5 Smart Ways to Buy a Foreclosure

The bargain shopper's guide to landing the deal of a lifetime.

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It makes sense that prospective buyers are becoming increasingly interested in foreclosures. After all, some of these properties—which accounted for 24 percent of home sales in May, by the way—are selling at up to 50 percent less than comparable homes. Interested in digging up a bargain home?

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Here's what you need to know before you buy a foreclosure:

Find foreclosure listings: This is the easy part. You don't need to show up at courthouse auctions or search through legal filings. All you need to do is look on sites that allow you to search for foreclosed properties. Just use the "Listing Type" search filter to narrow down to these sales.

Choose a specialized agent: A real estate agent who specializes in foreclosures is not only a time saver, but a necessity. They will guide you through the process, help you find the best properties, tip you off to the various issues/challenges/risk, and do the nitty gritty work along the way, from researching property title documents to recommending reputable inspectors and contractors.

Understand your buying options: While you can buy directly from the owner (before they're officially foreclosed on), or try your hand among the seasoned investors at an auction, the safest way to buy a foreclosed property is to buy it back from the bank (bank foreclosed properties are also called real estate owned, or REOs). Buying from the bank or lender will give you the opportunity to inspect the home before you buy it, and you can finance the purchase with a mortgage. Furthermore, when a bank takes back a home, it will clear any outstanding liens.

Budget for repairs/renovations: Don't underestimate the amount of work that may be needed to restore the home to a "livable" condition as these residences are sold "as is." You can easily factor in 10 percent (or more) for updates and repairs on any foreclosed purchase.

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Make an appropriate bid: Banks aren't necessarily selling foreclosed homes at the kind of fire sale prices you'd find at a pre-foreclosed sale or at an auction, but that doesn't mean you shouldn't haggle—particularly if the bank has a huge inventory of foreclosed homes, and the property has sat vacant for some time. Just make sure you've done your homework, taking into consideration not only the price, but also the condition of the property, and the surrounding neighborhood. (Ideally, you want to find a foreclosure in a neighborhood that doesn't have very many of them.) Also, get your financing pre-approved before you bid or you could delay the process and ultimately miss out.

Vera Gibbons is a financial journalist based in New York City and is a contributor to Zillow Blog. Connect with her at veragibbons.com.