A Good Deal or a Trap? What You Need to Know Before Buying a Foreclosed Home in Brooklyn

With the ever-escalating prices of real estate in Brooklyn, many first-time home buyers are understandably seeking a deal. One potential route is to look for a home that is in, or about to be in, foreclosure. While it is often possible to buy a foreclosed home at a steep discount from the going market rate, it is critical to understand the potential risks and legal traps presented by such properties.

What Is a Foreclosed Home?

When real property is secured by a mortgage, and the borrower fails to make the required monthly payments on that mortgage, the lender may initiate foreclosure proceedings. This is typically not a quick process. Lenders often extend a grace period to borrowers so they can get current on their mortgage. But if the homeowner is in financial distress, that may not be possible, in which case the lender has no choice but to foreclose.

The Three Stages of Foreclosure

Once the mortgage lender moves to initiate the foreclosure process, there are three basic points or “stages” where an interested buyer may appear to purchase the property:

• Pre-Foreclosure — If the homeowner knows they cannot keep their property, they will often negotiate a sale with a potential buyer before public foreclosure proceedings commence. This commonly leads to a “short sale” situation, where the homeowner asks for less than the balance of their mortgage, and any sale proceeds go directly to the lender.
• Public Sale/Auction — Once the lender forecloses on the property, the next step is to conduct a public sale, usually through an auction process. Some auctions are “absolute,” meaning the highest bid wins regardless of the amount. Other auctions will either start a predetermined minimum bid or have an unstated “reserve price” that must be met for a sale to occur.
• Real Estate Owned (REO) — When a foreclosed home is not sold at auction, the lender will simply list the property through traditional real estate agents, similar to any other home sale.

When Is the Best Time to Buy?

There is no one-size-fits-all answer to this question. In many cases, buyers will get a better deal on the purchase price in a pre-foreclosure or public auction over an REO sale. But there are trade-offs. For example, in a public auction the buyer typically must take the property “as-is,” i.e., without seeing the house in advance or conducting an inspection. This can lead to scenarios where the buyer ends up paying more in the long run because the property ends up requiring substantial repairs. Especially if you are a first-time homebuyer, this may represent too great a risk.

Contact a New York City Residential Real Estate Transactions Lawyer

Before committing yourself to purchasing any home, you need to seek out qualified legal advice from a New York City residential real estate transactions lawyer. Contact Yeung & Associates, PLLC, today at 718-889-7568 to schedule a consultation.