get rid of excess inventory. If you are new to foreclosure investing, you would be well served to hook up with an agent who has contacts with a bank in order to find the best properties.

How to Buy a Foreclosure – Get Listings

If you choose to purchase a foreclosure independently, you will need a good source of listings. While technically possible to develop a list of pre-foreclosures, auctions, and bank owned properties yourself, it is often more reasonable to subscribe to a service which compiles this information for you. At around $40 a month, it is well worth the money for any serious investor.

In this article, I’ve outlined the steps on how to buy a foreclosure.

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