Buying a foreclosed home at auction or from a lender can be a way to purchase a property at a discount, and who doesn’t like a discount? But purchasing a foreclosure property can be a complicated transaction. Here’s what you need to know about the process of buying a distressed home.

What, exactly, is a foreclosure property?

A foreclosed home is when a lender or lien holder seeks to take a property from a homeowner to satisfy a debt. The lender can either take ownership of the property or, most likely, sell the property to pay off the debt. The lender typically isn’t always looking for top dollar on this loan-gone-bad, just a fair price that will at least cover the unpaid mortgage.

What is pre-foreclosure?

A pre-foreclosure property is not necessarily for sale. The pre-foreclosure stage is the period after a default notice has been sent to the homeowner and before the property is sold at a foreclosure auction. The owner may be working to fix the loan default or be hoping a cash buyer will purchase the property before foreclosure, which would damage his or her credit. Most experts consider this the most difficult stage during which to purchase a distressed home; you’ll be dealing directly with the owner, not a bank or mortgage company.

Although the pre-foreclosure stage can yield some great deals, transactions are often tricky because most of these houses are not yet on the market and, if the owner pays off the debt, may never be for sale. If you’re still interested, read 10 tips to guide you through the search and purchase of a pre-foreclosure home.

How does a foreclosure auction work?

If you’re an auction newbie, attend a few with the intention of learning not buying. Some are small trustee auctions that don’t take long; others are held by large auction firms and include multiple properties. Seeing how the auction works will prepare you to jump in once you’ve found a property you like. Once that happens, use Zillow’s Foreclosure Estimate to determine what the home will likely sell for.

When you’ve found a property you want to bid on, contact the auctioneer or trustee to determine how much money you need to bring to the auction; the amount varies from state to state. Many auctions require bidders to bring a certified check for $5,000 made out to the auction company to show legitimate intent. In some cases, a percentage of the winning bid is required on the day of the sale. Make sure you research auction requirements in your state before bidding on a foreclosure.

And remember that your auction bid is absolute. Read more about foreclosure auctions, including tips from veteran auction-goers.

How to find foreclosure properties

To see pre-foreclosure and foreclosed properties on Zillow, enter your search area, click “Filter,” and then click the “Pre-Market” category. Or you can check Zillow’s Agent Finder to find agents who have experience with foreclosures; open the “Advanced” menu under Service Needed and click Foreclosures in the list of Specialties. Your agent will guide you to foreclosure property listings on the Multiple Listing Service (MLS), a real estate professionals-only database.

Other sources of distressed property information include newspaper legal notices, bank websites, and government websites such as the Federal Housing Administration. Beware of ad-based, subscription websites because which may include inaccurate or outdated listings.

A few words of caution

Distressed properties are generally sold “as-is,” as in what you see is what you get. There are no warranties so make sure a certified inspector looks over the property before you make an offer. You need to know how much it will cost to make the place habitable or flippable.

Lenders typically clear the title before listing a foreclosure, but it’s wise to hire a title company to research and cure title problems before closing on the property.

It’s also a good idea to have your financing lined up before making a bid. But even if you offer cash, don’t expect a deal on a bank-owned property to proceed quickly. Multiple pairs of eyes must review the deal and respond to your offer. It could take weeks, so be patient.

For more details about buying foreclosed properties, check the Foreclosure Buyers Guide in Zillow’s Foreclosure Center.

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