If you're currently renting in one of the country's hottest housing markets, you may be concerned that the prices of even entry-level homes are rising far more quickly than your ability to save up a down payment, potentially pricing you out of the market unless (or until) the bubble bursts. To help your down payment go further, you may be looking at homes that need quite a bit of work or are in some type of legal flux, such as those in pre-foreclosure or foreclosure. Could purchasing a home at a foreclosure auction be the answer to your housing woes? Read on to learn more about purchasing a property at a foreclosure sale to help you decide whether this is the right decision for you.
How do foreclosure sales work?
Each state sets forth its own laws and timelines when it comes to the forfeiture of homes through mortgage foreclosure; however, there are some common threads.
In a foreclosure auction, the home is being sold to satisfy the balance of an outstanding mortgage or land contract. Some states utilize a judicial foreclosure process, which requires the lender to first file a lawsuit against the borrower after he or she has failed to pay the mortgage for a specific length of time. Following a judicial hearing in which the lender establishes that the loan is in default and the borrower is unable to reinstate (or repay) the loan in a timely manner, the court will issue a judgment against the borrower in the amount of the outstanding mortgage plus any attorney's fees or other related costs.
To execute this judgment, the lender will schedule a foreclosure auction, and any proceeds realized from this sale will be used to satisfy the outstanding mortgage. If the home's final sale price is less than the mortgaged amount, the lender may seek to collect this deficiency judgment from the borrower or write it off as a loss.
Other states utilize a nonjudicial foreclosure process, which is often quicker than judicial foreclosure but provides less oversight. In these states, those who take out a mortgage on a property sign a deed of trust that includes a power of sale. Defaulting on this mortgage gives the lender the right to immediately execute the power of sale clause, and a foreclosure auction may be quickly scheduled.
When is purchasing a property in foreclosure a good idea?
After the most recent nationwide housing crash, a number of investors flocked to recently foreclosed properties as a good way to pick up homes on the cheap, renovate them, and flip them for a profit. Others purchased foreclosed homes as "starter homes" at a fraction of the price they'd have paid just a few years earlier, reserving these extra funds for home improvements rather than mortgage payments.
As many housing markets have fully recovered from their recession lows, high-quality foreclosed properties are often harder to find. However, for the prospective homeowner who has some cash in the bank and nerves of steel, a foreclosure auction could provide a good buying opportunity. You may want to start the process by browsing available auctions in your area. Many county websites or private auction companies maintain a database of homes subject to foreclosure liens, giving you a good idea of the prices for which the homes that interest you are selling. You'll then be able to contact some banks for mortgage quotes or a preapproval letter that can help you close quickly after the auction sale.
Alternatively, you may want to look into bank-owned homes. These homes have already gone through the foreclosure process and were purchased by a bank (often the mortgage holder). Because these properties have often been vacant for some time, they may require more extensive repairs than recently foreclosed homes, but they are usually priced accordingly. Try speaking with a representative from a company like Bob Parks Auction Company LLC as well for even more options.