Buying a Foreclosed Home: Good or Bad?

Though a difficult task, be informed before making a purchase

You’ve heard that the silver lining to all of the change and turmoil of the subprime mortgage crisis is that there are great deals to be had for would-be home buyers, specifically in the foreclosure market. You’ve heard the stories and seen the commercials, but some still want to know: Is buying foreclosed property a good idea? The short answer to this question is, “It depends.”

A record number of homes are headed for foreclosure, as many as 1.5 million by the end of this year, thanks largely to the subprime mortgage mess. While this is a terrible set of circumstances for the families living in these homes, as well as the economy as a whole, it has put would-be buyers in the driver’s seat. However, this is true for all homes, not just those in foreclosure. There is already a glut of newly-built homes as well as existing homes, with owners offering all kinds of incentives to lure potential buyers. Depending on the market, it is possible to get a great deal on a home that is not in foreclosure, which for most people (assuming you have an income, good credit, and enough cash for a healthy down payment) is far easier, and far less risky, than pursuing a foreclosed property.

That said, if you really want to test the foreclosure market, there are three basic ways to go, each with its own set of challenges and risks.

You can buy property in a pre-foreclosure stage—the time between when the current owner receives a notice of default from their lender and the day the lender puts the property up for auction. This period may offer the best bargains, but it is also the most difficult, because you have to try to cut a deal directly with the owner of the house, who may not even know that the house has been placed on a foreclosure listing. Also, assuming you and the owner can come to terms, you have to complete the transaction quickly, with only a month, depending on the state, before the bank puts the home up for auction. You can go to RealtyTrac.com or Foreclosures.com for information on the foreclosure laws in each state. Unless you are an experienced real estate investor, trying to buy a pre-foreclosed property is an extremely difficult way to go.

However, next to buying a home at auction, buying a home pre-foreclosure may seem like a piece of cake. The auctioning of a home is the next stage of foreclosure. If you want to get in this game, you have to ante up cold hard cash—you can’t finance the purchase of auctioned properties. Plus, you have to buy the house sight unseen, as is—without title insurance. That means if there is a tax lien on the property you bought, you have to pay it off on top of the cost of

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