House Hunting in Today’s Troubled Market

From on February 09, 2009 in General

Foreclosure Signs

It’s very rare nowadays that you come across a home for sale by the owner. The majority of homes on the market today are either foreclosures, REO’s, or short sales. This article will help you learn the difference between each, better preparing you for buying in today’s market.

REO’s

REO is an acronym for real estate owned, a.k.a. bank owned. These are foreclosure properties that were repossessed by banks or lenders. If a bank is the highest bidder at a foreclosure auction, or if no one bids on the property, the property reverts back to the lender and becomes an REO.

Advantages of buying REO’s

  • You’re purchasing property that is free of liens or other encumbrances. Lenders typically expunge all liens or claims against the property. If there are any clouds on the title (i.e., a second mortgage, mechanics liens, tax liens, or any other type of lien), it is wiped off the record.
  • You can negotiate with the lender’s loss mitigation department to discount the price below market value and negotiate great terms like low down payments and low interest rates, and have them pay for all or some of the closing costs.
  • Bank-owned properties are vacant, saving the homebuyer or investor money and time involved in the eviction process.
  • Buying these properties involves less risk and less competition.

Short sales, are they worth it? If you have 6 months to spare, then go for it because it can take that long to hear back from the bank regarding your offer. And, frustrating as the wait is, half of the time their answer is no. There are exceptions to the rule. However, a pre-approved short sale can shorten the wait period dramatically.

A short sale occurs when the lender agrees to accept less than the unpaid mortgage balance to facilitate a sale between the seller and buyer. Sellers often set the listed price too high and hope that buyers will believe it’s a great deal.

When you make an offer on a short sale the sellers can agree to anything on the purchase agreement; however, it’s not binding unless the bank approves the offer.

If there are multiple offers on a short sale property, the highest and most qualified offer will most likely win. In some cases the lender won’t take any offers because they’re too low, only to get title to the home through foreclosure – where they’ll lose much more than the lowest bid amount. So, be patient and watch for the listing to reappear as an REO – it will close much faster (30 days or so) than a short sale.

Pre-foreclosures

If you’re considering buying a pre-foreclosure it will involve approaching the owner and offering to purchase the property outright. This is the most crucial time in the foreclosure process and a time where you, the buyer, have a chance to make the largest profit. It’s beneficial for the owner (or borrower) because they can walk away without destroying their credit history and, in some cases, have a little equity to put in their pocket. You will have time to research the title and the condition of the property and most likely buy the property below market value.

Foreclosures

Bidding on properties at a public auction can be intimidating because you’re bidding against savvy investors and you’re bidding your hard earned money on a house somewhat blindly. Buyers are often required to pay in cash at the auction and in many cases there’s no time to research the property condition or the title beforehand. There are rewards to buying auction properties though – you avoid having to deal directly with the borrower/owner and some of the best bargains can be found at the auction.

If the defaulted loan is backed by a government agency, such as HUD, then the government agency is responsible for selling the property at auction. HUD’s link to foreclosure properties: http://hud1.towerauction.net/CA.htm

Steps to take before you bid

  • Once you find a property that you’re interested in, drive by the house and check out the exterior condition as well as the neighborhood in general. If you bump into the owner – great, you might be able to work out a deal through the pre-foreclosure process.
  • Find out what the estimated market value of the property is and how much is owed. Knowing what the property is worth will help keep you from over bidding and, knowing how much is owed (on the 1st deed) will tell you where the bidding amount will start. You’ll also want to find out if there are any liens against the property. This is public information that you can obtain from the county recorder, title office, or realtor. Note, you may be liable for any fees that incurred due to the foreclosure proceedings (i.e., attorney fees, filing, etc.). Also, if there are any junior liens (i.e., 2nd mortgages, mechanics liens, etc.), the winning bidder may be responsible to satisfy the debt. In many states the junior liens will be cleared out at auction; however, if there is a tax lien it will most likely continue to be in affect after the auction.
  • You can expect to pay 20 percent below full market value or better.
  • Redemption periods vary by state, so you’ll need to research this as well. The owner, depending on location, has a redemption period in which he/she can buy the property back from you if they pay the full amount paid at the auction, plus fees. So, the rule of thumb is don’t make any improvements to the property during the redemption period.

Pre-foreclosures and auction properties have the greatest potential for bargains while REO’s have the least risk. Good luck and happy shopping.