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Is Buying a Home in Foreclosure Right for You?

Buying a home from foreclosure can save you as much as 30 to 40 percent off the list price, but the rewards require some patience and risk taking.

Your Credit Score

The first task is to make certain your credit score is good, especially if you already have a mortgage on another property.

Buyers typically should prequalify for a traditional, fixed-rate mortgage for the value of the foreclosed property they want to purchase.

Do Your Research

Homes are in foreclosure for a reason. Try to find out as much about the property as possible, including liens and back taxes owed. Title research is a critical part of buying from foreclosure.

Your agent is your most important ally. Spend your time finding an agent with experience in foreclosures and knowledge of negotiating the twists and turns in the process.

Auction Sales

Auction sales are the riskiest way to purchase a foreclosed home. The buyer has to conduct title research. And you generally will not be allowed to inspect the property before the auction.

Auction sales usually require the winner to pay part or all in cash or with a cashiers check. You leave the auction as the owner of that property.

The reward for buying at auction is the opportunity to purchase a property at a significant discount versus the market.

Real Estate Owned (REO) Properties

Lenders, such as banks, make a determination to foreclose on properties they have not been able to sell in the traditional manner with a real estate agent, through the effort of individuals in the lending organization or an auction offer that is not high enough.

These properties are known as real estate owned (REO) properties. On the bank’s balance sheet the property gets reported as OREO (other real estate owned).

The lender has to understand any second mortgages and home equity lines of credit on the property that will encumber the property's title. In many cases back taxes are owed. Because the lender holding the REO wants as much as possible for the property, the process is much slower. In the end, the lender may consider discounts off the market value to get the property off its books.

Purchasing an REO has the least amount of risk. You have time to arrange financing, inspect the property and make a solid offer. The discount off market value will rarely be substantial. Working with the bank can be a more lengthy process.

Pre-foreclosures

The law in most states requires public notices about homes in default. The third option is to purchase this home for more than the loan amount but less than the market value before the official foreclosure process begins.

The biggest hurdle is contacting an owner who has not officially listed the property for sale. This again is where an experienced real estate agent can help.

Title insurance is once again vital to see what liens, including first and second mortgages, are on the property.

You'll also need to have the property inspected and then determine its market value. In making an offer on the property, consider the cost of paying off liens, making any repairs and any other fees you'll incur (such as those associated with securing financing to make the purchase).

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