Buying Foreclosed Homes: Be Careful

If you're looking for a great deal on a house, one option might be to purchase a home that's in foreclosure.

But Early Show financial contributor Vera Gibbons says the process isn't for everyone: It's complicated and fraught with potential stumbling blocks.

There's certainly no shortage of properties in or approaching foreclosure to pick from.

Some three million foreclosures are expected this year alone, according to the Web site Foreclosure.com and Foreclosures.com (two different sites), as well as RealtyTrac posting a vast array of listings to pick from.

The best bargains are in areas with the largest concentration of distressed properties, where there's a glut of homes banks want to unload.

But doesn't mean you should simply go for least expensive ones.

You must do your homework, taking into consideration the neighborhood, employment picture, school district, etc.: If you buy in an area that's losing jobs, has a high crime rate, etc., it's going take lot longer for home values to recover.

You could check out pre-foreclosure sales, in which you buy from owner before the house is formally foreclosed on. A "pro" of that is that you're dealing directly with the homeowner, who will likely be a very motivated seller at that point. You can inspect house, do a title search, etc. The homeowner would be able to sign the deed over to you; you'd assume the mortgage, and make any back payments due the lender. A "con" is that you'd be dealing with a seller who may be emotionally and financially distressed. There's also a short window in which to buy: Depending on the state, owners may only have a month before the bank puts the property up for auction.

The next stage in the foreclosure process is the auction. The obvious "pro": the prices. The "cons" include this being the riskiest way to buy, particularly if you're new at it. Investors like this method; they tend to renovate houses they buy at auction, then turn them around or rent them. But you're buying a house sight-unseen, with no inspection. It could be a total mess and in need major repairs. It might be a total lemon! Also, there may be unpaid taxes and liens that you, the new owner, would be responsible for. And you can only use cash or a cashier's check to pay.

If the house doesn't sell at auction, the bank that originally issued the loan takes ownership of the property and puts it up for sale through a real estate broker. Fifty out of every 100 properties now going back to the banks; this year, more than a million will be bank-owned. "Pros": There are lots of unsold homes to unload, so prices are likely to be good. Also, this is the safest and easiest way to buy foreclosed property, and you can get it with a traditional mortgage. You'll also have a chance to check and inspect the house before you buy it. A "con" is that you may not get as good a deal as you would from the auction block. Still, at least you know what you're getting, and can get it inspected.