How to Buy a Cheap Foreclosure

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

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When a home buyer or investor wants to buy a cheap foreclosure, it's easy to assume that all foreclosures sell for pennies on the dollar. However, that impression is false. It is not how foreclosures work. Especially if the home needs work. Your idea of a fix-up cost and the bank's estimate might be two different opinions.

When you watch TV news reports that sensationalize foreclosures or read headlines that foreclosure filings are increasing, it's normal to jump to the conclusion that banks are desperate.

People tend to believe that banks will do anything to unload foreclosures, including letting you buy properties for 50 percent of their value or less. Not true, in most instances.

Why the Price of a Foreclosure Can Appear Cheap

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 percent less than the last time the home sold, but that foreclosure price will generally reflect the value of the homes around it.

If you see a foreclosure advertised in MLS, it's at market value for its condition and location. It is not a steal. But the perception that foreclosures are a "steal" persist, regardless.

Where to Find a Cheap Foreclosure to Buy

I often receive calls from investors asking me about buying a foreclosure cheaply, and the truth is it's rare to find such a listing in the Multiple Listing Service (MLS).

Every so often, if you're very lucky and very fast to write an offer, you might be able to buy a foreclosure for a little bit under the 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. Here are three places to look for cheap foreclosures.

Buy a cheap foreclosure at a trustee's 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 such as Property Radar might offer a free 30-day trial.

You typically pay cash at public auctions and buy the home in its "as is" condition. Smart buyers 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 will be the sharks and pros at public auctions, and they will probably win the house, not you.

Buy a cheap foreclosure at a private online auction.

Auction houses generally advertise in newspapers and online.

These marketing guys might travel around the country holding auctions at hotels. 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. Otherwise, you can overpay for that cheap foreclosure.

Buy a cheap foreclosure 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/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.

At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.