Six Tips for Buying Foreclosures

Foreclosures not only represent a great professional investment opportunity, but can also be a fast way to acquire your first home or a cherished vacation property. In order to buy successfully and avoid common foreclosure pitfalls, it helps to know a bit about how these unique sales work.

According to recent CNN reports, the overall number of foreclosures increased 75 percent in 2007, as more than one out of every 100 American households was in some phase of foreclosure.

Foreclosure happens across a continuum of legal steps or stages, and these can generally be broken down into three: (1) Pre-foreclosure-the process leading to foreclosure; (2) the actual foreclosure auction; and (3) post-foreclosure sales of homes retained by lenders after the auction. Here are six tips that can help you successfully purchase a foreclosure property.

Tip 1. Early bird catches the worm. To make the most money by capturing higher amounts of equity, it's best to buy foreclosures early in the process. Sometimes, homeowners who are desperate to avoid foreclosure and the ruination of their credit will sell at deep discounts in order to raise enough cash to pay off their mortgage debt.

Tip 2. Consider the short sale. Lenders will, in certain cases, let homeowners sell for less than what is owed through a so-called "short sale." This offers an even bigger opportunity to get property for a below-wholesale price.

Tip 3. Buy at auction. Foreclosure auction sales, traditionally held on the steps of the county courthouse, are usually dominated by professional buyers, but they also offer the potential for extreme savings and profits. Auction sales are complicated by the fact that they usually require cash payment for the entire amount, and also offer few opportunities to scrutinize and inspect the property before it's sold.

Tip 4. Examine the complete package. If you buy any foreclosure home, you also buy any liabilities associated with it, so beware. Before buying a foreclosure, always do a thorough title search to determine whether there are any liens, owed taxes, or other obstacles to ownership.

Tip 5. Take a ride on the REO. The last chance to benefit from foreclosure pricing is to buy properties that didn't sell at auction, but were kept to sell through normal channels. They're listed as REO (real estate owned by mortgage companies) properties, because they don't attract high enough bids at auction. The mortgage company sends a representative to offer the highest bid, and thereby retain the property rather than sell it at too great a loss.

For newcomers to the process considering the purchase of a foreclosure, the REO generally represents the least amount of risk. You don't need special knowledge or experience to buy these kinds of homes, because they're sold pretty much like other homes. You can work with a realtor as your buying representative, for example, and use a licensed home inspector to check the property for problems. You can also use a regular mortgage loan to pay for an REO.