Foreclosures: What You Need to Know

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Roadside signs and online ads can commonly be found stating things like, “We buy houses.” These ads are typically from real estate investors looking to obtain a discounted property, such as a property heading into foreclosure. A foreclosure, often referred to as a REO or bank owned property, is a type of distressed property that has reverted back under the control of the original lender. Real estate investors and discount home buyers often seek out these types of properties as an alternative to paying higher prices on traditional retail properties. In many cases, a foreclosure property will be sold at or below market value. In some situations, however, they will be sold for well above market value. For this and many other reasons, those who are interested in purchasing foreclosure properties should become familiar with the way foreclosures are transacted before attempting to invest large sums of money in this type of asset.

Common Types of Foreclosure Sales

There are two primary methods of buying foreclosures. Either a person can buy a foreclosure through a real estate agent or through public auction. If a person is looking to buy a foreclosure through a real estate agent, then it is generally a good idea to make sure the real estate agent they are working with specializes in this type of real estate transaction. On the other hand, a person can just as easily bid for foreclosures at public auction in the county where the property resides. Most public auctions, involving REO properties, are either held online or in a manner designated by a given state’s real estate laws. Since you are not an attorney, you should read through the laws governing foreclosures for the state in which you are interested in engaging in real estate transactions.

The Downside of Public Auctions

The downside to buying foreclosures at public auction is that real estate investors will sometimes bid properties up above retail market value. This can become a problem for people interested in making a return on their investment. Another downside to public auctions is that the bank or lender is generally not required to make any guarantees, and the property will likely be transferred by way of a Quit Claim deed, rather than by a Warranty Deed. It is generally a smart idea to do research into the different types of property deeds. You will want to know what it means to come into possession of a given deed type for a foreclosure property before you commit to buy.

Title Search and Title Insurance

In a lot of foreclosure cases, people imagine that they will save money if they skip the step of having a title company run a title search on the property. This is a very risky and reckless practice. When you pay for a title search, the title company is actively and laboriously looking for any clouds on the title that could come back later to pose a problem. Purchasing title insurance also helps to protect a property owner if any missed title issues lead to legal action against the new owner of the foreclosure. For example, the bank or lender of the property may not have had true ownership of the property before it went to public auction. In such a case, the individual or entity on the chain of title that can prove they have an unresolved interest in the property can sue for damages. Without title insurance to protect the owner of the foreclosure, this will typically leave the new owner with a huge financial loss that could have been avoided.

Conclusion

Although buying foreclosures is a great way to pick up properties at a discount price, a person should always be aware of the issues involved to mitigate any risks. Understanding state laws and taking all necessary precautions will generally lead to a profitable outcome for a savvy individual trying to purchase foreclosures. Those who learn to make a sizable income in foreclosures will often see the value in employing ads that say, “We buy houses,” to help them earn more profits in the foreclosure market.

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