Get great deals on foreclosures with these strategies

Buying a foreclosure can save you 10-30% off market value, but comes with significant risks including property condition issues, limited inspection opportunities and complex purchase processes. The three main ways to buy foreclosures are pre-foreclosure (from distressed owner), auction (at courthouse steps) and REO (bank-owned after failed auction). REO properties offer the most protection for typical buyers. Always inspect when possible and budget for repairs.

Types of Foreclosure Purchases

Pre-Foreclosure

What it is: Buying directly from the homeowner before the foreclosure auction

How it works:

• Owner is behind on payments
• Property is in foreclosure process
• You negotiate directly with owner
• May be a short sale (lender approval needed)

Pros:

• Can negotiate directly
• Full inspection usually possible
• Standard purchase process
• Owner may be motivated

Cons:

• May require lender short sale approval
• Owner may be difficult to work with
• Property may have deferred maintenance
• Emotional situation for seller

Auction (Trustee Sale)

What it is: Buying at the courthouse steps or online auction

How it works:

• Property sold to highest bidder
• Cash or certified funds required
• Little or no inspection opportunity
• Bought “as-is”

Pros:

• Potential for biggest discounts
• Fast acquisition
• Clear title (usually)

Cons:

• Cash required (typically)
• No inspection
• No financing contingency
• May have occupants
• Hidden liens possible
• Highest risk

REO (Real Estate Owned)

What it is: Bank-owned property after failed auction

How it works:

• Bank owns property
• Listed through real estate agent
• Standard offer and closing process
• Sold “as-is” but inspectable

Pros:

• Can usually inspect
• Standard financing accepted
• Clear title
• Professional transaction
• Vacant property typically

Cons:

• Less discount than auction
• Sold as-is
• May have deferred maintenance
• Bank may be slow to respond

Finding Foreclosures

Where to Search

REO listings:

• MLS (through your agent)
• Bank websites (Wells Fargo, Bank of America, etc.)
• HUD Home Store (FHA foreclosures)
• HomePath.com (Fannie Mae)
• HomeSteps.com (Freddie Mac)

Auction listings:

• Auction.com
• County courthouse notices
• Legal newspapers
• RealtyTrac

Pre-foreclosure:

• Foreclosure listing services
• Public records (notice of default)
• Driving neighborhoods

Working With Professionals

Real estate agent:

• Find agent experienced with foreclosures
• REO listing agents work with banks regularly
• Buyer’s agent can work through complexities

Attorney:

• Especially for auction purchases
• Title review
• Contract review
• State-specific requirements

The REO Purchase Process

Step 1: Get Pre-Approved

Banks want serious buyers. Have pre-approval ready before making offers.

Step 2: Find Properties

Search through:

• MLS listings marked as REO/bank-owned
• Bank foreclosure websites
• Fannie Mae/Freddie Mac sites

Step 3: View and Inspect (If Possible)

• Schedule showing through listing agent
• Note obvious issues
• Full inspection contingency may or may not be available

Step 4: Make an Offer

Offer includes:

• Purchase price
• Proof of funds or pre-approval
• Earnest money deposit
• Timeline

Expect:

• Bank counter-offers
• Addendums and disclosures
• Bank’s own purchase agreement

Step 5: Bank Review

Banks may take 1-4 weeks to respond:

• Asset manager reviews
• May have multiple offers
• Patience required

Step 6: Inspection Period

If inspection contingency allowed:

• Complete inspection quickly (often 7-10 days)
• Document all issues
• Negotiate repairs or walk away

Note: Banks rarely make repairs—expect as-is or credit.

Step 7: Close

Standard closing process:

• Title search
• Financing finalization
• Document signing
• Property transfer

Auction Purchase Process

Before the Auction

Research:

• Property address and legal description
• Outstanding liens (title search)
• Property condition (drive-by)
• Market value of comparable sales

Prepare funds:

• Cashier’s check for deposit (often 5-10%)
• Proof of funds for full amount
• Know your maximum bid

At the Auction

What to expect:

• Auctioneer announces property
• Opening bid (often starting at debt amount)
• Bidding continues until highest bid
• Winner pays deposit immediately

After Winning

Immediately:

• Pay deposit
• Sign purchase documents
• Receive trustee’s deed

Within closing period (often 30 days):

• Pay remaining balance in cash
• Arrange title insurance
• Take possession

Auction Risks

Occupants:

• Previous owner may still live there
• Tenants may have rights
• Eviction may be required

Condition:

• No interior inspection usually
• May have major damage
• Could be stripped of fixtures

Title issues:

