"I'm interested in foreclosures." This is something I often hear from clients, but few people really understand the process, and specifically what it means to buy a foreclosed property. It's not for the faint of heart. Though you can occasionally find a bargain, there are unique risks involved with buying a foreclosed or bank-owned property. First, let's clarify some definitions.
It's possible that someone can be "upside down" on their mortgage (that is, they owe more on the mortgage than the property is worth) and are antsy for a quick sale before it gets worse. In this situation, the seller is said to be "bringing money to the table" because they literally need to write a check to the settlement company even AFTER receiving the proceeds from the buyer. The seller hires an agent (in most cases) and the property is listed in the MLS--the buyer may or may not even be aware that the seller is in this situation. But what if the seller doesn't HAVE funds to bring to the table? Then it becomes a pre-foreclosure or a short sale.
Pre-foreclosure or short sale: The bank is a third party to this transaction because they have negotiated with the seller to take a loss on their loan. The property will likely be listed in the MLS, but there are special addenda and disclosures because the bank has to approve any contracts. In some cases, this delays the process, which can make timing for a settlement and move date tricky. Read more about short sales in my blog here. If no buyer is found, then the property becomes a foreclosure.
Foreclosure or trustee sale: This is the proverbial auction on the courthouse steps. Properties are advertised in the newspaper, but typically no real estate agents are involved. Note that the property may or may not be vacant at this point. A buyer may be forced to evict the previous owner. This isn't a typical auction with bidders standing around with placards. The bank is unlikely to take a bid less than what is due on the loan, and if there's no equity in the property, someone is not likely to buy it. So you'll need a property that's worth more than the loan, and if that was the case then it wouldn't be a foreclosure to begin with! So most auctions quietly pass with no bidders. If you do wish to bid, it's typical for the bank to demand a 10% deposit at the auction, and you have 15 days to close on the property. These properties are typically sold "as is." If it's a condo, the seller (the bank) is not required to provide you with condo or HOA docs, as is the case in other sales. If the auction ends with out a winning bidder, the property becomes a bank-owned property, also known as Real Estate Owned (REO).
Bank-Owned Property or Real Estate Owned (REO): The bank usually works with a Realtor to list the home in the MLS and it will be advertised just like any other property. They are usually sold "as is" (no home inspections) and special addenda are required. The addendum usually includes a penalty for any change or delay in closing--anywhere from $65 to $200 per day. While the banks are quick to penalize buyers for any delays, they don't usually hold themselves to the same standards. Some banks have very quick turnaround times on offers (days) and some have very bad turnaround time (months). This uncertainly makes settlement and move-in dates very tricky, if not impossible, to manage. I've seen buyers put in an offer and wait three months only to be told that their offer was not accepted. A foreclosure is typically not an option for anyone with a brokered loan or stated-income loan because the timing is so difficult to manage.
I've found that the only REO properties that are priced significantly cheaper than the rest of the homes on the market are those that are in very poor condition, and maybe not such a bargain at all. There are always exceptions, and yes, a handful of really great deals are out there. But limiting yourself to foreclosures is cutting off some of the best deals out there! I've actually found that the best "deals" are where sellers have some equity and can actually afford to sell below market value, and have the incentive due to a life change (new job, new baby, etc.) to motivate them!
To recap, most people who are looking for foreclosures are actually looking for short sales or REO/Bank-Owned properties.
Both categories of sales come with unique risks:
Timing: If you have a specific timeframe for moving, make sure you have a backup option for temporary living
Financing: Related to timing
Property Condition: You won't get to ask for repairs, and may not even be allowed to have a home inspection prior to buying
My advice? Look at all the listings in your price range, not just foreclosures, which we now know really means short sales and REO properties. You never know where you're actually going to have the most negotiating power!
It's possible that someone can be "upside down" on their mortgage (that is, they owe more on the mortgage than the property is worth) and are antsy for a quick sale before it gets worse. In this situation, the seller is said to be "bringing money to the table" because they literally need to write a check to the settlement company even AFTER receiving the proceeds from the buyer. The seller hires an agent (in most cases) and the property is listed in the MLS--the buyer may or may not even be aware that the seller is in this situation. But what if the seller doesn't HAVE funds to bring to the table? Then it becomes a pre-foreclosure or a short sale.
Pre-foreclosure or short sale: The bank is a third party to this transaction because they have negotiated with the seller to take a loss on their loan. The property will likely be listed in the MLS, but there are special addenda and disclosures because the bank has to approve any contracts. In some cases, this delays the process, which can make timing for a settlement and move date tricky. Read more about short sales in my blog here. If no buyer is found, then the property becomes a foreclosure.
Foreclosure or trustee sale: This is the proverbial auction on the courthouse steps. Properties are advertised in the newspaper, but typically no real estate agents are involved. Note that the property may or may not be vacant at this point. A buyer may be forced to evict the previous owner. This isn't a typical auction with bidders standing around with placards. The bank is unlikely to take a bid less than what is due on the loan, and if there's no equity in the property, someone is not likely to buy it. So you'll need a property that's worth more than the loan, and if that was the case then it wouldn't be a foreclosure to begin with! So most auctions quietly pass with no bidders. If you do wish to bid, it's typical for the bank to demand a 10% deposit at the auction, and you have 15 days to close on the property. These properties are typically sold "as is." If it's a condo, the seller (the bank) is not required to provide you with condo or HOA docs, as is the case in other sales. If the auction ends with out a winning bidder, the property becomes a bank-owned property, also known as Real Estate Owned (REO).
Bank-Owned Property or Real Estate Owned (REO): The bank usually works with a Realtor to list the home in the MLS and it will be advertised just like any other property. They are usually sold "as is" (no home inspections) and special addenda are required. The addendum usually includes a penalty for any change or delay in closing--anywhere from $65 to $200 per day. While the banks are quick to penalize buyers for any delays, they don't usually hold themselves to the same standards. Some banks have very quick turnaround times on offers (days) and some have very bad turnaround time (months). This uncertainly makes settlement and move-in dates very tricky, if not impossible, to manage. I've seen buyers put in an offer and wait three months only to be told that their offer was not accepted. A foreclosure is typically not an option for anyone with a brokered loan or stated-income loan because the timing is so difficult to manage.
I've found that the only REO properties that are priced significantly cheaper than the rest of the homes on the market are those that are in very poor condition, and maybe not such a bargain at all. There are always exceptions, and yes, a handful of really great deals are out there. But limiting yourself to foreclosures is cutting off some of the best deals out there! I've actually found that the best "deals" are where sellers have some equity and can actually afford to sell below market value, and have the incentive due to a life change (new job, new baby, etc.) to motivate them!
To recap, most people who are looking for foreclosures are actually looking for short sales or REO/Bank-Owned properties.
Both categories of sales come with unique risks:
Timing: If you have a specific timeframe for moving, make sure you have a backup option for temporary living
Financing: Related to timing
Property Condition: You won't get to ask for repairs, and may not even be allowed to have a home inspection prior to buying
My advice? Look at all the listings in your price range, not just foreclosures, which we now know really means short sales and REO properties. You never know where you're actually going to have the most negotiating power!
Read more about the risks of foreclosures here.
