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Let’s get one thing out of the way: If you think that shopping foreclosure auctions is your ticket to a once-in-a-lifetime deal on a dream house, it’s time to lower your expectations. Fully 45 percent of April’s housing sales were foreclosed properties, and 33 percent of May’s, so you’ll have a lot of company at the fire sale. It’s tough to be “below market” when you are such a big chunk of the market.
If anything, it’s the other way around: Foreclosures are creating opportunities by dragging down the prices of traditional sales.
That said, a motivated seller is a buyer’s best friend, and no seller is more motivated than a lender with a ton of properties to unload. Here are four things you need to know before jumping in to oblige.

1. Don’t Speculate

If you’re looking to buy and flip, think carefully. The one thing economists agree on is that home prices are going to continue to fall and inventory will continue to rise in the near term, so you may wind up underwater. And no one predicts a major turnaround in prices for some years. So depending on the local market (Florida, for example, or Phoenix), even a 20 percent savings in the purchase price may not be enough to cover future declines.

2. Focus on REOs

There are two kinds of auctions: Foreclosures and REOs (Real Estate Owned properties). The latter are houses that fail to sell in a foreclosure auction and become the property of the lender or trustee. In a foreclosure sale, the minimum bid is the loan balance on the property plus all accrued interest, any expenses associated with the foreclosure process (including attorney fees), and any back taxes or liens, all of which could add up to more than the market value. You have to take the house “as is, where is,” so if the previous owner or his tenants still reside there, for example, it becomes your responsibility to evict them. On the other hand, because banks are eager to rid their balance sheets of real estate, they are often willing to heavily discount the price of REOs and cover all outstanding liens. In some cases, there is no reserve price at all and the property will go for the highest bid, regardless of the lender’s investment in it.

3. Get a Check

Long before the bidding starts, check the auction company’s particular requirements online. For example, you likely will need a government-issued ID and a cashier’s check for $5,000 to $10,000 to use as a down payment on your deposit, which is usually 5 percent or 10 percent of the purchase price. You can usually pay the difference between your cashier’s check and the deposit with a personal check. In most cases, you can change your mind after making the deposit, but the time frame varies. Plus, you may have to close within a very tight window — too tight to get financing — so you might need cash for the total purchase price.

4. Don’t Feel Guilty

You are not a greedy vulture for benefiting from someone else’s misfortune. These sales are an important factor in stabilizing the market. The faster the foreclosed inventory is eaten up, the faster the real estate market will improve.

Banks and homeowners alike need to take a more realistic view about how to stem the tide of foreclosures overtaking the housing market and the economy, the head of a government watchdog panel told CNBC.

Congressional Oversight Panel Chairwoman Elizabeth Warren

The more than $700 billion the government allocated toward dealing with foreclosures has only made a minor dent in the problem, said Elizabeth Warren, chairwoman of the Congressional Oversight Panel for the Troubled Asset Relief Program.

That's because those on both sides of the equation are not taking a proactive enough approach, she said.

"We have to sober up on this and say, 'Look, it's time to get realistic,'" Warren said. "It's time for the banks to get realistic about the value of the second mortgages, it's time to be realistic about doing some principal writedowns."

But the onus is not entirely on banks. Homeowners with distressed mortgages also may need a reality check.

• Click here for the full video of Warren's interview >>>

"Some of you should stay in your homes...and some of you don't belong in those homes and you've got to be moved out," Warren said. "And frankly, those houses need to get back onto the market and get into the hands of people who can afford them."

"In other words, acknowledge the problem, deal with it, write off the losses and start rebuilding an economy on solid ground."

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• Modifications Too Slow: Watchdog
• Mortgage Requests Slide

Warren projected that as many as 1.9 million homeowners will lose their houses this year, up a notch from the 1.7 million in 2009. Some 200,000 families a month are being added to the foreclosure rolls.

She called the situation a "negative spiral" in which foreclosures are driving down property values which in turn creates more foreclosures.

"We have a problem," she said. "It is continuing to grow."

In her new book, Buy, Close, Move In!, award-winning real estate guru tells readers everything they need to rebuild their financial lives to wade back into the housing market. In this excerpt, she points out the biggest mistakes that prospective buyers are making.

With real estate rules, laws, and fees changing daily, it’s easy to make a mistake when shopping for a home or a loan. Here are some of the most common mistakes buyers are making in the new housing market — and some tips on how you can avoid following suit.

