Need a Starter Home – Go For a Foreclosure

When for whatever reason a person who has taken out a mortgage from a bank or mortgage company no longer makes their monthly payments on their mortgage, they are what the bank will call; defaulting. After a person defaults on their mortgage payments, the bank, Mortgage Company, or whoever the lender is will repossess the home by foreclosing.


The first thing the lender will do after foreclosing on a home is try to get all of their money back from their investment. The best way for the lender to try and recover their money is to put the house up for sale at a foreclosure auction.

A foreclosure auction will work just like any English auction whether it be in New York or Arizona. Bidders are present to place their own bids and to bid against other consumers present at the auction until a winning bid is placed. Because the lender or investor does not want to lose money on the home, the auctioneer will start the auction with a minimum bid that will cover the cost of the home, the fees, and the taxes. As with all English auctions, the consumer that bids the highest will become the new owner of the property.

Selling a foreclosed home at an auction is a great deal for the lender or investor because they will be free of all additional obligations concerning the home and they will receive their investment back. Becoming the new owner of a foreclosed property through a foreclosure auction is less of a great deal because the new owner will be liable for evicting any remaining tenants, will have to pay cash for the house and will be responsible for any property liens.

Because it is not in the consumers best interest to purchase a foreclosed home at a foreclosure auction, often times, there will not be any bids on the home at the auction.

When there are zero bids at the auction, the lender will classify the auction as “failed.” When an auction fails, the lender or investor will then need to do a REO foreclosure, or a real estate owned deal. Lenders which are usually banks, are in the business of lending capitol to individuals who want to own a house and are not in the business of owning the house themselves. The lender makes money from the home owner, or the consumer, paying back their mortgage loans and therefore paying interest on the loan. So the longer a home is in the possession of the lender, the less money they will be earning.

In order to have a new consumer take possession of the home, the consumer is now purchasing directly from the lender, and the third party is eliminated. Because the lender is now selling the property; the taxes, property liens, and the former tenants, will no longer be the consumers’ problem.

First time home buyers often times cannot afford a livable home at the market price and do not have significant savings for a large down payment and of course do not want to pay higher interest on their loan. First time buyers can benefit greatly from a REO foreclosure because the lender will want to get rid of the property quickly, often times selling the property for 20% of the market value, with lower interest rates and lower down payments. Just because the former tenants or home owners were not able to pay their mortgage on time, does not mean that the home is in bad condition or undesirable. In fact, the added benefit of paying a lower price, down payment, and interest, could very likely make your first home your favorite.

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