Mention real estate bargains and the first thought that usually comes to mind is foreclosure. If there’s a bargain to be found, most people assume that this is where it is.

Foreclosures do, indeed, offer opportunities for bargain hunters. Here it is possible to obtain properties lor a fraction of their market value.

For example, let’s say you’ve found a neighborhood where the average house sells for about $150,000. Being a bargain hunter, you’re looking for a highly motivated seller, one you can lowball and perhaps, in exchange for a quick sale, negotiate a price of 10 to 15 percent under market.

But as you walk the neighborhood, you notice a house that seems abandoned. The doors are locked, the windows are boarded up. and the lawn has turned to weeds. You stop by a neighbor’s home, which is well kept, and learn that the former owner of the decrepit home couldn’t make the mortgage payments and the bank is foreclosing.

So you do some investigative work and discover that the house will be sold next week by the lender to the highest bidder “on the courthouse steps.”

Of course, the lender will bid the full amount of the mortgage plus interest and costs, which you have learned comes to $75,000. But could you bid $75,000 plus $1 and get the property?

If you could do that, think of what a steal it would be. You’d be getting a property for virtually half of the market price. That’s far better than any deal you are likely to negotiate with a lowball offer. Now that’s a bargain!

Does It Really Happen?

Yes, foreclosures with enormous bargain potential do occur. They happen all over the country and in boom times as well as bust.
 
When the economy is down, as it is right now, the rate of foreclosure was much higher. In recent years, particularly during the boom of the early twenty-first century, foreclosure rates dropped. For a short time, prices were rising so rapidly and houses were selling so fast that it was easier for people in foreclosure to sell their way out of the problem. Unless they were “upside-down,” they could find a buyer to bail them out by purchasing the property and paying off the old loan.
 
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Being upside-down means that the borrower owes more on the property than it’s worth. This can easily happen with the no-down loans and up to 125 percent of value loans that have become popular. If the borrower gets into financial trouble and can’t make the payments, there simply isn’t enough equity in the property to be able to resell (particularly when you add in a real estate commission and sales costs).

Are All Foreclosures Bargains?

No, not all. One of the hardest concepts to grasp for someone new to this field is that you’re better off staying away from most foreclosures. They aren’t a bargain; they’re a trap.

To see why, let’s go back to our example of the house with the $75,000 mortgage. We assumed that the only mortgage on the property was this one loan. But what if there were others?

For example, what if this was a second mortgage and there was a superior first mortgage of another $75,000 ahead of it?

Further, what if there was a tax lien on the property for another $10,000. Here’s what the lien structure on the property could look like:
 
Tax lien $ 10,000
First mortgage $ 75,000
Second mortgage $ 75,000
Total owed $ 160,000

In this case the total owed against the property exceeds its market value. If the lender of the second mortgage were foreclosing and you were to pay $75,001, you’d end up owning a property that still had $84,999 in liens against it. You would have in effect lost $10,000 in the purchase process.

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A lien is anything involving money that encumbers the tide to a piece of property. A mortgage is a lien, a judgment is a lien, and taxes can be a lien. For practical purposes this means you have to know what liens are on the property before you can safely make an offer to purchase.

Remember, just because it’s a foreclosure doesn’t necessarily mean it’s a bargain.