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Foreclosures for $1,000?

Could those late-night infomercials be true? Could you actually buy your next home for pennies on the dollar?

The answer to the first question won’t be tackled here, but the answer to the second question is "possibly." If you’re looking for a foreclosure, you understand the rules of this hidden market — and you’re willing to work hard to find the best deals.

Thousands of foreclosure properties across the country sold for deeply discounted prices in 2006, some of them for as much as 90 percent below market value, according to a survey of foreclosure sales by RealtyTrac. And some bank-owned property auctions scheduled for early 2007 have opening bids as low as $1,000.

On average, foreclosure properties sold for 28 percent below market value, but much bigger bargains were available. For example, a San Diego home with an estimated value of $486,000 sold for just $11,000 in November. A Notice of Default was filed against the property in September, but the owner sold the property to a third party before the public foreclosure auction.

An important caveat: the sales price may only represent the tip of the iceberg when it comes to the overall terms of the transaction agreement, according to RealtyTrac CEO Jim Saccacio.

"Because foreclosures often come with a complex set of circumstances, buying a foreclosure can involve an unorthodox purchase agreement where the sales price is minimal but the seller agrees to take on other costs such as expensive repairs or loans encumbering the property," he said. "That said, foreclosures still provide an amazing opportunity to buy real estate below market value, and foreclosure investors occasionally hit the jackpot with the type of jaw-dropping bargains that make real estate investing so enticing to many people."

The sales data also shows some apparent foreclosure bargains were missed by local buyers or real estate investors. One property in Fort Wayne, Ind., sold back to the foreclosing lender at a public auction for $10,316. That means no other bidders at the auction submitted a bid above that sales price. With an estimated value of $84,000, the property could have represented a profitable addition to someone’s real estate investment portfolio.

An important note in relation to buying at a foreclosure auction: the winning bid at the auction may not always represent all that’s needed to purchase the property free and clear. If the loan in foreclosure is not in first position — meaning that other active loans exist that were taken out after the loan in foreclosure — the winning bidder may also need to pay off those other loans to own the property with a clear title. However, if the loan in foreclosure is in the first position, other active loans are typically cleared from the title.

"Buying at an auction requires careful research and a higher tolerance for risk. But savvy investors who do their homework often find great discounts at auctions," Saccacio said, noting that RealtyTrac provides lien and loan history for foreclosure properties listed on its website.

For those wanting a more straightforward method for purchasing a foreclosure, there’s still a chance to buy a property once it’s repossessed by the foreclosing lender. In fact, some of the best foreclosure bargains in 2006 were for properties purchased directly from the foreclosing lender, bank or government agency — such as the Department of Housing and Urban Development. A HUD-repossessed property in North Tonawanda, N.Y., with an estimated market value of $63,000, sold for $10,200 in July, giving the buyer an 84 percent discount.

"In the past few years, when the housing market was soaring on rapid price appreciation and high demand, it was harder to find many lenders willing to give much of a discount on foreclosed property because they knew they could pretty much get full market price," Saccacio said. "But with foreclosures on the rise, lenders are saddled with larger inventories of repossessed properties and are often more willing to negotiate on the price."

Because of the bigger inventories, some lenders are turning to both offline and online auctions to sell bank-owned properties, also known as REOs. Offline auctions require an interested party to attend a physical auction to participate in bidding. Online auctions allow interested parties to submit their bids online and are typically open for bidding for at least a week. In both offline and online auctions, winning bidders usually have about 30 days to close the transaction by paying the seller the winning bid amount plus any transaction fees.

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