How to Buy a Foreclosed Home

Let's be clear.

• A foreclosure is a bank-owned home which once belonged to a homeowner who could no longer make the mortgage payments
• A Real Estate Owned or REO is a term used to describe a class of property owned by a lender—typically a bank, government agency, or government loan insurer—after an unsuccessful sale at a foreclosure auction.

Both bank-owned and REO Homes are under the ownership of the lender, which, in many instances, is a bank. The only distinction is what stage the foreclosure is in.

In a foreclosure, the homeowner has stopped making payments for a variety of reasons.

• Laid off, fired or quit their job
• Inability to continue to work due to some type of medical condition
• Excessive Debt
• Divorce, etc.

In California, the lender is required to inform the homeowner that they will go into foreclosure. This is the "Period of Redemption" or the time the seller has to cure the default—including paying all foreclosure costs, back interest, and missed principal payments—to regain control of the property. If the homeowner is unable to cure the default, it becomes bank-owned.  Sounds quick and easy, but this is a timely process.

Not all banks sell homes directly to investors or homebuyers.

• If a bank is willing to sell homes individually, the bank will generally sell the home through an auction where the bank tries to recoup the money for the property
• If a bank wants to do a bulk sale, the banks will package a bunch of properties into one transaction and sell them all at once to one entity. That is the best way to buy a foreclosure because the discounts are typically the steepest --if you have the funds!

In both cases, if the property doesn't sell, it’s still bank-owned, but it is now known as an REO home. REO properties have already gone through the auction process and remain unsold. The bank or lender retains ownership and tries to sell these properties, oftentimes through REO real estate agents.

To Purchase A Foreclosure

• Step 1: Get Preapproved for a Mortgage
• Step 2: Find a Real Estate Agent that will represent you (REO Agents represent the lender and this could affect the agents' ability to represent your best interests.)
• Step 3: Submit an Offer on a Foreclosed Home and get into a contract
• Step 4: Pay for Home Inspections and Resolve Liens
• Step 5: Finalize purchase, Renovate, Repair and Move-In

Bottom Line

Buying a foreclosure isn’t for everyone. It takes work to secure funding and at times, the property needs a lot of work to be move-in ready and that can be costly. With that said, if you partner with the right real estate agent, do your research, and weigh the pros and cons -- go for it. It can save you a great deal of money if you do it right.