FORECLOSURE:

What Every Buyer Must Know

In today’s market,you’ll hear lots of terms used to describe “bargain” properties – distressed, short sale, pre-foreclosure, auction, REO, bank owned, foreclosure, foreclosed, and more. Confused? That’s understandable. Some of these terms are interchangeable, some are not, and some cover a whole range of bargain property types.

Foreclosure Overview:

To understand the terms, it’s important to understand the three stages of foreclosure:

  1. Pre-foreclosure stage.This stage begins when the homeowner falls behind on home-loan payments (or sometimes other terms of the loan). Lenders may wait for a second, third or even fourth missed payment before sending the homeowner a Notice of Default — which becomes public record. The homeowner then has a given period of time to respond to the notice and/or come up with the outstanding payments and fees — sometimes by selling the home in a pre-foreclosure sale, also known as a distress sale. (If a judicial procedure is required, it occurs after the notice of default is given.)One type of pre-foreclosure or distress sale is a short sale — when proceeds from the sale of a home are less than the amount of mortgage still owed to the homeowner’s lender. A lender-approved short sale (or short payoff) occurs when the homeowner’s lender agrees to accept the proceeds of the home sale as satisfaction of the mortgage owed, even though proceeds are less than the outstanding debt.
  2. Foreclosure stage. At this stage, the former homeowner may or may not have been evicted — depending on state law — when the lender puts the home up for public auction (after a judgment of foreclosure in those states requiring judicial procedure).If the home sells at the foreclosure auction, (sometimes called a sheriff’s sale, trustee’s sale or step sale) money from the sale is used to pay off the costs of the foreclosure, taxes and other prior liens, service charges and advances, interest and principal on the mortgage, late charges or fees, and liens recorded after the first mortgage. Any amount left over is paid to the borrower (former homeowner). When proceeds from the sale are less than the various amounts owed, the lender may be able to hold the borrower responsible for the difference (deficiency judgment).
  3. Post-foreclosure stage.

    When a property that does not sell at auction — either because no one bid on it or because bids did not meet the lender’s or agency’s minimum price — the property becomes real estate owned (REO) by the lender or government agency that guaranteed the loan (such as FHA/HUD, VA, etc.). You’ll also hear the term bank-owned applied to these properties, whether they are owned by an actual bank or some other type of lender. (Be aware: The term REO also applies to properties purchased by companies from employees who didn’t sell their home on the market before relocating, which is to say that not all REOs are foreclosed properties.)

    Once the lender or agency has repossessed a property following a failed auction attempt, the home is put back on the market. Most REO properties are listed for sale through real estate brokers and placed on the Multiple Listing Service.

At this stage, the foreclosure process is complete, and the property may be accurately described as a foreclosed property, while in the first two stages the home is in foreclosure and should be referred to as a foreclosure property. (You’ll find, however, that real estate writers and others sometimes misuse this terminology; be sure to ask if you are unsure what stage of foreclosure a particular property is in.)

BANK OWNED:

6 Reasons Why Foreclosures Are Bargains

Foreclosed or bank-owned homes are very attractive to buyers seeking bargains. They understand that lenders and government organizations don’t really want to own homes, but would rather move their “non-performing assets” off the books as quickly as possible, minimizing carrying costs. That can mean a great value for the right buyer.

Foreclosed vs Other “Bargains”:

Still, there are other bargain opportunities out there — homes for sale in the pre-foreclosure stage (including short sales) and homes being sold at foreclosure auctions — sometimes at discounts significantly better than at either other stage of foreclosure. So, why would a buyer prefer a foreclosed/bank-owned home?

  • Condition.Lenders and government organizations selling foreclosed properties sometimes make repairs that return these properties to livable condition before putting them on the market -- or they discount the prices accordingly to sell more quickly.

    Homes sold pre-foreclosure or at auction can be in much worse shape, either due to neglect by their cash-strapped former owners or damage caused by disgruntled residents or vandals.
  • Inspections.With foreclosed homes, you have the opportunity to order professional inspections -- for structural integrity, systems, pests, mold, radon, etc. Although the home may be sold "as is," indicating the seller is not willing to rectify any problems, at least the buyer can find out in advance what problems the property may have. If buyers have inspections conducted before making a purchase offer, they don't have to go any further if the report shows problems they're not willing to deal with. Or, they can make a lower offer to factor in the costs of making needed repairs. If the buyer's intent is to conduct inspections after a sales contract is signed, buyers can include an inspection contingency in the contract that would allow them to terminate the sale if the inspection shows problems with the home.

