10 Steps to Buying a Foreclosure

By RealtyTrac | Published: 2/29/2008

STEP 1: Understand The Foreclosure Process

Foreclosure is a process that allows a lender to recover the amount owed on a defaulted loan by selling or taking ownership (repossession) of the property securing the loan. It begins when a borrower/owner defaults on loan payments and the lender files a public default notice or a lis pendens (Latin for "lawsuit pending"), depending on the state.

Ultimately, the foreclosure process can end one of four ways:

• The borrower/owner pays off the default amount to reinstate the loan during a grace period known as pre-foreclosure.
• The borrower/owner sells the property to a third party during pre-foreclosure, allowing the borrower/owner to pay off the loan and avoid having a foreclosure on his or her credit history.
• A third party buys the property at a public auction at the end of the pre-foreclosure period.
• The lender takes ownership of the property, usually with the intent to re-sell. The lender can take ownership through an agreement with the borrower/owner during pre-foreclosure or by buying back the property at the public auction.

Read the Advantages and Disadvantages of Buying a Foreclosure.

STEP 2: Choose a Foreclosure Stage You're Comfortable With

There are different stages in the foreclosure process, and each stage offers unique advantages and disadvantages for the buyer. For instance, some buyers prefer buying bank-owned properties because they're uncomfortable dealing with distressed homeowners. Read more about the three bargain-buying opportunities:

• How to Buy a Pre-Foreclosure House
• How to Buy a House at Public Auction
• How to Buy a Bank-Owned Property (REO)

Read The Three Faces of Foreclosure Buying.

STEP 3: Contact a Real Estate Agent

If you're a first-time homebuyer and you've never purchased a home, let alone a foreclosure property, a good real estate agent can be a helpful resource and guide you through the process of buying a foreclosure and drawing up a purchase agreement. Make sure they know your priorities.

For tips on how to find a good real estate agent, read Shopping for a Realtor.

STEP 4: Find Foreclosure Properties

• Look for notices of defaults and auctions in public records and local newspapers.
• Research "foreclosure" on the Web and subscribe to online listing services like RealtyTrac.
• Work with a real estate agent who specializes in foreclosures.
• Market yourself as an investor offering "cash" for property.
• To find bank-owned houses that aren't listed with an agent, contact the lender for information.
• Network with real estate investors in your area.

STEP 5: Check The Property Liens

A lien is a legal claim on a property by a lender or other entity that is owed money by the owner of the property. In addition to the outstanding mortgage balance, buyers need to be aware of other liens, which can drive up the purchase price. Examples include outstanding property taxes and unpaid repairs or remodeling done by a contractor. For tips on how to check liens, read this.

NEXT: Steps 6-10 for Buying a Foreclosure >>

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