Tips for Buying a Foreclosure

Foreclosures are dominating the housing market. Right now, there are 1.5 million such homes for sale, and more are expected to be available soon. That provides both opportunities and pitfalls for bargain hunters. Here are a few tips for making sure you don't get taken when buying a foreclosure.

1 - Don't get Caught Up in a Bidding War

Banks put repossessed homes back on the market at cut-rate prices because quick sales help avoid the expense of upkeep, such as property taxes, insurance, heat and electricity. Those lowball prices represent golden opportunities, but they also attract dozens of buyers who may bid until homes are no longer bargains. Don't get caught up in a bidding war. Instead, carefully calculate what you want to spend and do not exceed that price.

2 - Get Pre-Approved

If you're trying to buy a foreclosed property, it can help to get a pre-approved mortgage from the lender who holds the property. Doing so may cause lenders to look more favorably on your bid if it's similar to others. Plus, you're not locked in if other lenders offer you better terms. You can always change your mind and get your mortgage from another source.

3 - Consider Fixer-Uppers

Most REOs, the industry term for bank owned properties, are sold as is. "The conventional wisdom is that banks will do nothing to the houses before the sale. In 25% of cases, homebuyers persuade lenders to fix some of the problems before the sale closes. Most of the time, banks would rather sell the house to the next available bidder — one who doesn't ask the bank to pay for repairs. So be willing to consider a home that needs some work — but budget accordingly.

4 - Find a Real Estate Attorney

Once banks agree to sales, they often want to move fast and load contracts up with legal mumbo jumbo. As a result, buyers often do not have the time or expertise to figure all the angles. The solution is to hire a real estate attorney — even in states where home sales are usually completed without one. Considering you're making a six-figure investment, the legal fees are cheap insurance against the risks.

5 - Tour Properties with a Contractor or Home Inspector

With so many REOs in seriously deficient shape, it's essential to go over every inch with someone who can spot problems and tell you how much it will cost to remedy them. A foundation crack can be a minor problem or a deal breaker, and most ordinary homebuyers have no way of telling the difference. Like an attorney, a contractor can be very worthwhile insurance.

There are a lot of great deals on the market, but buyers beware: Purchasing a foreclosure is rife with pitfalls if you don't know what you're doing.