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Buying a Foreclosed Home: What You Need to Know

Jeff Cox, |Special to CNBC.com
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With thousands of Americans losing their homes every month, and banks eager to recoup some of their losses, this is perfect time to buy a foreclosed property--if you know what you're doing.

David Zalubowski

The foreclosure market offers a slew of temptations, the most alluring and basic being the opportunity to get a great house at a low price.

But the road to that new cut-rate luxury McMansion is fraught with landmines. They include undiscovered liens, daunting maintenance issues and even the potential to overpay that makes the process one to enter only with eyes wide open and a team of experts close at hand.

The Three Stages of Foreclosure (click here)

"I'm seeing millions of dollars of defaulted paper coming onto the market on a daily basis and this would probably be about the best time for anyone to buy either a foreclosed home or a non-foreclosed home, depending on the city you're living in," says Steve Hochman, president of Friendly Note Buyers and author of "How to Sell Your Real Estate When Real Estate is Not Selling."

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CNBC Special Report:

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Foreclosures -- when banks or lenders actually take possession of the property -- have been soaring over the past year. The states with the biggest foreclosure rates include economically depressed areas like Ohio, Indiana and Michigan, as well as those where the housing boom was biggest: California, Florida and Nevada. (Click here for slideshow)

"There are some places such as Florida that are in a desperate situation that can't possibly come out of this problem for at least five years," Hochman says.

The way to capitalize on the trend is through basic diligence. Making sure you do your homework before going to an auction or approaching a bank that has foreclosed on a home -- the two principal ways to acquire such properties -- makes all the difference in how successful the experience will be.

A basic checklist:

  • Foreclosed properties are part of the public record, and newspapers of general circulation periodically publish a list before they go up for sheriff's sale. Watch the notices closely for properties near you. Word of mouth also can be a big advantage and allow you to get a jump on anyone else interested in the home.
  • There are various Web sites that can help locate foreclosed properties, but most require a fee. Foreclosures.com, for instance, charges $49.95 a month, while foreclosuredeals.com charges $39.95 a month.
  • When identifying a home you'd like to purchase, check out other properties in the area. What's the going rate?
  • Hire a home inspector. Even the best-looking properties can have problems that range from poor heating and ventilation to a cracked foundation. Know what you're getting into.
  • A real estate attorney also is advisable in order to make sure the title is clear. In states that have deed of trust laws, buyers should get a writ of possession ensuring that the previous owners cannot re-enter the home.
  • If you choose to hire a Realtor, make sure it's someone who's not afraid to get in the pits and fight. Hochman advises that even a bank's so-called final offer probably isn't really the lowest price it will take. "I think that the most common error is not offering a low enough price," he says. "The banks are in no position to hardball. They need to get rid of it. The impact on the bank is more than the public sees or generally understands."
  • Visit a bank and get pre-qualified so you know what you can afford.
  • In the current market climate, most pros agree that this is not the time to buy a house to flip because real estate prices aren't likely to go up significantly anytime soon. Bidders instead should be seeking a place to live. Hochman does feel, though, that the steep dropoff in prices will stop by June.

Know Your Neighborhood

Of course, every market is different, and knowing your own region, how prices are trending and where the best buys can be found is paramount.

"I think if people know what they're doing it's a good time to get into it," says Lisa Breier Urban, a residential real estate attorney at Breier, Deutschmeister and Fromme in New York City. "You can definitely get a deal for your money if you know what you're looking for and you know what the value of the property is that you're looking at."

Manhattan is a good example of how knowing a market is important in the decision about going the foreclosure route. The market there has been consistently hot, and Urban says even foreclosed properties often end up going for near market value.

Urban also advises caution with public auctions, where many of the participants are skilled in the practice and can take advantage of novice bidders. Also, auctions usually require up-front non-refundable cash, sometimes for the entire price of the transaction, offering no leeway for buyer's remorse.

"While property can be purchased for deep discounts, buyers should take steps before arriving at the auction," says Charles J. Kovaleski, president of the Attorney's Title Insurance Fund, the largest insurer in Florida and the sixth-largest in the nation. "Buying a foreclosure is not for everyone, especially a novice with little financing. "There's likely to be competition, especially at an auction, with people quite experienced at the process."

Information, Kovaleski says, is the key.

"With home foreclosures at the highest level since record-keeping started nearly four decades ago, more properties will be sold under duress in the coming year," he says. "If you're tempted to buy, know what you're getting into."