Buying & Fixing Up a Foreclosed House

You've got two ways to buy a foreclosed home: at public auction or after the auction, when the bank is the owner. Foreclosures end at a property auction, with the home going to the highest bidder. You won't be able to see inside or get an inspection before the auction; you're getting the home "as-is." If no one wins at auction, the lender owns the home until a buyer comes forward. You make an offer to the lender as you would any home seller, and you can negotiate. You should be able to get an inspection if you pay for it yourself, but don't expect the lender to make any repairs. Lenders have real estate departments devoted to homes they own, and real estate agencies also list them.

Auctions rules depend on where you're bidding, but there are some common things you should know before your bid. Homes bought at auction require a cash-deposit, and you'll have to cough up the rest within 30 days of winning. It's difficult to get a mortgage for a home bought at auction. Loan processing takes days even if you're pre-approved, and you might not get the money in time, or find that the home won't qualify. If you're buying from a bank, you'll have more time to get a mortgage, but you still might run into a problem if the home is in poor condition. A lender won't give you a home loan if the property isn't worth enough to secure it.

Homes bought at auction are a shot in the dark. If the home's been vacant for a long time, it's more likely to have major problems, such as pest infestation and burst pipes. You need to have the cash available to cover the repairs you know the home needs plus the cost of fixing any unexpected damage. You'll have trouble getting a mortgage on the home if it needs significant work, so you'll need to finance repairs yourself. With a bank-owned home, you should have an idea -- based on the inspection report -- of what you're getting into before you buy.

You still need to do your homework on a foreclosed house just as you would for a traditional buy. Check property values in the area and the neighborhood itself. If you're buying in an area with a high crime or foreclosure rate, the value of your property upon completion of repairs might not cover reflect your investment. You need to be able to handle the cost of repairing and owning the house while it's being fixed. Even though you can't live in it or rent it out, you'll still have to pay property taxes, homeowners insurance and other home costs. If you let it go, you can lose the home for property taxes or get fined by the local government for property hazards and neglect.

Auctions come with some pitfalls you might not expect. If the former owner is still in the house, you'll have to evict her yourself. The lender doesn't evict unless it ends up owning the house after auction. While you're evicting the old owner, she might trash the house or cause problems with your new neighbors. You're also on the hook for some outstanding liens, such as property taxes, and problems with the home's history of ownership or title. Check for title problems and liens beforehand by ordering a title search from a title company. You'll have to pay for it, but you'll have a better idea of what you're getting into with the auctioned home.