What is the common theme among homebuyers? They all want a ‘good deal’ when they buy. Hence the attraction when the subject of buying foreclosed homes comes up. Foreclosures are certainly not for everyone though, and before you set your mind to pursuing them, there are some questions you need to ask yourself. Do you have the means to buy a foreclosure, and which phase of the foreclosure process is going to give you the best advantage as a consumer? Start with your financial picture. Talk to your lender and financial planner about your prospects. Do you have enough cash on hand to bid on homes, or to be used towards your necessary down payment on a rehab loan? Is your only option a traditional mortgage with zero or up to 5% down? Answering these questions first will help you know what to do next.
Distressed sale, or Short Sale Homes
This is what is also known as the Pre-Foreclosure phase. Let’s start with a definition for clarification. The term ‘Short Sale’ unfortunately has nothing to do with timeliness of the sale – instead it simply means that the proceeds from the sale are going to fall short of satisfying the current liens the property has. When a home owner owes more money on their home than what the home is worth on the open market, that owner has the potential of being in a distressed situation. If that same owner suffers a financial hardship, such as the loss of employment, and can no longer afford to pay the mortgage, selling the home as a short sale is one of a few options the owner can do to remedy their situation. There is a lot of infamy surrounding the business of buying and selling short sale homes, and with good reason. When the market crashed several years ago, nobody in the Real Estate or banking business had ever experienced this type and volume of a shift and new common practice of selling a home ‘short’. Being in the business of attempting to cooperate with lien holders by offering the best financial outcome possible, while selling homes for what the market would bear was the most dysfunctional proposition most of us in the business have ever encountered. The process of selling a home short is still challenging now, but a bit more streamlined than it used to be. There are still 101 things that could go wrong in a short sale, and this subject alone could be another several blog articles. The best advice I could offer to a first-time buyer or investor looking to pursue a short sale is this: 1. Find out as much as you can about the liens that are on the property, and what does it tell you about the potential for success or lack thereof? This information is available from both the seller, and from a current title report. 2. Who is handling the short sale? Make sure that the professionals involved (Agents, or Attorneys) have at least some track record of success in dealing with short sales.
This will be either a Trustee Sale or Sheriff’s Sale – basically the same meaning and intent. The auction is commonly held near the local county courthouse, and investors come to bid on property that is scheduled for auction. In most counties across the country, if you are bidding on auction homes, you have to pay with cash up front. Some investors plan ahead by bringing cashier’s checks they can endorse on the spot pending the final outcome of the successful bid. The disadvantages to purchasing homes this way are basically two things: 1. No pre-inspection is typically allowed. You cannot have the home inspected, or wander through the private property on your own. Depending upon how the owner reacted to the process of being foreclosed on, you may find some unwelcome surprises of sabotage of the property when you take possession of it. Think of all the worst possibilities that could have taken place on the property before your successful bid, and know that somewhere in America it has probably happened. 2. Your common home loan pre-approval does not work for auctions. You must have cash in hand when you’re bidding on foreclosures. The Trustee will include the outstanding balance of the defaulted mortgage, coupled with all the fees and costs of default, taxes and attorney fees to the balance when initiating the bidding process. If the home doesn’t sell in auction, the bank that holds the mortgage absorbs the loss.
REO/Government owned Homes
These are homes that the bank or government entity took back and now own from the auction. From a consumer’s standpoint, this has the potential to be a great opportunity! The entity absorbs a loss from all the debt and fees that came with the property, and they are now commonly putting the home on the open market at either fair market value or below. These homes can usually be found on your local Multiple Listing Service like all other listed properties. You can make offers subject to satisfactory inspections, and subject to financing if the home condition qualifies for the type of loan you are using. There’s still a myriad of intricacies to navigate through as each financial institution, REO company, etc. operates differently when managing and selling REO’s. All the more reason to have a Real Estate Professional helping guide you through the process of buying an REO.
Are you in the market to buy and are not committed to a local Realtor®? I have more than 17 years of experience in all types of Residential Real Estate, we should meet soon and discuss your plans for the near future. Let’s love your new home together!