The PropertyLark Guide to Buying Foreclosed Homes, Part 2

Foreclosed home concept

Last week, we discussed the advantages and disadvantages of buying foreclosed properties or homes that are in pre-foreclosure. As a real estate investor, looking for these properties below market value can be a great opportunity. At the same time, there are common pitfalls you want to avoid. Click here to read Part 1 of this article series.

Today, we want to talk about the different types of foreclosures and the different stages of foreclosure. It’s important to understand these legal terms and how these differences may affect you as a property buyer.


Once the mortgage lender or bank has notified the borrower that they are in default, the property is considered to be in “pre-foreclosure.” Legal foreclosure proceedings have not yet begun, but the writing is on the wall. Banks stand to lose a lot of money during a foreclosure, so they will give their borrowers plenty of opportunities to make up for missed payments or come to some other sort of acceptable financial agreement. If the seller doesn’t take action, foreclosure will eventually be the next step.

With the seller knowing that foreclosure is imminent, they may opt to sell their house while they still can. This can be advantageous to buyers—especially those paying cash—who should be able to purchase the property at a price lower than it would fetch on the open market. The seller doesn’t have as much time and will take the best offer they can get to avoid foreclosure. Pre-foreclosures are generally posted in county and city courthouse buildings and can be found using a variety of online resources.

Short Sales

A short sale is an agreement between the homeowner and the lender when the house is worth less than what is still owed on the mortgage and the borrower can prove they are in a state of financial distress. It allows the homeowner to sell their house at below-market price and avoid foreclosure. The seller may still owe some additional payments after the sale or the bank may forgive the difference. Either way, a short sale is another opportunity for a real estate investor looking to buy properties at lower prices. Short sales are usually advertised as “pending bank approval” and can be found on most public listing services.

Sheriff’s Sale Auctions

Foreclosed property auctions are not as common as they used to be, but they do happen. They are designed to get the lender repaid quickly for a loan that is in default. These auctions are managed by local law enforcement. Auctions are publicly announced to happen at a specific date, time and location (often the city courthouse, though many auctions also happen online these days). You can find these notices in local newspapers or through online searches in the city/county where you are looking to buy foreclosed properties.

Bank-Owned Properties

If a foreclosed property doesn’t sell at auction, it will revert back to the bank. Then it becomes a “bank-owned” or “real estate-owned” (REO) property. There are online services where you can easily search for REO listings in your area and you can also check with different lenders and banks to see what foreclosed properties they have available.

Government-Owned Properties

Some homes are purchased with mortgage loans backed by federal government entities, most commonly the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA). When these properties are foreclosed upon, the government repossesses them. They are ultimately resold by brokers who work for that particular federal agency. Government-owned houses can be listed publicly, or you can attempt to reach out directly to a government-registered broker.

As you can see, there are different types and stages of foreclosure and pre-foreclosure. Each one will be handled differently, but all can present real estate investors with good deals. The challenges are that you sometimes have to go through different channels to buy these houses. The process can take longer dealing with banks and governments, and you may have limited access to see the house in person. In many cases, you might be buying sight unseen and taking serious risk.

As always, it’s important to do your research, set your budget and refine your investment plan. Then you can decide if buying foreclosed homes is right for your investment strategy.

PropertyLark gives you access to exclusive off-market deals (including many pre-foreclosure properties) and resources to help you get the most out of your real estate investments. To see if you qualify for our home buying network, fill out our buyer contact form and brief questionnaire.