Many people have seen those late-night television infomercials about making money buying foreclosed properties. Can one make money? What is the real deal? Such commercials usually display cute homes picked up for pennies on the dollar.
Here is the truth: First, understand why homes are foreclosed upon by the lender. The borrower didn't make the payments for an extended period of time. Reasons for that default are many but common categories include accident or illness that prevented the homeowner from working, and suffering a loss of income. Or perhaps they were laid off, their job downsized or eliminated. They may even have had a drug or alcohol problem. Other situations include a borrower who had an ARM-adjustable rate mortgage- that recast and the increased interest rate made the mortgage payments skyrocket to where they became unaffordable.
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Second, understand that foreclosure law differs from state to state. There are generally several stages, from the lender's initial notice of default to the borrower, to the filing of foreclosure papers ith the courthouse and eviction of the homeowner from the property. Beyond that, many states still permit a redemption of the property by the evicted owner for a period of time. Finally, the property is unalterably owned by the lender and is sitting in their REO - Real Estate Owned- inventory until it can be sold by a real estate broker or at auction. So you need to know that the property you are considering purchasing will not be snatched back from you by the former owner who has suddenly been able to come up with the back payments. (By the way, this caveat applies equally to property purchased through "tax sales", another late night infomercial subject) The homeowner has some period of time to "cure the default."
If you buy a foreclosure at action, you will usually gain absolute title to the property. But if you buy the property from the homeowner at some earlier stage in the foreclosure process, it would be wise to work with a real estate attorney to protect your interests.
Purchasing at auction, "on the courthouse steps", do your research with the county about how the sealed bid process works, how much of a deposit you must make immediately if you win the bid, how long you then have to get a loan to pay for the bid price, etc. Auctioned properties are often sold "as is" and no inspection is permitted, so try to find out what you may be letting yourself in for. There are many legends of angry homeowners trashing the interior of a property or stealing the basic kitchen and bathroom fixtures, etc. Know what you are buying, and have some idea of what it is going to cost to bring the home to a habitable condition.
All these precautions having been said, buying foreclosures can indeed be profitable.
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