• Junior liens may survive
• Tax liens may survive
• Title insurance essential

Financing Foreclosures

REO Financing

Conventional loans: Yes, if property meets standards

FHA loans: Yes, with property condition requirements

VA loans: Yes, with VA minimum property requirements

203(k) rehab loan: Good option for foreclosures needing work

Auction Financing

Typically requires cash:

• Banks don’t finance auction purchases
• Must have funds available immediately
• Some auctions allow short financing period

Alternative: Hard money loan, then refinance

Property Condition Issues

Foreclosures may not qualify for standard financing if:

• Safety hazards exist
• Systems don’t function
• Structural issues present
• Deferred maintenance is severe

Solution: Renovation loans (FHA 203k, Fannie Mae HomeStyle)

Inspecting Foreclosures

When Inspection Is Possible

REO: Usually allows inspection period

Pre-foreclosure: Usually allows inspection

Auction: Rarely possible

What to Look For

Exterior:

• Roof condition
• Foundation cracks
• Siding damage
• Overgrown landscaping (sign of neglect)

Interior:

• Water damage
• Mold
• Missing fixtures/appliances
• HVAC functionality
• Plumbing (test all faucets)
• Electrical (test outlets)

Vandalism/neglect signs:

• Broken windows
• Graffiti
• Stripped copper
• Holes in walls

Budgeting for Repairs

Conservative approach:

• Get contractor estimates before buying
• Add 20-30% buffer for unknowns
• Have reserves beyond purchase price

Risks and How to Mitigate Them

Property Condition Risk

Risk: Hidden damage, no seller disclosures

Mitigation:

• Thorough inspection when possible
• Conservative repair budget
• Walk away if uncertain
• Consider renovation financing

Title Risk

Risk: Unknown liens, claims on property

Mitigation:

• Title search before purchase
• Title insurance required
• Attorney review for auctions

Occupancy Risk

Risk: Previous owners or tenants remain

Mitigation:

• Verify occupancy status
• Budget for eviction costs/time
• Know state eviction laws

Competition Risk

Risk: Multiple bidders drive up price

Mitigation:

• Know your maximum price
• Don’t overpay for “deal”
• Walk away if needed

Timeline Risk

Risk: Bank slow to respond or close

Mitigation:

• Patience
• Don’t commit to move date too early
• Have backup plans

Calculating If It’s a Deal

Compare to Market Value

Steps:

1. Find comparable sales (similar homes sold recently)
2. Calculate price per square foot
3. Apply to foreclosure
4. Compare to asking price

Factor in Repairs

True cost formula: Purchase price + Repairs + closing costs = Total investment

Example:

• Foreclosure price: $280,000
• Estimated repairs: $35,000
• Closing costs: $8,000
• Total investment: $323,000

Compare to similar homes in move-in condition.

Discount Needed

Condition	Minimum Discount Needed
Move-in ready	5-10%
Cosmetic updates needed	15-20%
Major repairs needed	25-35%
Extensive renovation	40%+

Financing Options for Fixer Foreclosures

FHA 203(k)

For: Purchase plus renovation

Types:

• Standard: Major renovations, structural
• Limited: Up to $35,000 in repairs

Requirements:

• FHA credit/income requirements
• HUD consultant (standard)
• Licensed contractors

Fannie Mae HomeStyle

For: Purchase plus renovation

Features:

• conventional loan
• Up to 75% of after-repair value
• More renovation flexibility than 203(k)

Hard Money Then Refinance

For: Cash-equivalent speed

Process:

1. Buy with hard money (high rate, fast)
2. Complete repairs
3. Refinance to traditional mortgage

Frequently Asked Questions

Are foreclosures really cheaper?

Often 10-30% below market, but factor in repairs, condition issues and competition. The best deals are usually at auction (highest risk) or distressed properties needing significant work.

Can I get a mortgage on a foreclosure?

Yes for REO properties that meet lender standards. Auction purchases typically require cash. Properties needing repairs may need renovation loans.

Why do banks sell foreclosures below market value?

Banks want to sell quickly—holding costs money. They’re not in the real estate business and prefer fast sales to maximum prices.

Should I buy at auction?

Only if you’re experienced, have cash and can accept significant risk. For most buyers, REO purchases through normal channels are safer.

How long does buying a foreclosure take?

REO: 30-60 days typical (bank response time varies). Auction: Immediate purchase, 30 days to close. Pre-foreclosure/short sale: 2-6 months (lender approval).

Can I negotiate on a foreclosure?

REO: Yes, banks often accept below asking price. Auction: No, highest bid wins. Pre-foreclosure: Yes, negotiate with owner (and lender for short sales).

What if there are people living in the foreclosure?

REO properties are usually vacant. Auction properties may have occupants requiring eviction. Know your state’s eviction laws and budget for this possibility.

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