Heard that you can score a great deal when you buy a foreclosure home for real estate investments?
Buying foreclosed homes soared in popularity during the Great Recession as a wave of foreclosures hit the market and drove down prices nationwide. While foreclosure rates since then have fallen—270,222 in 2023, a steep drop from 2019’s numbers—there are always people who default on their mortgages.
And for real estate investors and homebuyers alike, distressed properties spell opportunity.
But learning how to buy foreclosure properties isn’t as simple as TV shows make it out to be. To begin with, you have to understand the foreclosure process — and how the strategies for buying foreclosures differ at each phase.
Home Foreclosure Process
When a borrower defaults on their monthly mortgage payment, it triggers a lengthy legal process:
| Stage | Description |
|---|---|
| Missed Payment Outreach | 15 days late: Informal notice sent by lender. 36 days late: The lender must reach out again. 45 days late: Written demand letter sent, including loss mitigation and repayment options. |
| Notice of Default | 90 days: Official notice of default after three consecutive missed payments. 120 days: Legal foreclosure action will be initiated. |
| Filing of Foreclosure Complaint | The bank hires a law firm to file a lawsuit in court. The borrower now owes legal fees in addition to late fees. |
| Notice of Trustee’s Sale | The lender’s attorney schedules a foreclosure date and sends an official notice to the borrower. The foreclosure sale is advertised publicly. |
| Trustee’s Sale (Public Auction) | Property is auctioned, typically at the local courthouse. Bidding often starts at the total amount owed, including late and attorney fees. |
| Transfer of Legal Ownership | It can take a couple of months from the sale until the deed ownership changes hands. |
| Eviction | The new owner must go through the eviction process to remove the previous homeowners if they remain as squatters. |
| Real Estate Owned (REO) | If the lender acquires the property at auction, it is listed for sale through a real estate agent. |
How to Buy a Foreclosure Home
The strategy and steps to buy a foreclosed home depend on the stage of the foreclosure process when you choose to buy.
Buying Short Sales
In the early stages of mortgage default, homeowners — and their lenders — have more flexibility. If the property is upside-down, the lender may agree to a short sale: a loan payoff lower than the balance owed.
But lenders are fickle, bureaucratic beasts, and you can expect extra red tape in the short sale process. It’s also hard to find good deals on properties offered on short sales, as lenders are loath to discount the loan payoff below the property’s market value.
Some investors find a way to make it work, but most opt to target pre-foreclosure homes instead.
Buying a Pre-Foreclosure Home
Once the lender hires an attorney and files for foreclosure in court, there’s no more Mr. Nice Guy. The borrower has had at least four months to bring their loan current, agree to a payment plan, or sell the home, and they haven’t done any of those.
Now the homeowner is under the proverbial gun, with an auction date looming. They need to sell now or lose their home at auction.
That urgency can make for motivated sellers. But it also puts you on a tight timeline to secure financing and settle.
When I first started investing in real estate, I bought pre-foreclosure homes. I found that the overwhelming majority of distressed homeowners didn’t want to sell — they wanted to stay in their homes.
You can offer to buy their home and lease it back to them, as one way to get their attention. You then enter an installment contract for them to rent the property from you and buy it back.
If you really want to get creative, keep their mortgage in place and use a wrap-around mortgage to finance your portion. That works especially well if they have a low-interest mortgage in place.
As for where to find pre-foreclosure homes, you can always go to the courthouse to look up foreclosure filings directly, but that’s a lot of work. Alternatively, just use an off-market distressed property platform like Propstream or Foreclosure.com.
Buying at Foreclosure Auctions
Anyone can show up and bid at a public foreclosure auction. You just need to provide proof of funds for the down payment — often a bank check made out to yourself, which you can later cancel.
The problem, however, is that you can’t see the inside of the property. The bank doesn’t own it at that point; it still belongs to the defaulting property owner. So you have no idea what kind of condition the property is in. It could look perfect on the outside and be a shell on the inside.
Or it could be pristine. You just don’t know.
Unless, of course, you do. If you have previously gained access to the property, for example by meeting with the homeowner there to discuss options for selling, then you have insider information.
Remember, the lender typically sets the opening bid at the total amount owed on the loan. At this point, that includes massive late fees and legal fees. Only bother bidding at foreclosure auctions where the property still has plenty of equity.
Buying Bank-Owned REO Properties
If no one buys the property at public auction, the lender buys the property themselves.
After jumping through the legal hoops to take ownership of the deed, and possibly evicting the former homeowners if they refused to leave, the bank then hires a Realtor and decides whether to sell the property as-is or do some repairs first. Then it goes on the market, listed on the multiple listing service (MLS).
At this point, anyone can walk through the property and make offers. If the property needs significant repairs, you’ll get the “Needs TLC” price, but that’s still the market price for the property. You’re bidding against every other Tom, Dick, and Harry out there.
Unless, of course, you can get a first glimpse of these bank-owned properties. While huge corporate banks follow procedures to the letter, local and regional banks are more accessible. There’s probably one person in charge of REO properties at these banks, and if you can establish a relationship with that person, you can sometimes get first access to their REO list before they go through the hassle of hiring a real estate agent.
It makes sense for the bank, too. They get to sell the property faster, without having to pay a realtor’s commission on foreclosure listings.
Read more about how to buy REO properties if you like this strategy.
Buying Government-Owned Foreclosure Properties
What happens when homeowners default on government-backed loans, such as FHA loans and VA loans?
If no one buys them at auction, the government takes them back instead of the lender.
Expect some extra steps and red tape, of course; but in exchange, you can sometimes score a great deal on government-owned foreclosed properties. You can view the list of government REOs on the Department of Housing and Urban Development (HUD) website.