    Although professional inspections are also possible with pre-foreclosure and short sales, buyers of homes being sold at foreclosure auctions frequently do not have the opportunity to order professional inspections - and may not even be given time to conduct a personal inspection of the home's interior. These buyers take the risk that the home sold at auction - usually "as is" with no warranty or disclosure requirements -- comes with significant and costly physical problems that would have to be corrected at the buyer's expense after the purchase.
  • Title issues.Sellers of most foreclosed homes will deliver a General Warranty Deed to the buyer, which guarantees that the seller owns the property and has the right to sell it. After repossessing the property, institutional owners - lenders or government agencies - will usually pay off any known outstanding liens and taxes, relieving the next buyer of those obligations. (However, buyers should still ensure a title search is conducted and purchase an owner's title insurance policy for extra protection.)

    With pre-foreclosure and auction sales, by contrast, the buyer must be wary of possible unsettled claims and unpaid taxes or liens that would transfer with the property - not uncommon with these types of sales. Even if the buyer conducts a title search and can negotiate to have those issues resolved, unrecorded liens can show up between the search and settlement/closing on the property. Paying off those obligations can be an expensive surprise that cuts into the savings from buying the discounted property.
  • Evictions.By the time an institutional owner puts a foreclosed property on the market, former owners or tenants have already been evicted from the premises.

    Buying a pre-foreclosure or auction property, however, risks being in the position of having to enforce evictions - often an expensive, frustrating and time-consuming process (in some states it can take up to a year to accomplish).
  • Ease of purchase.Although the process of buying a foreclosed property may present some additional wrinkles compared with buying a traditional home, the challenges pale in comparison with arranging the purchase of pre-foreclosure and auction sales.

    With a short sale (a type of pre-foreclosure sale), you must not only negotiate with the seller, but also with the seller's lender(s), who can reject your negotiated deal with the seller if it does not meet the lender's requirements. In addition, the process can take many more weeks, sometimes months, to accomplish compared with a traditional home sale. In fact, many attempts at short sales never reach the settlement/closing table.

    Foreclosure auction sales present their own challenges, with bidding procedures that vary by location. In some states, bidders must bring to the auction the full amount of their bid in cash or a cashier's check. In other states, bidders must have a substantial cash deposit on auction day and be able to arrange financing for the remainder within a short period of time - sometimes as little as 24 hours -- or forfeit the deposit. In addition, a thorough knowledge of the local auction process is essential to winning an auction bid, which is why novices are seldom able to win over seasoned professionals at foreclosure auctions.
  • Redemption issues.Lenders may not put foreclosed homes on the market until the state's mandatory "right of redemption" period has expired. Not all states mandate a redemption period, but in states where they do exist they allow a specified amount of time for the foreclosed homeowner to buy back the property after it sells at auction.

    If you purchase a home at auction, you may be in the position of having to turn it back over to the foreclosed homeowner who is able to reclaim it by buying it back from you. The buy-back price could simply be your costs of purchasing the property, not necessarily reimbursement for any improvements you make afterward - depending on how the state law is written. In addition, if a redemption period still applies to the home after you purchase it, you would be prevented from selling the home until the redemption period expires - which could be up to a year in some states.

VALUE:

How To Spot A Great Deal Today

Just because a foreclosed home is priced less than similar homes in the neighborhood does not necessarily make it a great deal for you. Other factors will influence whether the foreclosed property ends up being a great buy or an expensive mistake.

Picking A Real Bargain:

