It’s crucial to understand the foreclosure process before you start buying foreclosed properties. There are many properties in various stages of foreclosure or lender repossession currently, and many buyers inquire about them because they’ve heard it’s where you can find incredible deals. After gaining more experience with these types of properties, I’ve noticed a lot of misinformation and hype, and I want to provide you with some facts to help you understand this topic better. During the boom years, there were many seminars and books on how to make a lot of money in real estate by buying and flipping homes. While some people were able to generate significant cash quickly during the period from about 2003 to mid-2005, many others are now part of the foreclosure statistics.
Similarly, there are now many websites, seminars, publications, and so on, on how to make your fortune buying foreclosed real estate. They present stories of exceptionally good scenarios that make it sound like this is how every foreclosure case goes, even though it’s actually more of a rare occurrence for the average person. Perhaps these are the same people who promoted the seminars and books on “flipping” (and perhaps they’re also those who email you about winning the UK lottery or about the $50 million they want to send you from Nigeria). In cases where a buyer actually needs to move into the home before making the final purchase
That’s not to say that there aren’t great deals available in properties that are in some stage of foreclosure; there are. BUT – you will need to understand some things because the process can be very different from the standard one.
First, there are some distinct types of ‘foreclosure’ properties, and I want to start by clarifying this for you.
- Pre-foreclosure: This is a home where the owner has fallen behind on their payments to a point where the bank has started the foreclosure procedures (usually by filing a notice of pending legal action).
- Short sale: This usually signifies a pre-foreclosure property where the home is being listed at a price that is less than what’s owed on the outstanding loans. You can recognize these in listings as it will either say “short sale” or “third-party approval required” or “list price may not be sufficient to cover all encumbrances” (meaning that the lender will have to approve it in addition to the seller accepting the offer). One word of caution, though: some realtors will list 1 a home as a short sale or “potential” short sale without even having their customer complete a “short sale package” (the paperwork that will have to be submitted to the lender with any agreement) – avoid these, as usually they end up going nowhere or require several weeks to hear anything back.
- Bank-owned (REO): Bank-owned signifies the bank has completed the foreclosure procedures and now owns the home outright. These are typically the easiest and quickest of the different kinds of foreclosure properties to deal with, even though they are typically (not always) in quite bad condition.