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Investing in foreclosure properties is a popular way for investors to leverage real estate assets for higher profit. There are two to three ways in which to buy foreclosure properties. The first way is to purchase it from a sheriff’s auction. This would be in a judicial state where the foreclosure is done through the court system. The second way is directly from a lender whose foreclosed and taken ownership of that property. The third way to purchase is from a lender’s representative. This would be in a non-judicial state where it goes through a trustee. These cases are usually done by law firms that auction off the properties.

As an investor it’s important to understand what your property rights position is relative to a foreclosure. At a foreclosure auction, that auction process may wipe out some encumbrances on the property, but it may not wipe out all of them. For example, tax liens or government liens typically survive most types of foreclosures, but a second mortgage line of credit or even a credit card judgment may not.

When bidding at foreclosure auctions, it’s a pretty common mistake for investors to bid on a second mortgage when, unknowingly, the first mortgage is still in place. Then, that first mortgage becomes the obligation of the investor. That’s why understanding which claims against a property exist at the time of the auction and which claims will be extinguished by that auction process is important. These are things you’ll want to look at in your own particular county and state because the law regarding them varies by location. There are usually statutes that describe which items will survive a foreclosure and which won’t.

The second option of buying a foreclosure is directly through the lender who has foreclosed and owns that property. The lender may have the property listed with a realtor, an REO department, or a short sale department. Whatever the case, dealing with a lender typically gives you a couple advantages. First of all, they may have done some rehab on the property. Secondly, you probably have some time to inspect the property, as is opposed to buying at auction where you typically can’t look inside. However, with those advantages comes a higher price point. Usually, because the property is more appealing, investors bid more for it. Also, if it’s a straight sale the lender will probably price it higher because they’ve incurred some expenses from those additional services.

The third option is buying a foreclosure through a non-judicial state where a trustee is holding the auction. Typically, in these cases, you may have some access to the property because it is a private sale. You also may have different payment terms, which is another very important aspect to look at. Sometimes a sheriff’s sale requires a cashier’s check in the full amount within 24 hours which means having the funds ready to go at a moment’s notice. Other times a 10 percent cashier’s check is required at the time of the sale and 30 days are allotted to pay the rest. Typically there are no contingencies on these purchases, meaning once someone has bid on the property, there is no way to get out of it. It doesn’t matter if there are liens on the property or it has extreme water damage inside. It is an as is sale.

Performing a good amount of due diligence and knowing the risks of buying a foreclosure property is key. It is an excellent way to purchase a property for 10, 15, or 20 percent less than the typical market value and save on closing costs. Instead of spending thousands of dollars on closing costs you may only want to spend a couple hundred on some due diligence, title research, or inspections and be ahead of the game versus somebody who is buying it retail through the MLS system.