  1. Final contract price.Some institutional sellers — lenders and government agencies — initially price their foreclosed homes much lower than market value to attract buyer interest. If they sell the home through a bidding process, you could end up competing with other interested buyers who can eventually drive the price up closer to or even above market value.Set a limit on howmuch you are willing to pay for a particular property and stick to yourplan. If one foreclosed home doesn’t work out at the price you want topay, chances are another one will.
  2. Location. A foreclosed property that’s significantly less expensive than nearby comparable homes may not have the same locational advantages. Positioned on a busy street, backing into commercial or shopping facilities, or next to a run-down property, the foreclosed home you are considering may in fact be worth less simply because of where it is.
  3. Condition.Many foreclosed homes show up on the market in less than ideal shape. Former owners, who were having trouble making payments, may not have spent precious cash on repairs and maintenance. Some angry owners and tenants have been known to damage properties on purpose or sell off key components before moving out. In addition, properties that sit vacant with utilities off can become homes to pests, mold and mildew, and may attract vandals.Bear in mind that institutional sellers are generally not held to the same kind of disclosure requirements as are homeowners, since the lenders/government agencies have not lived in the property. That’s why it is so important to order a professional inspection of the home’s structure and systems. You may also want to call in inspectors who specialize in checking for radon gas, mold and pests. The inspections themselves can become a challenge if turned-off utilities prevent testing of electrical components, plumbing, appliances and the heating/air conditioning system. And if the lights are out, problems with walls, floors, foundations, etc. are not as readily noticeable.If anything of concern is found during the inspections, have one or more trusted contractors review the inspection reports, take a look at the issues on the property and develop a written estimate of the repair and fix-up costs you would be responsible for as the new owner. Be sure to factor those costs in with the price of the home to determine whether it really is a bargain.Remember, any money you spend checking out a foreclosed property will be well worth it if it saves you from purchasing an overpriced money pit.
  4. Insurability. With property insurance costs rising, it makes sense to determine whether the foreclosed property is insurable and at what cost. Your ability to insure a particular home can be affected by previous insurance losses associated with the home.As a contingency in your contract, consider asking the seller to provide you with a C.L.U.E. report. The Comprehensive Loss Underwriting Exchange, maintained by Choice Point, Inc. of Atlanta, is an information database used by 90% of insurance providers to keep up with the claims history of policyholders and the homes they insure. The C.L.U.E. Home Seller’s Disclosure Report that the seller provides you will detail any insurance losses at the home over the past five years.
  5. Amenities.Bear in mind, if the bargain-priced foreclosed home you purchase doesn’t really meet your family’s needs in terms of number of rooms, location, etc., you’ll find yourself looking for your next home sooner than later. The costs of quickly selling the not-right home and buying another could easily eat up any savings you achieved buying the foreclosed home in the first place.

HUD & VA:

14 Tips To Buy Government Foreclosures

Government-owned properties include homes that previously had loans backed by the federal government through programs sponsored by agencies such as Veterans Affairs (VA), US Department of Housing and Urban Development (HUD), and others.

Buying HUD or VA Foreclosures:

Once the loans backed by these agencies are in default, the lender takes over the property, after which the government entity that insured the loan pays off the lender and takes possession of the property.

To purchase a government-owned home, you’ll have to do some research into the process, which varies by agency. Here are 14 general tips to get you started.

If you buy a VA or HUD home, you must:

  1. Buy the VA and HUD home “as is.”
  2. Use the services of a VA qualified or HUD registered real estate broker.
  3. Prove you have adequate cash reserves to purchase the home and be pre-approved for a mortgage.
  4. Provide your real estate broker with the required earnest money in the form of a cashiers check or money order, before making a bid on a VA or HUD home.

Tips to buy a HUD foreclosed home:

  1. HUD buyers do not have to finance a HUD home with a FHA loan.
  2. HUD gives first priority to owner-occupied purchasers (not investors) to buy HUD homes.
  3. HUD offers three property types: FHA insurable homes; FHA insurable homes with a repair escrow; and, homes that are not insurable with an FHA loan.
  4. HUD may escrow part of the sales price to bring a property up to its standards to qualify for a Federal Housing Administration (FHA) loan.
  5. HUD buyer must make earnest money check payable to the escrow account of your HUD registered real estate broker.
  6. HUD requires earnest money of $500 if the purchase price is $50,000 or less; $1,000 earnest money is required if the purchase price is greater than $50,000.

Tips to buy a VA foreclosed home:

  1. VA property code determines how a buyer may finance the property.
  2. VA offers “VA Vendee Financing” which is a form of seller financing.
  3. VA buyers do not have to be veterans to qualify for VA Vendee financing.
  4. VA requires the minimum earnest money deposit is $1,000 and the deposit is non-refundable except if the buyer is unable to obtain financing.

See the article Finding Foreclosures to learn more about which federal agencies sell foreclosed homes and to find links to those agencies’ websites.

