When Should You Purchase A Foreclosure?

When to Purchase A Foreclosed Property

Purchasing foreclosed property has a number of advantages, such as greatly reduced prices and faster move-in times. But when is the best time to purchase that property? Below we'll be examining the pros and cons of making the purchase at different times during the process so you can decide when to make your move.

Pre-Foreclosure Stage

At this point in the process, you are going to be working directly with the current owners of the property in order to develop an agreement that will allow you to take over the property. There are some advantages to making your purchase at this stage:

Savings – Because of the situation the home owners are in, you may be able to negotiate a good deal for the property. Purchase prices that are ¼ to ½ the property's market value are common at this stage because the owner, at this point, is more interested in covering the outstanding debt on the property than on making any type of profit on the sale.
Low Down Payment – While some lenders would ask for 10% as a down payment for non-foreclosure property, when you purchase property during the pre-foreclosure stage this can be significantly reduced and even waived depending on how badly the current owner wants to get rid of the property.
Negotiable Purchase Agreement – Instead of having to haggle with real estate agents and other professionals, you are going to be dealing directly with the property owners which means you have more flexibility regarding the arrangement you reach.
Faster Closing Times – Again, if the property owner is anxious to get rid of the debt and to move on, then you can complete the entire deal much faster than you would with other traditional property purchases.

Despite this list of advantages, there are some drawbacks you should also be aware of before buying a home at the pre-foreclosure stage.

Research – When you purchase the property, you are going to be taking over all of the debt associated with that property so you need to know what you are getting into. For example, if a second mortgage has been taken out on the house or if it is being used as collateral for another debt that has not been paid, then you may end up owing additional money.
Locating Pre-Foreclosure Homes – One challenge can be simply finding pre-foreclosure homes. By law, the lender must submit a Notice of Election and Demand (NED) into public records before foreclosing on the property. You may be able to find these NED's at lenders' web sites or by checking the public records section of your local newspaper. You can also go to your local courthouse and search for the records, but this is extremely time-consuming and not very productive.
Reaching an Agreement – While dealing directly with home owners can have its advantages, it can also make reaching an agreement more difficult. You need to locate a property owner who is serious about selling the property and who is willing to negotiate. Otherwise, the deal is not going to go through.

Foreclosure Auction Stage

When the property reaches this stage, the bank has already reclaimed ownership over the property, and the time for negotiating a purchase agreement with the owner has passed. Auctions are one of the most common ways for individuals looking for real estate as an investment find their properties usually become of the following advantages:

Incredible Bargains – Lenders do not want to hold onto the property they have foreclosed on. In only about 1/5 of all auctions, however, does the property actually end up getting purchased. Because lenders are desperate to recoup their loses and to get rid of the property, they are open to very low bids at times.
Easy to Locate Auctions – Unlike pre-foreclosure properties, auctions involving foreclosed property are fairly easy to find. They are advertised online, in newspapers, and occasionally on television. You can also contact some lenders directly to find out when and where these auctions will be held.
No Guilt Feelings – Some buyers of pre-foreclosure properties report feeling guilty about profiting from the original owner's misfortune. This feeling is often exacerbated because they get to know the old owners through their negotiations. The impersonal feel of the auctions ensures this will not be a problem.

Although the potential for saving a lot of money on the property is great, there are also some risks and problems with choosing to make a purchase during the foreclosure auction stage.

Competition – Foreclosure auctions attract larger crowds, and this means you may find yourself bidding against other potential buyers who desire the property. This means you may end up paying more for the property or losing it altogether.
Limited Research – Most of the time when you bid on property in foreclosure auctions you are bidding without examining the property. This can be a dangerous game. The property may look amazing from the outside but may be infested by mold or termites, may have an outdated heating or cooling system, etc. which is going to cost you more money in the end.
Lost Time – About half of all scheduled foreclosure auctions end up being canceled or delayed because the owners want a chance to keep their property. If you are traveling to the auction or taking time off from work to bid on a property, these cancellations can cost you time and money. To prevent problems, you should always call ahead to make sure the auction is going to be held as planned.
Other Issues – Besides the other problems, the auction winner is sometimes responsible for additional costs, including the fees incurred for advertising the auctioned property. Plus, if the original owner has not or will not leave the property, the new owner has the responsibility of getting them evicted. This can be a time-consuming and expensive process.

REO (Real Estate Owned) Stage

Most foreclosed properties are not sold at auction, so the lender is left with the property. At this point, they will usually fix up the property, pay off any back taxes, and do a few more things to make the property more appealing, then the house will go on the market.

Low Risk – At this point, the home is in the possession of the primary lender meaning all of the other liens have been removed from the property. You do not have to worry about making the purchase only to discover you have to pay more money in order to do anything with the property.
Easy to Locate – These properties are advertised just like any other property being sold through realtors. The advertising won't always specify that the property was a foreclosure but it often does.
Repairs – The lender wants to earn as much money from the property as possible, so they will often cover the costs of making the home more desirable. If they do not, they will usually discount the purchase price so the buyer can cover the costs of those repairs.
Plentiful – With the recent changes in the housing market, foreclosures are on an increase. This means you can find available REO properties easily. In just one Midwestern county at one listing agency, about 125 REO properties were available for purchase.

Although this option does provide the lowest risk when you are buying foreclosure property, there are still some disadvantages.

Cost – When lenders reach this point, they are unlikely to let the property go for next to nothing so don't expect to find amazing deals during this stage. At most, you might save 15% off the market value.
Similar to Buying Non-Foreclosure Property – Many of the benefits of purchasing foreclosed property, including low down payments and flexible contracts, are not applicable at this stage. You will be dealing with a lender and a realtor so the process will not be more similar to traditional property purchasing.

In the end, you have to decide what you want in order to determine when to purchase foreclosed property. Risk-takers who want to save the most money possible are better off waiting for the foreclosure auctions where they will get the best deals. Buyers who want to save a little money but don't want a lot of risk might want to wait for the REO stage. Those who want a combination of a low price, average risk, and a flexible arrangement may be better off making their move during the pre-foreclosure stage.