Q- I have seen a number of shows about people who buy and sell foreclosures. From how it’s depicted on TV, it seems easy, allot of fun and very profitable. How can a person buy foreclosed homes?

First of all, what we see on TV has been staged and can’t be considered reliable information. On the other hand, buying and selling foreclosures can be exciting and profitable as long as you understand that this is high stakes gambling, and there are as many losers as winners.

There are 3 stages of the foreclosure process where buyers can attempt to purchase homes. The first stage is pre-foreclosure and this group consists of homes which are in default, but not yet foreclosed. The second stage are trustee sales where lender’s auction homes to third party buyers. Trustee sales usually occur on the court house steps. The third stage are lender owned homes known as REO’s (real estate owned by a lender). These are homes that did not sell at the trustee sale, are now owned by the lender, and are being sold by lenders through realtors.

Let’s take a look at each stage and how you can get involved.

During the pre-foreclosure stage, you will need to locate defaulting homeowners, contact and negotiate directly with them regarding the purchase. There are numerous companies who sell lists of defaulted homeowners which will make this part of your search easier. From a liability standpoint, if the entire sale is placed in an escrow through a Title Company, you will be guaranteed a clear title, have an opportunity to arrange financing, and allowed to perform inspections, exactly as you would in a traditional purchase. You will need to comply with the Home Equity Sales Contract Act (Civil Code 1695) in all purchases. Failure to comply with Civil Code 1695 has serious consequences so please make sure you understand the law clearly. The down side is that most of these defaulting sellers owe way more than the house is worth, and unless you’re an expert in processing and negotiating short sales, you won’t be able to find many great deals.

Most of the TV shows are about buying foreclosures at trustee sales. This method has the highest risk/reward ratio of the different scenarios. The profit potential is the greatest and also carries the highest risk. You will be required to pay cash at the time of sale. The auctioneer won’t allow you to bid without first verifying that you have enough money, and it will need to be either cash or a cashier’s check. You won’t be able to perform any inspections, you won’t get a Title report, and there are no guarantees that there aren’t additional liens. You will also have to deal with evictions and/or tenants who may be in the home. Unless you clearly understand how loan seniority, tax liens, mechanics liens, or HOA liens affect the particular sale you are pursuing, you should probably keep your money in your pocket. Even if you successfully purchase a home at the Trustee Sale, you may still be surprised by homes that have been gutted, tenants who won’t leave or legal action from the defaulted homeowner.

The bottom line, it’s a great way to make money, but it is not for the faint at heart.

The third stage is the REO stage. As stated above, REO stands for ‘real estate owned’ by a lender. The best part about REO’s is that in most cases the lender has already evicted the tenants, and cleared up the Title issues. As a purchaser you will be able to use standard real estate contracts, be represented by your realtor, obtain Title insurance, perform all your pre-purchase inspections, and have plenty of time to arrange financing. You will be able to negotiate a good deal without the risks associated with trustee sales. The only downside to REO purchases is that all sales are as-is, and you should never expect the selling lender to perform any repairs. Your offer should take into account any problems you see. Granted the deals may not be as good as at the trustee sale, but you eliminate almost all of the risk. For most buyers, this is the safest path to a good deal on a foreclosed home.

If you are looking for a good deal, we would recommend that you find an experienced realtor who understands foreclosures and can assist you in finding the right home and the right deal.

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