Buying Foreclosures: 101

Hoping to score a house on the cheap by buying a foreclosed property? There are good deals out there, but the process is complicated and risky. Here's what you need to know.

There are certainly plenty of foreclosed homes on the market. In the Twin Cities up to 25% of existing homes sold in the second quarter were foreclosures, according to Minneapolis Area Association of Realtors (MAAR).

There are three different stages of foreclosure, each of which presents different opportunities for buyers. The first step is to figure out which one makes the most sense for you.

Pre-foreclosure

A home goes into pre-foreclosure when a borrower has fallen behind on his payments, but the house has yet to be auctioned off. Buyers can find pre-foreclosures by poring over the delinquency notices that lenders file with county courthouses when a borrower misses a payment. These are typically filed 6 weeks prior to the sheriffs auction. Armed with prospects, buyers should go scouting. If they see homes they like, they should contact the owners to see if they want to sell.

Cold calling and making low-ball offers on people's homes can be difficult: Some owners are emotional, even angry. Many are trying to hold onto their houses and don't appreciate what they consider scavengers sniffing around.

Some owners are open to doing what's called a short sale, which is when a buyer pays less for a house than the mortgage that is owed on it. Lenders must agree to a short sale, and will then forgive the rest of the debt.

Often, banks are reluctant to do such deals, since it requires them to take a loss. It can take months and a lot of badgering before a deal goes through, and not every buyer is up for that kind of hassle. In buying any pre-foreclosure, experts advise buyers to not be turned off by dirty carpets or ugly paint jobs. That's where the best deals are.

Sheriffs' sales

In the next stage of foreclosure, homes in default are auctioned off on the county courthouse steps. These homes can be real bargains, but the process is a crap shoot.

Bidders can't inspect the property, so there's no telling how much work it needs. And there is also no telling what kind of liens there are against the home, due to unpaid taxes and so forth, which can also jack up the cost of these homes.

Even after a purchase, a deal can fall through if the current owner can come up with enough cash to repay the buyer the amount of the winning bid. In Minnesota, home owners have up to 6 months to redeem their property from the buyers. Despite the late night infomercials, it is extremely difficult to purchase a home at a sheriff’s sale in Minnesota. Often the primary lender will be bidding against you to cover their interest in the property, aking it unlikely that the average home buyer will pick up a home on the courthouse steps for just pennies on the dollar.

Post-foreclosure

After a lender takes back a house, the property goes back on the market as what's called an REO (real estate owned) property. These are treated like ordinary sales, listed with a broker. Typically, bargains are not as sharp.

Another way to buy an REO is through an REO auction. As bank portfolios of these properties have swollen, they've started to unload them en masse. Locally, REDC has auctioned over 200 homes in one weekend. Look for more of these auctions in the future as banks work to unload inventory before winter. But remember, inspect the property before hand, or risk losing your money (and more) in a money pit called ‘home’.

Always rely on a licensed real estate agent when attempting to purchase any home. They can advise you on price, condition and all the pitfalls associated with buying distressed properties. Courtesy CNN. Additional information by blog author.