Fannie Mae and Freddie Mac provide insurance to banks and other lenders so that people buying real estate pay lower interest rates and make low down payment. When borrowing homeowners cannot make their payments lending organizations foreclose on the properties. Lending organizations go back to Fannie Mae and Freddie Mac and ask for payment if they obtained insurance when they expended the mortgage loans. Then, such homes become the property of the government.

Another source: IRS, U.S. Customs, and other federal and local government agencies seize the properties of those who did not pay their taxes or violated the law.

See our Foreclosure glossary for these and other terms used in government foreclosures.

How does government foreclosure work?

Government agency has the title. You participate in the auction conducted by an organization authorized by the government agency. You buy the property if your bid is accepted.

The most popular HUD sales are carried out by special real estate agents. You need to work through a licensed real estate agent to participate in bidding. HUD pays about six percent commission to the agent for selling government foreclosures. Such commission is added to the price you bid. You need to obtain a letter from your bank to cover the amount of your purchase. This letter should be valid for 60 days.

Use "free" information liberally!

Pubic information is available to anyone who knows where the information is located. Go to your county real estate office and examine title records of the homes in your interest area.

You can obtain all publicly available information from government agencies. U.S. Department of Housing and Urban Development (HUD) has information on your rights to request information under the Freedom of Information Act (FOIA).

Real estate agents can get all the information you need faster. If you are going to work with a real estate agent, let him or her do the job for you.

Foreclosure home buying strategies

If you are buying to live in the property, buy one that needs extensive repairs. You can repair your home gradually while you are in it. You have the option to design it as much as you wish. Fixing and designing will mean the same.
If you are going to sell the property for immediate profit and you are short on money, buy a foreclosed house that needs cosmetic repair.
If you are going to lease the property and you have enough funds, work with a contractor or a handyman to make the property ready for renting. Multiple-family units are great for leasing.

Government foreclosure home buying tips

Tip #1: (a) Ask your real estate agent to find prices of comparable real estate in the neighborhood before you bid. (b) Make an assessment of possible repairs. HUD may state its estimation of such repairs.

Tip #2: Don't buy a foreclosed home at your first auction. Gain some experience and get the feeling of an auction before you buy. Each auction is a great learning experience!

Tip #3: Don't buy a real estate property if you cannot make at least 10 percent profit after deducting all expenses.

Tip #4: Get insurance and change the locks as soon as you get the title.

Tip #5: Set a limit for your purchase and NEVER exceed it.

Internal Revenue Service (IRS) Sales

Federal tax liens have a redemption period of 120 days. During this period, the IRS can take over the property at any time. You must obtain a title insurance to protect your interest. Many title insurance companies will want to wait until the end of this 120-day period to make sure that IRS will not exercise its option.

IRS sells foreclosure properties through auctions to satisfy the amount owed to the IRS. Sales are on “as-is” basis. You are allowed to inspect the house before your purchase.

Make your government foreclosure business your hobby!

Watching houses sold at the stairs of a courthouse is fun! You can see how much profit people are making in half an hour or so.

See how some people come prepared and others with no preparation. Follow their gestures and reactions to other bids.

You will be surprised if you think that all auctions are highly competitive. Sometimes, you may see only five or six persons for eight or nine properties. Sale of some foreclosed properties is postponed due to lower than suggested sale price which is an indication of lack of competition.

Be an informed buyer!

Read books, collect information on the Internet, go to your county's real estate department and gather as much as information you need. Be an informed buyer in your foreclosure property purchases. Your investment in obtaining information will definitely payoff in your real estate investment.