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How to Buy a Cheap Foreclosure

The Phrase "Cheap Foreclosure" is Relative

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All buyers want a good deal when they buy a foreclosure but banks generally want market value.

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There is often a huge disconnect between the way a buyer views an opportunity to buy a foreclosure and the real world of bank-owned homes. If a home buyer or an investor wants to buy a cheap foreclosure, it's easy to assume that all foreclosures sell for pennies on the dollar. However, that impression is false. It is not how foreclosures work.

When buyers watch TV news reports that sensationalize foreclosures or read headlines that foreclosure filings are increasing, it's normal for buyers to automatically jump to the conclusion that banks are desperate. Buyers tend to believe that banks will do anything to unload foreclosures, including letting the buyer buy that foreclosure for 50% of its value or less.

Why the Price of a Foreclosure Can Appear Cheap

You can buy a foreclosure generally for much less than its original loan balance, especially in a declining market. But that doesn't mean the bank will sell the foreclosure for less than market value. Market value might be 50% less than the last time the home sold, but that foreclosure price will generally reflect the value of the homes around it.

Where to Find a Cheap Foreclosure to Buy

I often receive calls from investors asking me about buying a foreclosure very cheaply, and the truth is it's rare to find such a listing in MLS. Every so often, if you're very lucky and very fast to write an offer, you might be able to buy a foreclosure for a little bit under the comparable sales. But bargain-basement steals are typically not listed in MLS.

That's because banks, like any other seller, want to make as much money as possible on the sale of a home. They hire real estate agents to do an appraisal and tell them how much they can get. The agent takes the condition of the home into consideration and names a price. Then other agents in MLS compete to buy that home for their buyers.

When buyers compete, multiple offers are the result. Multiple offers tend to drive up the price. To find a cheap foreclosure, buyers need to reduce the competition for that foreclosure. Here are 3 places to look for a cheap foreclosure:

  • Buy a cheap foreclosure at a trustee's or sheriff's auction.
    Buyers can find notices of auctions online and in a newspaper of general circulation in the community where they live. There are a number of websites that post information on auctions, and some such as foreclosure radar might offer a free 30-day trial.

    Buyers typically pay cash at the public auction and buy the home in its "as is" condition. Smart buyers pay a title company to do a preliminary search prior to bidding. If there are liens such as taxes, delinquent HOA dues or superior loans, those encumbrances stay with the home.

  • Buy a cheap foreclosure through a private auction.
    Auction houses generally advertise in newspapers and online. They might travel around the country holding auctions at hotels. A private auction house often will let a buyer obtain financing to buy a cheap foreclosure. Buyers can also bring a buyer's agent to represent them.

    Some auction companies will let buyers inspect their foreclosures prior to bidding. But buyers should be prepared to set a limit and be careful to not get carried away by the excitement created during the bidding process. Otherwise, a buyer can overpay for that cheap foreclosure.

  • Buy a cheap foreclosure directly from the bank.
    The best way to eliminate most of the competing buyers for a cheap foreclosure is to contact the bank directly. Banks are more willing to give a break on the price if a buyer / investor buys more than one home in a bulk purchase.

    Some banks maintain a list of foreclosure homes online that are available to buy. Buyers can also check the HUD website for a list of HUD-owned homes.

At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.

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