Buying a Foreclosure Property at Auction; What you need to know before you buy, from our Park Ridge Real Estate Lawyer

Introduction

A foreclosure occurs when a homeowner fails to pay the mortgage on their home. This will result in that homeowner forfeiting the rights to their property. You can find foreclosed properties in Multiple Listing Service periodicals and other listing websites. There are also some financial institutions, like the Bank of America, that offer pages that are dedicated to helping you search for a foreclosed home.

The four phases in buying a foreclosed house

Pre-foreclosure. This involves buying directly from the current homeowner. In most cases, the lender will agree to accept less than the existing balance, and a result, the buyer will get a better deal. A property is classified in pre-foreclosure after the mortgage lender has notified the borrowers that they are in default, but before it is put on auction.

Auction sales. Normally the sheriff or the trustee will conduct the auction for the property. One of the main downsides of the auction is that the buyer usually purchases the home in its current state. This means that the buyer will not be able to see the inside of the home beforehand, which in turn can lead to major disappointment from the buyer. These auctions usually occur on the courthouse steps within the city and will be managed by law enforcement authorities.

Lender owned property. This is the most popular phase for purchasing a foreclosed property, mainly because it is typically the safest and most simple method. This is property that, as the name says it, is essentially owned by the lender. Specifically, when the property owner forecloses on the property, the lender (usually the bank) will repossess the property, make the required renovations and will resell the property for a profit. It is important to note that this type of property often offers the least value and has the highest level of competition.

Government owned. Some homes are purchased with loans guaranteed by the federal government’s Federal Housing Administration (FHA). Essentially, when these properties go into foreclosure, they get repossessed by the government (instead of by the lender) and are then sold by brokers that work for a federal agency.

Risk of buying foreclosed homes

There are numerous risks, however, the two main ones include problems with the property and hidden costs. In regards to property problems, if the home is still being occupied by the owners, there is a chance it is going to be poorly maintained. When people know they are going to sell, they usually make sure to clean the property properly. However, there is less of a chance this will occur if the owners are pushed out. Also, if the owners cannot keep up with the monthly payments, there is a good chance they won’t be able to make the necessary maintenance repairs. In regards to the latter, there are certain delinquencies that are involved (even if everything looks good on the surface). These can include back taxes and liens. It is important to note that whatever kind of tax or loan is owned, it must first be paid before the buying process can move forward. It is important to work with a good attorney during your purchase of a distressed property to ensure that any of the liens on the title are not somehow passed onto you, the buyer.