PITFALLS:

8 Costly Bank-Owned Mistakes To Avoid

Understanding some of the costliest mistakes to avoid goes a long way in finding a great foreclosed bargain in today’s market. Here are seven common mistakes to be aware of:

Avoiding Common Pitfalls:

Mistake 1. All foreclosed homes are bargains.

Understand that the institution selling the property (lender, government agency, etc.) wants to clear its inventory. The home’s condition is not their concern. Be prepared to do your homework — and rely on a professional real estate specialist (like us!) — to avoid any land mines.

Mistake 2. Overbidding.
Foreclosed-home buyers must know area home values, condition of nearby properties, neighborhood trends, street noise, airplane traffic, zoning and other issues that affect the property’s value. Sometimes bank-owned REO properties are priced below market value to attract multiple bids and drive up the sales price. We’ll help you bid right.

Mistake 3. No inspection necessary.
Some buyers of foreclosed homes think a professional home inspection is too expensive — that’s a costly mistake. Lenders and others who sell a property “as is” may not be obligated to repair problems and defects.

Only a licensed home inspector can identify problems from electrical wiring or plumbing to radon or pest infestation to serious structural or system problems. If you don’t have inspections conducted on a property prior to making a purchase offer, you’ll want to include an inspection contingency in your contract. That contingency allows you to terminate the contract if inspections reveal problems the seller won’t fix and you don’t want to handle yourself.

Also, be sure to do a final walk-through inspection just before closing/settlement to ensure the condition of the property has not changed for the worse and that any agreed-upon improvements by the seller have been made to specifications.

Mistake 4. No clear title.
Most sellers of foreclosed properties will deliver a General Warranty Deed for the property, which guarantees that the seller holds clear title to the property and has the right to sell it to you. Be sure to add a clear-title contingency to your contract with the seller, just to make sure.

Having a professional title search conducted before closing/settlement is critical to ensure you won’t be surprised by hidden ownership claims or liens. (A lien is a legal claim against a home for such things as unpaid property or income taxes, unpaid contractors or loans borrowed against the property. Liens can stay intact until the money is paid, which means you may have to pay off any outstanding liens as the new owner if the institutional seller has not already done so.) Without a clear title, you may not be able to get owner’s title insurance to protect you against future unforeseen claims.

Mistake 5. Not buying owner’s title insurance.
Your lender will require you to purchase a title insurance policy to protect the lender’s investment against unexpected liens and claims. As the buyer, you can also purchase an owner’s title policy to protect your own investment — highly recommended when purchasing a property that has gone through foreclosure. According to the American Land Title Association (ALTA), a third of properties on which title investigations are conducted show some problem with the title that must be corrected before the sale is finalized.

Although buying your own policy could add hundreds (in some cases thousands) to your closing costs, the one-time cost of the policy provides protection, for as long as you own the property, against claims on the home that could arise after you become the owner. Consider buying upgraded owner’s insurance (an ALTA-R policy) to protect against last-minute or unrecorded liens. You may be able to save a few hundred dollars on your policy by shopping around for the best price.

Mistake 6. Not enough cash.
Be prepared to pay for closing costs and fees or any repairs and unforeseen expenses, especially if you’re buying an “as is” property with FHA financing that may require buyer-paid repairs to pass FHA inspection. A foreclosed home may not be a bargain if you can’t afford to make it livable.

Mistake 7. Not enough patience.
To buy smart in the foreclosed-home market, you must do your research, learn about other higher or lower bids (if possible), property taxes, utility bills, liens, and so on. Take time for due diligence.

Mistake 7. Not asking enough questions.
Ask for copies of all relevant permits, repair receipts, surveys and inspection reports (if any). Inquire about past-due condominium assessments or homeowners association dues that might create a lien. Be clear about any brokerage commission to be paid and who pays it (seller or buyer). Then follow up with calls, on-site visits and more research.

Remember, we have vast resources of information to help, and we’ll guide your foreclosed-home purchase to closing/settlement.

INVESTING:

4 Critical Factors To Investor Success

For any landlord, success starts with buying the right property to rent out — one that appeals to renters, minimizes your costs, maximizes your income and appreciates in value while you own it. Finding that property among the many foreclosed homes available takes some extra work — and professional help.

Buy The Right Investment:

Here are some key local factors you’ll want to pay attention to:

1. Location and demand.

Look closely at the location of any foreclosed property you are considering. You want to buy in an area that does not have a lot of other foreclosures, which could negatively affect the future value of your investment.

