With all the press generated about sub-prime mortgage failure and defaults, many more people are curious to know about buying a foreclosure home. Most people hope that by purchasing a foreclosure home they will be getting a better bargain and saving some cash. This may or may not be the case.
Unfortunately, when people begin to neglect their bills they also begin to neglect their home. Frequently a home that is in a state of foreclosure has deferred maintenance and is in need of repair. The amount of disrepair varies from home to home.
If a person is willing to put in some "sweat equity", then this type of home can be a good buy. It will take either time devoted to the repairs, or additional funds to pay for the repairs. However, if a person has a history of failing to complete tasks and is short on cash, this is not good choice no matter how great a deal. It is very likely that the house will stay in a state of disrepair, and make home-life unbearable (Husbands read UNHAPPY WIFE).
Three Phases of Foreclosure
Pre-Foreclosure
When a homeowner fails to pay their mortgage, the bank or lender will send them a notice of default and file this with the appropriate government authority. The notice of default begins the foreclosure process and the homeowner is in a state of pre-foreclosure. The pre-foreclosure period varies from state to state. In California the borrower or homeowner has 90 days to bring the account current, called the reinstatement period.
If after 90 days the account has not been brought current, the lender will file a notice of trustee's sale. This notifies the home owner and the public that the house will be sold at public auction. The homeowner has until 5 days prior to the trustee's sale to redeem the house and pay off their loan. The trustee's sale ends the period of pre-foreclosure.
Buying a Home in Pre-Foreclosure
There are varying views on buying a home in pre-foreclosure. When you buy a home in pre-foreclosure you are usually buying the home from the homeowner. Some people question whether or not this is ethical because you are profiting from another's misfortune. Other's will argue that assisting the borrower in their time of need can actually help them. It can prevent them from having a foreclosure or bankruptcy on their credit record.
Homeowners can be in foreclosure for a number of reasons many of them unpleasant: divorce, job loss, medical bills, death of a bread-winner, etc. Contacting a homeowner in any of these distressed states can be touchy. One must tread carefully and attempt to provide a win-win situation for the homeowner and buyer alike.
Trustee's Sale
The trustee's sale occurs after the notice of default and the notice of trustee's sale has occurred. The auction often takes place on the steps of the county courthouse. The notifications of these sale dates and times are frequently obscure. The house is sold to the highest bidder. At many trustee's sales the lender buys the home back to cover their losses.Buying a Home at a Trustee's Sale
A trustee's sale does offer bargains, AT TIMES. However, most of the time a buyer is not able to inspect a home prior to purchase. What appears to be a good deal, may not be. The cost to repair the property combined with the purchase price may exceed the property's value. This can make buying a house at a trustee's sale a risky endeavor for the novice.Bank Owned or REO (Real Estate Owned)
At many trustee's sales the bank or lender will repurchase the house to minimize their losses. Most banks are not in the real estate business but in the lending and interest business. If they have money tied up in real estate, they have less money that they can lend to borrowers. This costs them money in interest earned each day they hold the property.
Banks will list the property for sale on the local MLS with an agent. Many of these are sold "as is". Some lenders require that the purchaser be pre-qualified for a loan through them.
Buying a Bank Owned or REO Property
There are many good deals to be found at this stage of the process. The benefit for the average buyer is that because the homes are listed, they can be visited and viewed. Visiting the house with a carpenter or repair man, provides an estimate of the cost of repairs before the purchase, not after. An initial offer should be adjusted to account for repair costs.
The beauty of investing at this stage is their is no "emotional attachment" to the home by the current owner (bank or lender). For these owners it is a simple business decision. They want to minimize their loss. As time passes their loss grows and they are more likely to lower the asking price or accept a lower offer.
Summing Up
Buying a home in foreclosure can be rewarding. The homes are often below value. If you are willing to add value to the home through repairs and upgrades, you may be way ahead at the end of the game. However, it is not for everyone.
Always remember the real estate mantra "Location, location, location." Don't buy the best home in a bad neighborhood, rather buy the worst home in a great neighborhood. - Peter
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