3 Ways To Purchase Foreclosed Properties

The process of buying a foreclosed home is slightly different from the process of buying a non-foreclosure home.  If you want to invest in foreclosures, therefore, it is important to understand the different ways by which to purchase a foreclosed home.

There are three main ways to buy a foreclosed home.

Buying before the auction
Some delinquent homeowners may want to sell their homes before facing an actual foreclosure.In this instance, the homeowner, in agreement with the lender, agrees to sell the home for less than the amount owed on the mortgage.This is called a short sale. Short sales are "pre-foreclosures", of sorts. By broadening your home search to include short sales, you can identify homes that may be sold at a discount.

Buying at the auction
Another way by which you can invest in foreclosure homes is by buying the home at auction. From area to area, the legal requirements for the sale of a foreclosed home at auction may differ. If you plan to buy at auction, you'll want to be familiar with your area's customary judicial proceedings.

Buying after the auction
Buying after the auction means buying bank-owned properties. This can be the most lucrative and safest means of investing foreclosure properties. This is because lenders often reduce the sales prices of their home inventory in order to "sell it quickly". It can be expensive for banks to own foreclosed homes, and few banks are equipped for managing owned homes. Check with your local real estate agent to see what, if any, bank-owned homes are available for sale in your area.

The process of buying a distressed home is different from the process of buying a "traditional" one. Therefore, regardless of which path you follow to buy a foreclosed property, have an experienced real estate professional on your team.

Short Sales Outnumber Foreclosure Sales For Third Straight Quarter

Foreclosure-tracker RealtyTrac reports falling foreclosure sales nationwide as banks get better at selling homes via short sale.

In its Q3 2012 report, RealtyTrac says that 193,059 homes in some stage of foreclosure were sold, accounting for 19% of all residential home sales. In addition, pre-foreclosure sales -- also known as "short sales" -- climbed 22% on a year-over-year basis.

For the first time since 2007, the number of short sales outnumbered the number of homes sold in foreclosure over three consecutive quarters.

The average price of a short sale home fell by 5 percent as compared to a year ago which may reflect an eagerness on the part of mortgage lenders to dispose of distressed properties before they fall into foreclosure. Foreclosures can increase a lender's losses, and foreclosed properties be expensive to manage.

Compare the average Q3 2012 sale price of a home in short sale versus one in foreclosure :

• Average sale price of a residential property in short sale : $191,025
• Average sale price of a residential property in foreclosure : $161,954

It's not just the higher home sale prices that have pushing banks to settle on short sales, either. Short sales are less costly, too. Foreclosing on a home requires banks to pay court costs, among other fees, and which positions the short sale outcome as a clear winner for many banks. 

For homebuyers , the banking industry's shift toward short sales is welcome news.

Buying a short sale has been a notoriously slow process with a lack of defined timeline. As banks improve their distressed sales division, they're getting faster and more efficient. This makes it "easier" for a buyer to buy a home in short sale.

However, don't buy a short sale without the help of an experienced, licensed real estate professional.

The negotiation process is different for a short sale than with a "traditional" home purchase. Time lines are different, responsibilities are different, and purchase contract language may be different, too. The same is true for buying a foreclosure.

Short Sale : Writing A Letter Of Hardship

A short sale is when a property is sold for less than its remaining mortgage principal balance, and executed as a way for both the existing homeowner and mortgage lender to reduce their respective losses.

Typically, although not always, short sales are reserved for situations of extreme financial hardship; just prior a bank beginning foreclosure proceedings.

Short sales are not automatic, however. Homeowners must often prove the merits a short sale to their lender, which often involves documenting that selling the home for less than its worth is the best and most viable option for all parties involved. 

The short sale process starts with a letter of hardship.

To prove your short sale worthiness to the bank, you'll be asked to submit a cover letter which explains your hardship, and to provide full financial disclosure. You will also need your original purchase contract, a balance sheet of your income and expenses, your asset statements and proof of income, and two years of federal tax returns.

Lenders prefer handwritten letters and are more apt to agree to a short sale for homeowners who may have lost jobs or encountered significant medical bills, as opposed to those who engaged careless spending.

Draft a compelling letter and avoid extraneous details. Be short, be thorough, and be complete.

In addition, note that the following traits can help speed your short sale approval : 

• The home is marketable
• A second lien holder, if one exists, is amenable to short sale proceedings
• A foreclosure is not scheduled within the next four months

Choosing to short sale your home , though, is not something which a homeowner should pursue alone.

The process of selling a home in a "distressed" state is significantly different from selling a non-distressed home. Homeowners selling in a short sale should seek the advice and counsel of an experienced real estate agent.