Most everyone thinks foreclosures are the best bargains around. It isn't necessarily so. A property that's being taken back by the bank may be a bargain, selling at an average price, or even above the cost of nearby, similar properties. You need to compare foreclosed properties to nearby homes for sale to get a sense of what it's actually worth.
There are three kinds of sales that are called foreclosures.
In a short sale, the owner can't pay the mortgage and the lender has filed a Notice of Default (the first step towards foreclosing on the house). When you buy a short sale, the bank has to agree on the purchase price, which can take a long time. There's no way to know what the bank will accept or if you'll hear back in time. Typically it should be near the appraised value - the price of other nearby homes. But it may actually be higher, because the bank is trying to get their money back. Plus there are additional risks to short sales. You could pay to have the home inspected, but the bank takes too long to respond and it gets foreclosed anyway. Perhaps it isn't well maintained, or stripped of plumbing or otherwise damaged. There could be other liens that the buyer may have to pay.
When a bank completes the foreclosure process, the property is sold on the courthouse steps. You can get a list of when these properties will be sold from City Hall. While you might get a bargain buying a home this way, there are many risks. You don't get to inspect the house. You need to come to the courthouse with a certified check. And you risk paying more than the house is worth.
If nobody buys the property, or if the bank doesn't accept any of the offers, the bank gets the property for the amount of the loan. They are now called bank owned or real estate owned (REO). The bank may now become more realistic about pricing. They may price it near the prices of comparable homes that are for sale. Yet nearby homes that aren't bank owned may still be a better deal, with less hassle and risk.
Real bargains are out there. Some properties need cosmetic repairs, or are in less-desirable locations, and aren't appealing to most buyers. Some sellers need the money quickly because they are leaving the area, getting divorced, or in financial trouble. Sellers whose homes have been on the market for 90 days or more may be more willing to negotiate on price. Far more homes are a bargain in this market, but that won't last. Don't try to time the market - you may find yourself buying as prices are rising and you're competing with lots of other buyers.
Home Auctions
Is it a bargain?
Maybe. You may find a bargain at an auction, or you may pay more than the home is worth. Because people get emotional, what people bid bears little relation to a home’s value, so make sure you know what each house is worth. (Have your Realtor® show what similar homes have sold for in that area.) There may be 3-10 bids per property, perhaps fewer later in the day.
How do I choose which house to bid on?
See a variety of properties before the auction, and pick a few you like. Then hire a home inspector for a day during the open houses to make sure the homes you’re considering are in good condition.
What if I change my mind after I win a bid?
It may cost you 3% of the house value, but more likely you won’t be allowed to bid during the remainder of the auction.
If I win the bid, do I get to buy the house?
Not always. Sometimes there’s a hidden reserve, which means the bank can back out of the transaction within 15 days if that amount is not bid.
How long does it take to close the transaction?
It typically takes 30 days to close the transaction, just like conventional home sales.
What about other costs?
Because it’s a bank-owned title, all other liens should be gone. However, the company hosting the auction will add a percentage to the winning bids to cover their costs.
Do I need to bring money?
Yes. You must have a $5,000 cashier’s check plus a personal check for the remainder (either down payment or purchase price). For your second winning bid, you must have more money (see the auction booklet).
Can I get financing?
You can get financing with their bank or you can do a cash-only purchase. There’s an instant preapproval contingency – they pull up your bank records and FICO score, and do an analysis of your debt-to-income ratio.
None of this is legal advice, nor am I actively working as a real estate agent.