How to Buy a Cheap Foreclosure

The phrase "cheap foreclosure" is relative, but you can still find bargains

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When a home buyer or investor wants to buy a cheap house, it's easy to assume that all foreclosures sell for much less. However, that impression is somewhat false, especially if the home needs repairs. Your idea of a fixer-upper cost and the bank's estimate might be very different.

Foreclosures will generally be priced around the market value, with comparable houses dictating prices. Realtors will generally not be listing houses for "cheaper" prices.

If you'd really like to find a house cheaper, there are some places you can find houses besides realtor listings, such as sheriff's auctions, estate auctions, private auctions, or directly from the bank.

Buy at a Trustee or Sheriff's Auction

You can find notices of auctions online and in local newspapers. There are a number of websites that post information on auctions, and some might offer free trials.

You typically pay cash at public auctions and buy the home in "as is" condition. Smart buyers will pay a title company to do a preliminary search prior to bidding.

If there are liens such as taxes, delinquent homeowners association (HOA) dues or superior loans, those encumbrances stay with the home.

There could be a number of professionals and investors at public auctions that can reduce your chances of winning a house.

Buy a Cheap Foreclosure at a Private Online Auction

Auction houses generally advertise online and in newspapers. These auction outfits might have marketers traveling around the country holding auctions at various venues.

A private auction house often will let you obtain financing to buy a cheap foreclosure. You can also bring a buyer's agent to represent you.

Some auction companies will let you inspect the foreclosures prior to bidding. But you should be prepared to set a limit and be careful to not get carried away by the excitement created during the bidding process.

Buy Directly From the Bank

The best way to eliminate most of the competing buyers for a cheap foreclosure is to contact the bank directly. Banks are often willing to give a break on the price if a buyer or investor buys more than one home in a bulk-purchase package.

What you will find more often than not is the bank does not want to sell to you. If the home is not on the market, but it's bank-owned, it's probably because there are tax advantages to the bank not to sell it.

Some banks maintain a list of foreclosure homes online that are available to buy. Buyers can also check the U.S. Department of Housing and Urban Development (HUD) website for a list of HUD-owned homes.

Foreclosures Listed on a Realtor Site

You can buy a foreclosure generally for much less than its original loan balance, especially in a declining market. But that doesn't mean the bank will sell the property for less than market value.

The market value might be 50% less than the last time the home sold, but that foreclosure price will generally reflect the value of the comparable homes around it, less the costs to fix it up.

The truth is it's rare to find a cheap foreclosure listing in the Multiple Listing Service (MLS). Every so often, if you're lucky and fast enough to write an offer, you might be able to buy a foreclosure for a little bit under comparable sales. But bargain-basement deals are typically not listed in the MLS.

That's because banks, like any other seller, want to make as much money as possible. They hire real estate agents to prepare an estimate of value and tell them how much they can get.

The agent takes the condition of the home into consideration and names a price. Then other agents in the MLS compete to buy that home for their buyers.

When buyers compete, multiple offers are the result. Multiple offers tend to drive up the price. To find a cheap foreclosure, buyers need to reduce the competition for that foreclosure by exploring the alternatives.