Buying a Home Through Foreclosure

There are tons and tons of articles you can read about the do's and don'ts of buying foreclosure property. You can even subscribe to programs (for a price) that will keep you updated on what properties are available (or soon to be) and what stage they are in at any given moment. While most of these programs will give you an idea of what's available, by doing a little homework on your own, you can find properties that are in various stages of the foreclosure process. This article is not about buying for investment. It is about my experience in going through the process of buying a home to live in.

When I first started looking for a home, I knew I didn't have the capital available to buy the house that I wanted. Even though there are ways to creatively finance, coming up with 20% in cash seemed a little beyond my reach for the size of home that I wanted. So I started looking at the foreclosure lists. I even signed up for the free trial and got some addresses to go look at. But what I quickly found out was that it was difficult to get in to see how the houses were laid out. Many were in early stages and didn't even have a realtor or sign with a number to call to find out more.

Some will tell you that you can actually find houses in foreclosure and buy them for pennies on the dollar. While it's true that some are able to do this, my experience was not quite this cheap. I expect that is true of the vast majority of foreclosures. While the bank that actually owns the property is not into real estate management and doesn't have the desire to be in real estate management, they are in the money business and their objective is to obtain a reasonable price for the value of the house without losing their shirt.

So, my wife and I, decided where we wanted to live and looked at a lot of houses, did some walk-throughs. We found houses that we couldn't afford and those that would need a lot of work after paying what we had to to get the house. By the way, you can expect the latter with most foreclosures.

We ran across a home that we loved. We actually knew the property and the past oweners. They had split up an turned the property over to the bank. It was months down the road before the owner was required to vacate the property. The house had been remodeled on several occasions and was currently in process of moving the bathroom. Originally about 5' X 8', it was being moved to a 8' X 10' bedroom that wasn't being used. During the interim, the whirlpool tub that had been partially installed, was removed for sale. As we found out later, ceiling fans and heat registers were also removed.

We found out that the property would be going up for sheriff's auction in January 2006 and decided that we would try to buy the house there. When we showed up, there were a lot of people there. Not all to bid on "our" house because there were several properties on the docket.
When it came time for our auction, it started with several people bidding. One being a neighbor who wanted to see it go to someone who could afford it. Another was an attorney for the bank, although we only guessed that at the time.

The bidding started at the usual 2/3 appraised value and went up quickly from there. My wife and I had set our limit before the bidding started and we made our final bid. Then the bank made one last bid. I almost rebid, but we had already decided to stop. The bank had bought it back. To say the least, we were devastated. To make matters worse, I went over to speak with the attorney and he told me that his last bid was as high as he was authorized to go. So my next bid would have won the house. UGH!

We left the courthouse with information from the attorney and immediately called his office to speak with someone about our desire to deal. They couldn't tell me anything, other than that they had to get back with the bank and they gave me a contact there. I immediately called and told them about the house and they had no clue what was going on. It seems that different departments at the bank handle different areas of a foreclosure and they don't necessarily talk.

As you read about foreclosures, you will hear the term REO, short for Real Estate Owned. This is the department of the bank or the stage in the foreclosure process where the bank now has the information and the authority to sell the property. After weeks of calling, (make it months) we finally got some information. But it didn't come directly from the bank.

One day, just by chance, my wife passed the house and saw a note on the front door. She stopped to read it and found it was a notice from the real estate agent assigned to list the property. She immediately called and we were set up for an appointment the next day.

We did our walk through and took a lot of photos. There was a lot of cosmetic things that need to be done, but at least the hardwood floors were still there and in pretty good shape. We knew the furnace hadn't worked for ten years, but at least the gas fireplace in the family room was still intact. The bathroom was half moved and the new tub was gone, but there was a shower upstairs, so no big deal. We planned on moving the bathroom anyway. The house looked worse than it was because of the color schemes and the bathroom, but all-in-all, it looked pretty good to us.

The agent thought it was over priced for what she saw though. The bank had put a price on it. You guessed it - The bid I would have made if I had bid again at the auction. But the agent said she would contact the bank and suggest that the price was too high for what was there.

Now one thing I haven't said. When a property goes into foreclosure and is scheduled for sheriff's auction, the property is valued based on two things. 1) The overall look of the house as seen from the outside and 2) The value of properties similar to it it the area. They do not gain access to the inside of the house and have no idea what condition it is in unless they can see through the windows.

At this point, the bank decided to have an independent appraiser look at the property. The price came back better, but not nearly as good as what the agent had guessed. But it was good enough for our purposes. Besides, we made the one fatal mistake of deciding the house was ours long before the bidding was over. Even so, we saved 15% -20% over what we would have paid had we won the auction.

So, for this chapter - the rule. Make sure you know going in on whether you are willing to lose the property if the right situation doesn't evolve. Can you walk away if the price is too high? If you just have to have the house, make sure you know what to expect in additional expenses to make the house what you want it to be. Because that is the overall cost of the home when it's all said and done.