1. Not Understanding the New Rules

What’s changed in real estate? The details. While you still go out and shop for a home, make an offer, find financing and close on the property, the details of how this process works today are vastly different from the way we went about buying real estate five, 10, or 20 years ago. If you attempt to wade in without familiarizing yourself with the new way of doing business, you’ll find yourself blocked at almost every turn. Finding good partners (see below) can help, but you have to be prepared to provide more information and evaluate more factors in order to close successfully on a new home.

2. Failing to Build a Top Real Estate Team

If you buy and sell property for a living, you know that it’s a team sport. Even if you’re a real estate agent, you’ll still need a good lender, inspector, title or escrow company, and attorney to assist you in completing this purchase successfully. But some buyers think they can do it on their own. In today’s new real estate world, that’s a mistake. For example, even in states where real estate attorneys aren’t generally used to close house deals, using an attorney to help you negotiate a foreclosure or short-sale purchase can mean the difference between closing and sitting in limbo. Real estate agents who intimately know the foreclosure market or have colleagues who represent real estate owned properties for banks and other financial institutions can help you find the right property faster. Get on their short list as an investor with cash to spend and they’ll give you extra time and attention. Taking the time to build a great real estate team will pay off in spades. Not putting this team together ahead of time is a mistake you don’t want to make.

3. Not Responding to Your Lender’s Requests

Lenders have tightened up credit requirements and are taking the time to verify every piece of information you submit. In fact, when you apply for a mortgage today, you should expect to provide reams of documentation both with your application and during the verification process.

It’s quite likely that some of your information will disappear during the process, and you’ll be asked to replace various documents or augment your documentation. When these requests come in, you should take them seriously and respond quickly. If you don’t, you could be putting your financing in jeopardy.

4. Not Cleaning Up Your Credit in Advance

One of the ways lenders are tightening credit requirements is by raising the minimum credit score necessary to be approved for a mortgage. Prior to the credit crisis, lenders might have charged one interest rate if you had a 680 credit score — today you might need a credit score of 720 to get the same rate. When it comes to government-backed loans, FHA originally didn’t have a minimum acceptable credit score limit, but it has now instituted tougher standards that require a credit score floor of at least 600 in order to get a loan. That’s why is extremely important that you spend time cleaning up your credit history and score before you apply for a loan.

5. Paying Too Much

Although home buyers are enjoying the strongest buyers’ market in recent memory, some buyers are paying more than they should for properties. Why? There seems to be a fear growing in some areas of the country that if you don’t buy now, you’ll miss out on a once-in-a-lifetime opportunity to “get in at the bottom.” While it’s true that in some markets, “bottom feeders” are coming in and swooping up properties by the dozen, fear is the wrong emotion to drive the real estate market. The housing bubble formed because too many folks were thinking about real estate as an investment and not about the other parts of the equation. They were afraid to wait, believing that property prices would go up at 8 to 10 percent per year. We now know that property prices can tank as well as soar. The trick is to understand what the real value is in a neighborhood and not overpay for property. Don’t be pressured into making a move before you’re ready.

6. Believing What You Read and See on the Internet

Scam artists love the Internet, and there will always someone trying to scam you in some way, shape, or form. And when it comes to real estate, it’s even easier to get ensnared in someone’s web. But even if you don’t get scammed, it’s easy to get fooled by what you read or see on the Internet. If you shop for a home only on the Internet, and never go to see the property in person, you might be surprised to find that the house looks different, or the neighborhood is not as it was represented. Perhaps the property backs up to a dump or the train tracks that you didn’t notice when you did your Google search. The smartest thing you can do is take everything you see on the Internet with a grain of salt — and then take the time to see the property in person.

7. Not Understanding the Risks with a Desperate Seller

The housing crisis has produced millions of foreclosures. But it has also spawned millions of homeowners who are “underwater” with their mortgages — that is, who owe more than their homes are worth — and are offering them for sale for less than the mortgage amount. There are some risks involved when you buy a home through one of these so-called “short sales”: The property might have years of deferred maintenance (because if you can’t afford your mortgage, you probably can’t afford to maintain your home either); there may be hidden liens lurking that will cause problems after the closing; and you may have to negotiate with several lenders, which could take months. If you’re hoping for a big bargain from an underwater seller, you’ll need to be patient. And above all, you’ll need to realize that even if you’ve spent months negotiating a deal, it could fall apart overnight — and you’ll have to start all over again.

