Talk about foreclosures is everywhere.  It is very likely, if you are shopping to purchase a home, that one or more of the properties are going to be in some state of foreclosure and most likely they will be REO properties.  REO properties are ones that you will find on the traditional MLS but are actually being sold by lenders and marketed by real estate agents.  So when it comes to buying foreclosures, a lot of buyers are wondering if the rules are somehow different and if they are what do buyers need to know about foreclosures. 

It is important first to understand the foreclosure process.  As soon as a homeowner is late on a single payment, the foreclosure process actually begins.  The lender will file notice with the county that they plan to foreclose on a property.  At that moment, the clock is ticking for the homeowner to make their payment.  The timeline differs by location and state legislation, but at some point, if the homeowner is not able to make the payment or sell the property, there will be a public auction held for the sale of the property.  This is the foreclosure sale.  If the property does not sell at auction, ownership of the property falls into the hands of the lender making it a bank-owned property, also known as a REO or post-foreclosure.  

The structure of foreclosures allows buyers three separate buying opportunities.  I you can identify a pre-foreclosure by tracking notices filed with the county, you have an opportunity to approach the homeowner and offer to buy out the homeowner for what they owe on the property or some time even less than what they owe.  This is considered a private sale.  Additionally, you can work with both the lender and the homeowner to come to terms for a short sale, where the bank tells the buyer just how low they will go on the sale of the property.  Both of these options save the distressed homeowner from having to deal with the credit damage associated with being foreclosed on.

The second buying opportunity is to purchase at auction.  Foreclosure auction purchases require you to have cash on hand for the property.  Most auctions see some good level of bid competition so be sure that you know your financial limits to the purchase.  One downside to buying at foreclosure auction is that you are unable to complete a home inspection before the purchase and you may end up with a property in need of tremendous repairs.  However, most properties sold at auction are sold for well below market value and there are many loan programs designed for repairing such properties.

The final and safest way to purchase foreclosures is in the post foreclosure or REO state.  In the majority of cases, when ownership of a property that did not sell at auction returns to the lender,  the lender will clear back liens, have the property emptied and in many cases they will address major repair issues that may exist.  It is for these reasons that often REO properties are priced higher than short sales and foreclosures, but the risks involved are much lower and the price is generally still below market value.