You’ll also want to look in areas that have been consistently popular with renters in the past — areas near public transportation, employment centers, shopping, good schools and/or colleges, recreational opportunities, etc.

We can help you:

  • Check out rental vacancy rates in the area.
  • Find out how long rental properties stay on the market.
  • Research what economists and local experts predict about the future of the area, including its rental market and employment opportunities.
  • Investigate plans for the neighborhood and general area, such as road improvements, industrial or commercial developments, new-home construction, etc.
  • Find which types of properties are most in demand. In some areas, condos, townhouses or multi-family units may be easier to rent out than single-family homes. In other areas, the reverse may be true.

You can find U.S. Census Bureau statistics on rental vacancy rates by region, state, metropolitan area and type of property at: www.census.gov/housing/hvs/index.html. Or, give us a call. We track rental statistics in our area and can tell you what types of properties in which locations have been in demand over the long term.

If you plan to manage the property yourself, be sure to select one that’s conveniently located near your home or work so that on-site visits don’t present a major challenge.

2. Condition.

Choose a property that is in good shape and easy to maintain. (Read more under Finding Foreclosures/Picking A Real Bargain.)

Repair and maintenance expenses can seriously impact the profitability of your investment. Although some lenders and government agencies may make minor repairs or improvements before putting their foreclosed homes on the market, they generally recoil from investing much money at all in homes that they’re already sure to lose money on.

Since foreclosed homes are usually sold “as is” — meaning you, the new owner, will be responsible for bringing the property up to standards for rentals in the area — you can minimize your financial outlay by selecting a property that does not require extensive structural repairs or major improvements.

Your best approach is to hire professional inspectors who will give you thorough reports on the condition of the roof, major systems (heating, air conditioning, plumbing, electrical), foundation, walls and ceilings, flooring, mold issues, radon gas, pests, etc. Then have a general contractor give you estimates on the cost of repairing or improving items that must receive attention before you can rent out the property.

3. Costs and benefits.
Before buying a foreclosed property as an investment, take a careful look at the numbers to make sure it will meet your financial goals.

  • Purchase costs include the property’s price and the cash you’ll need for the down payment and closing costs.
  • Ownership costs include monthly expenses for your mortgage payment, insurance and property taxes, and homeowners association or condo fees (if not paid for by tenants).
  • Operating costs include expenses for maintenance, repairs and improvements, as well as utilities and property management fees (if any). Plan for a reserve fund to cover unexpected repairs and at least two or three months of vacancy periods between rentals.
  • Income from the property should be calculated after you determine a competitive rental price. (We can tell you what typical rents are for different types of homes in the areas and neighborhoods you are considering.) Be sure to calculate income from the property with an assumption that you will have occasional vacancies — thus no income — between renters.
  • Tax benefits should also be factored into the equation. For example, most property owners can take a tax deduction for mortgage interest, property taxes and a variety of other expenses, as well as depreciate the value of the home every year.

For authoritative information on tax issues, see IRS Pub. 527, “Residential Rental Property” and consult your tax advisor.

Bear in mind, even though you may not be able to cover all the costs of investing in a foreclosed home during the first few years of ownership, that doesn’t necessarily mean it is a bad investment — providing you have extra resources to make up the difference. By holding the property long enough, inflation is likely to increase the rents you can charge, eventually generating income that exceeds expenses. In addition, properties usually increase in value over time, rewarding investors with a capital gain upon sale.

4. Legal issues.You’ll want to ensure that local zoning ordinances and homeowners association rules allow you to rent out the property as you envision. Seek information about rental restrictions that may affect how long or how often the property may be rented and the number of people who are allowed to occupy the home.

Although federal laws generally apply to discrimination and your responsibilities with respect to environmental health hazards including lead paint and asbestos, the landlord-tenant relationship is governed by federal, state and local laws.

States laws may address discrimination and environmental issues as well as security deposits, housing standards, right of entry, eviction procedures, maintenance and repairs, and other rental rules. Local ordinances may regulate rent amounts and the frequency and amount of rent increases, among other matters.

Give us a call to find out about applicable laws in the area you are considering or check the following sources:

  • Your state housing-services or consumer-affairs office.
  • Local landlords’ organizations.
  • Online information sources. One of the most comprehensive online resources for landlords is provided by Cornell University’s Legal Information Institute: law.cornell.edu/wex/landlord-tenant_law.