While foreclosed homes tend to be lumped into one type of property, there are in fact many types of distressed property. Each has their own advantages and potential pitfalls for the buyer:
1) HUD homes. HUD (The Department of Housing and Urban Development) homes are sold by the federal government. The last owner of an HUD home had a government-insured loan. When the owner defaulted on this loan, the lender recouped the money lost on the loan via the government. The government is selling the home. HUD homes are attractive because the HUD offers many special programs for first-time and low-income homebuyers. If you qualify for one of the HUD's programs, you could enjoy substantial savings. HUD homes are also appealing because they can be purchased through an HUD-approved real estate agent, who can guide the buyer through the process.
2) VA homes. VA homes are being sold by the Department of Veteran Affairs (VA). The last owner of a VA home was a member of the army, navy, or another branch of the military. When this owner defaulted on the mortgage, the VA paid for the default amount and took possession of the property. Buying a VA home means that you buy a home with some of the same advantages as a member of the military. For example, you may not have to pay mortgage insurance on the property.
3) Tax sale homes. Tax sale homes are sold through public auction because the homeowner has failed to pay property taxes on the property. In many cases, this type of foreclosure can be purchased for the amount of outstanding taxes - which is often a small fraction of the home's value. However, tax sales are very competitive and the price of these homes quickly rises as bidders vie for the property. As well, tax sale homes are sold with no warranties so that it is often hard to tell whether there are major problems with the home.
4) Foreclosure homes. Foreclosure homes are sold through public auction. Some are sold at deep discount and some are sold for nearly full market value. It is up to the buyer to do enough research to ensure that they are getting a foreclosure deal and not a dud.
5) Pre-foreclosure homes. These foreclosed houses have not gone into foreclosure - yet. Usually, the homeowner is facing a financial crisis and is willing to sell the home for less than full market value in order to avoid foreclosure. Pre-foreclosures vary widely. Some offer a good discount while some homes have too little equity to make a good bargain. It is up to the investor to put together a deal that is attractive to the homeowner and a good business plan for the investor.
6) REO real estate. REO (Real Estate Owned) properties are sold as foreclosures through a lender or a lender's representative. Usually, REO homes have failed to sell at auction or were purchased by the lender at auction. Usually, these homes do not offer a huge discount. In fact, some are priced at full market value or even above. Still, some REO houses are a good bargain. One major advantage of buying an REO home is that title problems are usually taken care of by the lender, so there is less risk buying this type of property. As well, some lenders are willing to offer great rates on loans for buyers of REO homes.
7) Distressed properties. "Distressed properties" is an umbrella term for any property that has some disadvantage that may affect its asking price. For example, foreclosures are often called distressed properties, as are homes that need some repairs or renovations.
8) FSBO homes. For Sale by Owner (FSBO) homes are sometimes pre-foreclosure homes although they can also be homes that are not at risk of foreclosure. Some FSBO properties are sold at below market value because the owner is motivated to sell and is saving money on a real estate agent - a savings he or she passes on to the buyer.
Joseph B. Smith has been educating buyers on the finer points of foreclosures at ForeclosureDeals.com for over ten years. Contact
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