Tips for Buying a Foreclosed Home

May 9, 2007 — -- More foreclosure signs are popping up in front of houses across the country.

Foreclosures went up an astounding 42 percent last year, reaching 1.2 million, according to RealtyTrac. Already in 2007, 2 million homeowners have been late making their mortgage payments, says Moody's Economy.com.

"In 2006, the average foreclosed home sold about 25 percent below market value. That is real money. You want to do your homework on both the property and the process," said Mellody Hobson, "Good Morning America's" financial contributor.

However, if there is any silver lining to this dark cloud above real estate, it is for those in the market to buy a home. But is buying a foreclosed home a safe investment?

Hobson offered a list of guidelines for foreclosure sales.

Some Terms to Know:

Pre-foreclosure sale: That's where you buy a home from the owner before the owner is foreclosed upon. Hobson said she liked this type of sale because the buyer and the seller were motivated. The seller, of course, wants to dodge the bullet of foreclosure. But the buyer gets the discount, which is typically in the neighborhood of 10 percent to 20 percent. The buyer also gets the opportunity to inspect the property.

Auction: An auction comes with lots of risks. You're buying the property, as is. That means you can't go in and inspect it, and generally people who have fallen behind on a mortgage haven't made a lot of home improvements or been able to maintain the home.You just don't know what you're getting.

There are also people who bid on homes at auction for a living, so you might be bidding against someone who's very savvy.

Generally, a home that's bought at auction sells for about 40 percent below market value, so you get an incredible deal here. But another downside is that you must pay cash for it. You cannot get a mortgage, because a mortgage company must be able to go in and appraise or inspect the property, which it can't do in this situation.

Real estate-owned: That's where the lender or the bank has the title, and it owns it. Typically you find that the property doesn't sell at as big a discount as a pre-foreclosure sale or an auction. There's much less risk there. You can get a mortgage, and you can inspect it. So it's really like buying a property from a regular person. It's just owned by a bank.

How to Find These Listings

Check in legal newspapers. Every week they list foreclosed properties. You also can check in your local paper in the Legal Notices section, which runs from time to time.

Or you can just pick up the phone and call your recorder of deeds and ask about foreclosed property in a neighborhood that's close to you. There are Web sites out there, but Hobson isn't a huge fan of that method because a number of sites require you to pay for the information.

"It came across a little sketchy when I did my research on them," Hobson said. "You could really get the same information for free, and you're paying and you don't quite know what you're getting."

What Happens After You Get the Listing?

Once you get the listing, check the title. Realize that a lot of people have taken second mortgages. They've been tapping into the home equity that they have with home equity loans and lines of credit.

Keep in mind, once you own it, you owe it. So you are assuming whatever debt that the pervious owner had. So the savings you think you're getting could be wiped out, or there could even be more because of the title not being clear.

Bottom Line

"If you're a first-time home buyer, I would not recommend auction for you," Hobson said. "I think that gets too tricky. There are too many risks."

Hobson recommends sticking with the pre-foreclosure sale property where the seller is very motivated to sell, or try the real estate-owned property that's owned by the lender.