The record number of foreclosures over the past few years has illustrated one downside to the real estate boom, as some buyers wind up overextended.
No surprise, say real estate experts, that more people are buying foreclosed properties to serve as new residences or short-term investments.
This surging interest not only mirrors the growth in the number of foreclosures, but the tight real estate market, which has prompted many prospective home buyers to look for alternative approaches.
Experts also credit growing public interest to a huge increase in the number of companies that track foreclosed properties.
"Ten years ago, we were one of three companies that provided national data on foreclosures," says Todd Beitler, president of the Real Estate Library, which publishes reports on properties nearing foreclosure. The Internet has helped change that. "Today we compete against hundreds and hundreds of companies."
Many people who consistently bid on foreclosed properties up for auction are professionally linked to the real estate industry. But auctioneers say regular consumers are beginning to participate in much greater numbers, primarily in the hope of finding a new residence.
"About 50 percent of the people who bid on our private residences are not real estate specialists," says Paul Talkow- ski, president of the Quincy, Mass., real estate firm Daniel J. Flynn & Co, which auctions about 700 properties a year, nearly all of it residential.
Foreclosed properties often can be purchased at a significant discount from the house's market value. Experts recommend prospective buyers not purchase a property for more than 70 percent of its appraised value. Most buyers overestimate their potential savings - and underestimate the hassle associated with making an auctioned property their own, say experts.
For those who want to give it a try, there are three ways to buy a foreclosed property.
Preforeclosure sale The first window for pursuing a property opens when the lender that is owed money submits a "notice of election and demand" (NED) into the public record. Several companies list NEDs on their websites. The NED begins the foreclosure process in earnest and gives the property owner two to eight months to at least show an effort pay back the debt.
To avoid legal fees and the foreclosure process, some property owners try to sell their home - and shift debt responsibility - to a private buyer. This option offers medium levels of reward and risk, according to Mr. Beitler, because the borrower may be willing to sell at a low price to attract a buyer, but the buyer must do research to find out what is owed on the property.
That often requires combing through documents in a county courthouse to find all of the liens placed on the property, as well as secondary mortgage debt and state property taxes owed.
Foreclosure auction Purchases made at auction offer a high reward, high-risk opportunity. Buyers usually must pay advertising and lawyer fees. The property often cannot be viewed before the auction, and the buyer is solely responsible for evicting anyone who lives in the property. About 50 percent of auctions are postponed or canceled the day before because of a final effort to reconcile the debt.
Still, because most banks would prefer not to hold onto the property - 80 percent of auctions now end with the bank retaining ownership - they are likely to accept a reasonable bid.
"The sales prices ... are usually at the low end of the price range in any given neighborhood," says Greg Sullivan, president of Foreclosure.com.
REO (real-estate owned) sales If a property is not sold at auction, it normally is fixed up by the primary lender and sold through a Realtor. Buying a foreclosed property put on the market in this manner carries the least amount of risk.
Because the bank puts a great deal of work into the project, however, it will not likely sell the home far below its market value. Banks often advertise properties as foreclosed in order to get the attention of potential buyers.
"They do it to drum up interest, but it doesn't necessarily mean the buyer gets a deal," Beitler says.
Experts say those interested in looking at the foreclosure market should approach it with skepticism. "Quite often it's not as simple or great a deal as they might think," says John Propp, president of Propp Property in Denver.