One of the most common questions I get is "I'm looking to buy a house and want a deal - what about a foreclosure?" My answer is this: Proceed with great caution and do your homework!
When a homeowner defaults on their mortgage, the bank starts the foreclosure process. If the process goes all the way to the auction stage, a public auction is held and the property is offered to the highest bidder (the bank usually has a minimum price) and the buyer purchases the property as-is, often sight unseen, with all the liability on the buyer. If there are any back taxes, unpaid liens, etc, the buyer is responsible for paying these outstanding debts. Buying at an auction is extremely risky for the average buyer and is generally saved for the seasoned investor (with deep pockets who can afford the unexpected once they purchase the property).
Before the property gets to the auction stage, it is advertised in various publications as required by law. Companies like RealtyTrac.com and Massforeclosure.com tap into these announcement lists to get information on who is defaulting on their mortgage and then post the property information as a potential foreclosure. The problem is that even though the homeowner has defaulted on their mortgage, they haven’t been foreclosed on yet, and they retain ownership in the property. Oftentimes the homeowner works out a deal with the bank and they keep the property, and the auction never happens. For this reason, these lists online are often unreliable and are not helpful to the average buyer. The only way to find out if a homeowner is willing to sell the property would be to physically knock on the door and speak directly to the homeowner, tell him you saw his property online with a defaulted loan, and ask him if he would be interested in working out a deal. I don’t recommend this. Also – the price you see online is most often the amount of the outstanding mortgage, not the selling price. And it doesn’t tell the complete story – the homeowner could have other outstanding equity loans with other banks, unpaid taxes and other liens.
When an auction takes place, and if no one buys the property at the auction (at the price the bank sets), then the bank takes ownership of the property. It then becomes a ‘Bank Owned’ property and eventually (it sometimes takes up to 6 months or longer) is listed with a local real estate agent for sale. Once listed for sale on the market (in the MLS), a buyer can enter the property and assess for damage and rehab costs. In some cases, the bank may be willing to do minor repairs to the house, although most of the time the properties are sold as-is.
The important thing to remember when looking at bank owned properties - the bank is looking to recapture the money lost on the defaulted loan. They will discount a property to reflect work needed, but they won't 'give' the property away. Not all bank owned properties are the same - if you're diligent and do your homework (with the help of seasoned realtor who has experience in dealing with bank owned properties), you can find a great deal. Happy house hunting!