How would you like to knock tens of thousands of dollars off the price when you buy a home? You can do just that if you buy a foreclosed property.
Last year, across the country, houses that had been through foreclosure sold for an average of 28 percent less than other houses. But there are perils and pitfalls you need to know about.
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"GMA" did the math for you. The median home price in America is about $160,000, so if you get that 28 percent discount, that's a savings of nearly $45,000.
Here's how it works:
"Auctioned on the courthouse steps." It's a phrase you've heard, but a sight most haven't seen.
Banks are required to go through an auction to repossess a house from the owners. And the general public can bid, too.
"You can do it," Paul Cooper of Alex Cooper Auctioneers, told "Good Morning America." "It's possible. It's just you have to do your homework before you come to my sale and bid."
And it's hard homework at this stage because:
You can't get inside to see the house.
You have to bring a 5 to 10 percent down payment.
It's tough to get a mortgage for a property, sight unseen.
And if you do make the winning bid, you may have to evict the current residents.
At a recent Montgomery County, Md., auction the crowd wasn't biting, so the bank was the only bidder paying roughly what it was owed.
The courthouse steps are not the only place to buy a foreclosed home. So often the bank buys the property back, and that actually opens up a whole new opportunity.
For example, one cute Washington, D.C., duplex is now bank-owned once more. You can actually hire an agent and take a tour.
"It's substantially less risky than the courthouse steps process," said Dale Mattison of The Mattison Group.
The stereotypical foreclosure property has been neglected, even trashed, but there's a flip side. Banks often invest in things like new paint, carpets and appliances before putting a house on the market.
"So the bank recoups a little more money and the new home buyer gets a property that's fresh and they don't have to do a whole lot to it," Mattison added.
Sometimes the bank selling the house will even offer you a mortgage. But it's not all rosy: big banks are notorious for taking a long time to decide on your offer, then making you meet rapid deadlines.
"It's gotten a lot better. It's cleaned up. The process is a lot smoother than it was, I'd say, two to three years ago with bank-owned properties," Christa Hodge of Long and Foster Realty told "GMA."
Hodge found one bank-owned home in Maryland for her brother, James Glavas, a single dad. All it needs is cosmetic work.
The house last sold for $300,000 in 2005 – way out of reach for Glavas.
"When I first moved out here from Dallas, I was like, how will I ever be able to afford a home and live the American dream like everybody else?" he said.
But now he's snagged it for $175,000. That's $100,000 less than nearby houses that haven't been through foreclosure.
"I'm going to be able to own a home at the same price that I'm renting at now, so that's a beautiful thing," Glavas added.
Real estate agents say it's the cycle of life. Yes, some people lost their homes, but now a whole new group can afford to buy.
"The affordability factor or the ease of the ability to buy today are higher than we've seen in probably 25 years," Mattison, of The Mattison Group, noted.
"It makes me feel good at the end of the day to be able to help everybody," Hodge said.
That's one of the silver linings of the recession.
The key is to work with real estate professionals who have experience with foreclosures.
Never skip the home inspection, because unoccupied houses can develop unusual problems.
And purchase a quality owner's title insurance policy in case somebody comes along later and claims the house is theirs.
There are two main junctures at which you can purchase a foreclosed property: on the courthouse steps when it is being auctioned off to satisfy the debt owed to the mortgage company. Or after that same bank has bought the property back itself in order to recoup its investment.
This second is known as a bank-owned or "real estate owned" property. You can also buy a property before the bank forecloses, usually in a short sale situation, where the homeowner is trying to sell it at a discount to avoid foreclosure. Since the bank has not yet foreclosed, this is really a different sort of transaction, with lots of messy complications as the homeowner tries to save -- and possibly stay in -- their home. So, for the purposes of this article, we will just cover the other two options.
You hear the phrase "auctioned on the courthouse steps" frequently, but the truth is, not all courthouses have steps and not all of these auctions are conducted at courthouses. Some states hire professional auctioneers and ask that the auctions be held at the auctioneer's office. Others allow them to be held on the premises of the property being sold. Additionally, some of these auctions are conducted by professional auctioneers, while others are run by the local sheriff's office and some are handled by attorneys.
If you are hoping to buy a property at one of these initial auctions, where the bank is repossessing the home from the mortgagees, it's a good idea to attend several and get a feel for how they work before you actually bid. Keep in mind that many -- even the majority -- of these auctions are canceled at the last minute when the homeowners somehow work out a deal with the bank. So try to re-check listings before heading to the auction site.
Typically you cannot get inside to see the property, but here is one helpful hint: if the property changed hands in recent years, there may still be photos and details archived in the Multiple Listing Service that real estate agents have access to. So ask licensed agents if they can conduct a search for you.
Industry experts say bank-owned properties are already marked down 20 percent to 30 percent compared with other homes in the neighborhood, so you may not have much luck making a lowball offer of even less. However, if the home has been on the market a long time, your chances are better of talking the price down. It helps to know if there are other liens against the property for homeowner's association dues, property taxes and so on, because then you can calculate how much the bank needs to get out of the property to break even.
You should know that banks are not required to disclose defects in the property in the same detail that regular sellers are because they have not lived in the home. It's important to get an expert home inspection to look for expensive flaws. If you are in a competitive bidding situation, you may be able to get a "pre-inspection." This inspection is conducted before you make your offer, and will help you decide if the place is in good enough shape to make an offer at all.
Nearly all bank-owned properties are listed on an as-is basis. That means the bank is stating it will not repair defects to the property. If you find flaws, you should mark your offer down accordingly. Alternatively, if the property has been sitting around for awhile, even though the bank has listed it "as is," it may be able to pay for repairs in order to get the home off of its books.
It's best to approach any home purchase with your own preapproved financing in place, but since you are dealing with a bank, it is quite possible that they will want you to get preapproved by their own mortgage department as well. Some banks selling properties will actually offer to provide you a mortgage for a property. It's a fine idea, as long as you have shopped around elsewhere and know you are getting a good rate and fees.