On Buying a Foreclosure

A READER ASKS, “There is a house near where I live that’s been vacant and boarded up for some time. Is this a foreclosure? How do I find who owns it and how much they want for it?”

Working class neighborhoods across the Chicago area have an ample supply of “vacant and boarded” single family homes and smaller apartment buildings. Many offer excellent investment opportunities. If there is a realtor’s sign in evidence, anyone may call for information. But even more properties are simply boarded up, with no indication of who to contact. Invariably, it seems these are the ones we want to learn more about.

In most cases, where the occupants have moved out and the property has been secured by board-up, the property is already caught up in the bank foreclosure process. Foreclosure is a legal action–in fact a law suit–initiated by a bank or mortgage lender claiming the borrower has defaulted under the terms of the mortgage. Closely governed by law, the foreclosure process may take many months (sometimes a year or more) to complete.

Unless the defaulting borrower chooses to voluntarily give up the property to the bank ‘in lieu of foreclosure,’ in the end the Court orders the sale of the property by public auction. The amounts due the lender are paid out of the sale proceeds; should there be funds remaining, they belong to the defaulted homeowner. The owners may or may not have moved out of the property during these proceedings.

The public has the opportunity to purchase foreclosed real estate properties (of every description) at the foreclosure auction. Investors who deal in foreclosures sometimes purchase at auction. Such auctions are held several times a week in downtown Chicago. This is not, however, a marketplace for the faint of heart.

Not for the faint of heart

Auction participants are governed by a few firm rules: Not the least of which is the requirement that the successful bidder must be prepared to deposit with the auction house the full purchase price, in cash or certified funds, within 24 hours. Title will transfer some 2-3 weeks later. Title to the property will be free of liens or encumbrances with the possible exception of Federal income tax liens which may survive a foreclosure proceeding.

Such information is not readily available to prospective buyers. Experienced auction participants will research the title prior to the sale and gage their bidding accordingly. In most cases, no prior access is possible – most bidders will not have been inside the property before the auction!

Finally, it is an Urban Myth that properties are bought for little or nothing at foreclosure sales. Desireable properties will attract professional real estate dealers. Neighboring residents, happy just to buy at a discount will bid the price up even further. And the foreclosing bank, if unsatisfied with the bidding progress, may step in as a bidder on its own account, either driving up the price or in fact buying the property for resale through its real estate owned (REO) department.

Professional investors and rehabbers seldom spend much time or energy tracking down owners of otherwise anonymous properties. When found, foreclosing banks generally will not discuss a pending foreclosure; when appropriate, calls may be referred to their brokers.

In the event the bank ends up as owner following the auction, that lender will immediately seek to sell the property through its designated broker. They really don’t want to own the property, nor will they deal directly with the public.

It is really only then, after a thorough inspection of the property and with the facts known, that the experienced investor or rehabber is in position to make the offer, to do the deal. Schooled in the business, they are forthright in negotiation, know what they’re prepared to pay, and generally in position to offer cash in return for an attractive price.