by Jessica P. Beganski

Lured by the potential for getting a good deal on a home purchase, many first-time home buyers consider foreclosure properties. With the increasing popularity of foreclosure-targeted Web sites, finding foreclosures is easier than ever, but actually purchasing them hasn’t become any easier or safer for novice home buyers. While bargains can be found, purchasing foreclosure properties is a risky endeavor.

Foreclosures Defined
Foreclosure is the process by which a lender or other creditor seeks to take ownership of or to sell property to satisfy a debt. The process begins when a lis pendens or lawsuit is filed and recorded on the land records. Foreclosure ends when the house has been redeemed by the owner (the balance of debt plus fees are paid), the house is sold to another party to satisfy the debt, or the house is purchased by the creditor, known as an REO, or real estate owned property.

In Connecticut, two types of foreclosure may be used: strict foreclosure and foreclosure by sale.
With strict foreclosure, the creditor goes to court and proves that the owner is in default. The owner is given a period of time to “redeem” the mortgage by paying off the debt or owner may sell the property to someone else to pay off the debt. If the owner does not redeem or sell the property, the creditor takes ownership of the property. 

In foreclosure by sale, the court appoints an attorney, known as committee of sale, to sell the property at an auction to the highest bidder. The committee of sale advertises the auction and conducts the actual auction at the home. If the creditor has to buy the house either because no one bids or the amount owed on the house is equal to or greater than the value, the property will become REO.

Buying Foreclosure Property

Property may be purchased through a pre-foreclosure sale or auction or from the bank directly as an REO. 

Pre-foreclosure properties are those that are in the stages between the day the property owner receives a Notice of Default from the creditor and the day the property is redeemed by the owner, sold at auction or taken by the creditor. 

To purchase a pre-foreclosure property, buyers must contact the property owner directly. While the contact information is generally available through Web sites and newspapers that provide foreclosure listings, actually speaking with the owners can be very difficult. 

Owners in default have likely experienced financial, personal, or physical hardships that have made them unable to make mortgage payments. Homeowners in foreclosure may be in denial, angry, or difficult. 

If an owner is willing to talk with a buyer, the buyer must be ready to act quickly before the creditor takes possession of the property or before it’s sold at auction. Buyers will need to know the market value of the property, the cost of repairs, and how to negotiate with the buyer. These tasks can be difficult for the first-time home buyer who has little expertise in these areas, but pre-foreclosure properties can be the most profitable.

Properties being sold at auction are not for the novice homeowner. First, buyers often have to bid on the property without ever going inside. Secondly, the creditor will be at the auction, ensuring the property does not sell for less than the appraised value. The creditor may have a minimum bid and will bid on the property along with other investors, to keep the price high.

Another problem with buying properties at an auction is that tenants may come with the property. If the home hasn’t already been vacated by the owners before the auction, they become tenants. Buyers are then faced with handling an eviction, which can be costly and time consuming. 

Lastly, buyers must buy properties at auction with cash, typically due within thirty to forty-five days of the auction.

REO properties are the least risky foreclosure properties to buy, but less risk also means less savings. REO properties are often listed for sale with real estate agents and can be financed as you would any other property. 

Also known as “bank-owned,” REOs are usually sold at or near market value, so you may not be getting much of a deal. Another consideration is that when you’re dealing with an REO property, the creditor hasn’t actually lived in the property and won’t know the history of the house, good or bad. They are sold in “as is” condition, meaning the seller is not making any representations about the property’s condition. 

Overall the greatest risk is the condition of the property. When owners are not making their mortgage payments, they may also not be making necessary repairs or keeping up with regular maintenance. If you are a buyer seriously considering purchasing a home in any stage of foreclosure, it is wise to undertake a great deal of homework and research before making a purchase.

Jessica P. Beganski is a licensed Realtor ® with A Buyer’s Market, LLC. She may be reached at (860) 648-9637 or jessica@buyeragentct.com