Looking for a bargain? One way to save on a new home is to buy one in foreclosure. Foreclosure occurs when the borrower fails to make their mortgage payments. By defaulting on their loan, the lender has no other recourse than to repossess the property.

In 2010 there were more than 2.87 million homes in foreclosure. Today there are roughly 1.8 million, a decrease of 62%. While the number may be diminishing, the savings remain real. According to RealtyTrac, the average bank-owned home sold for 38% less than comparable homes sold at current market-rates.

Buying a foreclosed property is not for the faint of heart — but, if you have the stomach for it, there are real savings to be had. Here’s what you need to know.

1. Types of foreclosures

Types of foreclosures can vary by state.

  • A “non-judicial foreclosure,” sometimes referred to as a “power of sale,” is pretty straight forward. The lender forecloses on the property following a stated waiting period and is then able to offer the home in a public auction.
  • A “judicial foreclosure” is required in some states and allowed in all. In this case, the lender brings a lawsuit against the homeowner for repayment of the mortgage. If payment is not received, the court grants a judgement enabling the lender to begin the selling process if the delinquent homeowner fails to redeem the property within a court assigned “redemption” timeframe.
  • Finally, a “strict foreclosure” enables the lender to file a lawsuit as soon as the homeowner defaults on their loan. The homeowner is given a court-ordered timeframe to repay. Failing to do so, the lender is allowed to sell immediately. Strict foreclosures are only allowed in a few states.

2. Two ways to buy

The lender will first auction off a foreclosed bank-owned property sight unseen to the highest bidder who typically pays in cash. Failing to sell through a public auction, the lender will sell the real estate owned (REO) through a real estate agent in much the same way as a traditional home buying transaction.

3. Get a mortgage pre-approval

Foreclosed properties can move quickly. Having a pre-approval from a lender is critical so you’re ready to go when the right property becomes available.

4. Get an experienced agent

If you choose to buy a foreclosed property you’re going to want to get a real estate agent with experience. Look for an agent with a the designation of Short Sales and Foreclosure Resource (SFR) or a Certified Distressed Property Expert (CSPE).

5. Get a home inspector

Foreclosed properties are very often poorly maintained. Before you make an offer, get a home inspection. For potentially less than two hundred dollars you can get a clear picture of the work needed and potential cost.

6. Check comps

To get a sense of what a similar home in good condition sells for in the same market, look for comparison properties.

7. Run a title search

The last thing you need is to find out your newly-purchased foreclosure has a loan, lien, or taxes that have not been paid. If it does you’re going to need to add this expense, along with the cost of repairs, to your buying budget.

8. Bid based on the pace of sales

The market for foreclosures is highly competitive. Sales move quickly. If foreclosures are moving quickly in the market you may want to bid higher to improve your chances.

9. Foreclosure loan programs

There are loan programs specifically designed to finance the purchase of a foreclosed property. The Federal Housing Association (FHA) 203k loan includes funds for renovations and repairs of up to $35,000 and is available to both owner-occupants and real estate investors.

The Bottom Line

Depending on your risk tolerance and ability to move quickly, you could potentially save by purchasing a foreclosed property. The key to success is going in with eyes wide open and knowing what to expect.