Buying Homes in Foreclosure and Other Special Circumstances

Article highlights:

• Why short sales are potential bargains
• Buying a foreclosure home “as is”
• Risks of buying at auction

Homeowners or developers sometimes find themselves financially overextended and need to liquidate their property quickly. Although some auction, foreclosures, and short-sale homes are bargains, weeding through the inventory to find one that is acceptable to you and your mortgage lender can be daunting. These properties are known as “distressed,” meaning they might be in rough condition, stripped of their light and plumbing fixtures, missing appliances, including furnaces and hot-water heaters.

Spiteful homeowners, who have a grudge against their mortgage lender, can inflict huge damage to their home before leaving unexpectedly in a foreclosure proceeding. Damage can run from punched holes in the drywall to flooded basements.

Short sales are preforeclosure home sales. To control losses, sometimes a mortgage lender will accept a short sale rather than go through the foreclosure legal process. A short sale is when a mortgage lender agrees with the homeowner to accept less than the outstanding mortgage loan balance to satisfy a mortgage. The owner vacates the property at the time of signing the short-sale agreement. Typically, short-sale homes are in better condition than foreclosed properties, because the parties have found a solution before a legal foreclosure proceeding begins. As with foreclosure and auction homes, the home is sold in “as is” condition. Sometimes the buyer will have the right to inspect the property, without the right to ask the lender to fix any defects. “As is” condition means that you will accept the property in its present condition — what you see now and discover later, is what you get.

Foreclosures are homes that have entered litigation initiated by the mortgage lender, who has the right under the mortgage agreement to redeem the property. When you sign a mortgage note, the property is used to collateralize the loan, and the lender has the right to foreclose the home if mortgage payments aren’t met. Homes that have been foreclosed are usually winterized to reduce the risk of damage to the property. The plumbing is drained, the hot water is turned off and the windows are boarded. In some instances, this “as is” condition can limit how much you can inspect the property. If you feel this is an option for you, tour several foreclosed homes to get a firsthand idea this type of investment is all about.

Real estate auctions are also potential bargains. However, these aren’t for novice investors who shy from risk-taking. When buying an auctioned home, it’s common not to have the right to view, let alone inspect the property, meaning it could be bought sight unseen. Some of these properties are burdened with title and deed problems, such as liens filled against the real estate company by unpaid creditors, such as contractors. If you choose to go this route, deal with reputable residential real estate auction companies. Read the terms and conditions on their Web sites. Internet-based auctions are commonly just a way for sellers and buyers to meet, with the Web site assuming no liability for transaction details. The most common auction procedure is for the buyer to bid on the home. If he’s successful, both parties draft a real estate contract according to state laws.

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