8. Forgetting to Buy Owner’s Title Insurance

When you purchase property, your lender will require you to buy a lender’s title insurance policy. But unless you also purchase an owner’s title insurance policy, only the lender will be made whole financially if something goes wrong. And there are so many things that can go wrong when it comes to title. Not only can a former owner pop out of the woodwork, but mechanics’ and tax liens can “magically” appear — especially if you’re buying a short sale. (See above.) Don’t risk it. Order an owner’s title insurance policy when you order the lender’s policy. If you’re buying with cash, don’t forget to order your owner’s policy well in advance of the closing date.

9. Not Considering a HUD Home

At a “How to Profit from Foreclosures” event I held in Atlanta in October 2009, I learned that there were more than 4,000 HUD homes for sale. (A HUD home is simply a foreclosure that had FHA financing.) I learned that there are clever ways of searching for an agent who is more than just HUD-certified, but who really knows how to put in an offer on a HUD home. (You must have a HUD-certified agent put in your offers for HUD homes.) I learned that home buyers who plan to live in the house have a two-week advantage over real estate investors. And I learned that with FHA financing about 20 to 25 percent of all homes purchased, there will be plenty of HUD homes for sale over the next few years. There are thousands of HUD homes for sale across the country, in most neighborhoods. If you’re not thinking about buying HUD homes, you should.
Excerpt from Buy, Close, Move In! reprinted courtesy of Harper Paperbacks.

Buying Bank Owned Properties

There is a lot of interest in buying bank owned properties these days. A lot of information, some good and some bad, is floating around about the subject. Often the information offered is for sale, with the promise that you can make a lot of money with little effort once you know “the secret formula”. The fact is that there are no secrets, and to make money does require effort.

What’s an REO?
REO stands for “Real Estate Owned”. These are properties that have gone through foreclosure and are now owned by the bank or mortgage company. This is not the same as a property up for foreclosure auction. When buying a property during a foreclosure sale, you must pay at least the loan balance plus any interest and other fees accumulated during the foreclosure process. You must also be prepared to pay with cash in hand. And on top of all that, you’ll receive the property 100% “as is”. That could include existing liens and even current occupants that need to be evicted. A REO, by contrast, is a much “cleaner” and attractive transaction. The REO property did not find a buyer during foreclosure auction. The bank now owns it. The bank will see to the removal of tax liens, evict occupants if needed and generally prepare for the issuance of a title insurance policy to the buyer at closing. Do be aware that REO’s may be exempt from normal disclosure requirements. In California, for example, banks are exempt from giving a Transfer Disclosure Statement, a document that normally requires sellers to tell you about any defects they are aware of.

Is it a bargain?
It’s commonly assumed that any REO must be a bargain and an opportunity for easy money. This simply isn’t true. You have to be very careful about buying a REO if your intent is to make money off of it. While it’s true that the bank is typically anxious to sell it quickly, they are also strongly motivated to get as much as they can for it. When considering the value of a REO, you need to look closely at comparable sales in the neighborhood and be sure to take into account the time and cost of any repairs or remodeling needed to prepare the house for resale. The bargains with money making potential exist, and many people do very well buying foreclosures. But there are also many REO’s that are not good buys and not likely to turn a profit.

Ready to make an offer?
Most banks have a REO department that you’ll work with in buying a REO property from them. Typically the REO department will use a listing agent to get their REO properties listed on the local MLS. Before making your offer, you’ll want to contact either the listing agent or REO department at the bank and find out as much as you can about what they know about the condition of the property and what their process is for receiving offers. Since banks almost always sell REO properties “as is”, you’ll want to be sure and include an inspection contingency in your offer that gives you time to check for hidden damage and terminate the offer if you find it. As with making any offer on real estate, you’ll make your offer more attractive if you can include documentation of your ability to pay, such as a pre-approval letter from a lender. After you’ve made your offer, you can expect the bank to make a counter offer. Then it will be up to you to decide whether to accept their counter, or offer a counter to the counter offer. Realize, you’ll be dealing with a process that probably involves multiple people at the bank, and they don’t work evenings or weekends. It’s not unusual for the process of offers and counter offers to take days or even weeks.