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Foreclosures are said to be the financial epidemic of our time. There are many reasons that cause people to go into pre foreclosure. To name a few: divorce, layoffs, or change in income, illness, or death in the family.Banks in recent years have also done some very “creative lending” meaning offering loans to buyers who really weren’t qualified as they required minimal or in some cases, no supporting documentation in order to get approved.Loans were approve with little or no down payment. Many were adjustable rate loans with very low teaser rates thatshot skyward after the initial period.Once these rates reset, owners could no longer afford the payments and often ended up in foreclosure.
What is Foreclosure?
When attempts to refinance a home, get a loan modification, or sell the home as a short sale fail, the distressed homeowner is left with only one option:foreclosure.Foreclosure is the legal process by which a bank or other secured creditor either sells or repossesses a parcel of real property, home or land after the owner has failed to comply with the mortgage or deed of trust agreement with the lender. Most frequently, the violation of the mortgage agreement is the default of payment.
In order to understand buyer opportunities for distressed property sales, it is important to understand the process a little bit.Here is a summary of the steps involved in the foreclosure process:
- Homeowner defaults on mortgage payments.Once the owner defaults on their payments, they are in pre-foreclosure.This period extends up to when the distressed property is sold, either to a third party as a short sale or at a Trustee or Sheriff’s Auction.
- After a time period established by state law (often 90 days), the lender sends an official notice called a Notice of Default (NOD) to the homeowner notifying the owner that they have defaulted on the mortgage.The NOD formally begins the foreclosure process and also outlines the reinstatement period which is the period of time the owner has to reinstate the loan by making all required payments and bringing the account into good standing.
- If, after receiving the NOD, the borrower does not or is unable to reinstate the loan, a Notice of Sale (NOS) is recorded by the lender.The Notice of Sale advises the homeowner when and where the foreclosure sale will take place.
- The foreclosure sale, also known as a Trustee Sale, or Sheriff’s Auction is a public auction when the property is auctioned off to the highest bidder.
- If the property is not sold to anyone at the Trustee Sale or Sheriff’s auction, ownership of the property is transferred to the lender. Once the transfer of ownership occurs, the status of the property is now REO, meaning real estate owned or bank owned.
- The owner can still redeem the property after the foreclosure sale during a process known as the “redemption period”.In NC, the right of redemption period is 10 days.Redemption typically requires that the owner pay the sales price, interest, penalties and other costs.
- If the owner does not redeem the home, the bank will normally put the house on the market for sale.Once it is sold, the proceeds are used to pay off the mortgage amount and other costs.
- This foreclosure process allows for three opportunities for buyers to find significant bargains on distressed homes.
- Search Carteret County Foreclosures
- Search Onslow County Foreclosures
Pre-Foreclosure:
Pre-foreclosure is the period between when the lender sends the home owner the Notice of Default (NOD) and the end of the auction sale event that finalizes the foreclosure and transfer of title to the property to either the highest bidder or the lender. Often times, a buyer can realize discounts of 20-40 percent below market value.
Buying a property in pre-foreclosure involves approaching the borrower/owner and offering to buy the property outright.Find out all you can about the physical and financial details of the property. Also find out the number of liens, type of liens, loan balances, and total amount of arrears. Ask to see any correspondence from the lender(s) that will fill in the details the owners may not be fully aware of or may not fully understand.
You will need all this physical and financial information to do your research and to determine whether the property represents a good deal, given the buyers intention for the property.Make sure a thorough title search is done so the owners can convey clean, marketable title to the buyers.Once you have made the determination, you can then prepare a written contract and submit it to the sellers for approval.
If the seller is not “upside down” on their property, meaning they owe more on the property than what the property would net if it were sold, then the owner does NOT need lender approval to sell the property.If however, the owner is “upside down” then both the owner and the lender need to approve the sale. When you have successfully negotiated the purchase, you must then inform the foreclosure attorney to stop the foreclosure process during the time necessary to proceed to closing and settlement of the purchase transaction.
How much does it cost to buy a pre foreclosure?At first, you generally don't need much of an earnest money deposit when negotiating with property owners. Deposits are usually $1,000 or less. If this is a short sale subject to lender approval, the bank may dictate the amount of earnest money required, however, it is normally between $500 - $1000.. Later, of course, you will need to obtain the funding to pay off all current debt(s) on the property.
As you can see, buying a home in pre-foreclosure can be a very complex process.I highly recommend you consult a real estate professional such as myself that has obtained their Short Sale and Foreclosure Resource (SFR) certification to help with this kind of transaction.
There are two primary points to remember when thinking about purchasing a home in pre-foreclosure.The first is that all of the debt that encumbers the pre-foreclosure property remains against the property until it is sold at the foreclosure auction. This means that any "junior" or subordinate debt stays in place, including trusts, second and perhaps even third mortgages, tax liens, assessments, and judgments. Any of these debts incurred by the owner and secured by the real estate, which may exist against the property, must be paid off.A few years ago, there was normally only one trust deed or mortgage on a property; however, in recent years, that has changed drastically as more distressed properties today have second mortgages, home equity loans or liens that have to be considered.It is of vital importance that you find out about any other possible indebtedness before you spend too much time and money pursuing a purchase of the property.
The second issue is that only the individuals who are named on the title can sell the property. This seems obvious, but it can go overlooked and valuable time can be wasted. All of the owners of the property must agree to sell it to you before a legal sales transaction can be completed. Make sure that you know who ALL the owners are and that they are all interested in selling before you start negotiating a deal. Most homes are owned by individuals or couples, so finding them and negotiating with them should be straightforward. Owners who have co-signors or non-resident partners, and owners who have abandoned the property and may have moved out of the area will obviously take additional time and effort to locate, negotiate with, and get documents signed. Just remember that even one deal that nets you thousands of dollars will make your time well spent.
Public Auction / Sheriff’s Auction / Trustees Sale:
If the loan is not reinstated or the seller could not sell or dispose of the property (either via short sale, deed in lieu of foreclosure) by the end of the pre-foreclosure period, potential buyers can bid on the property at a public auction also know as a Sheriff’s Auction or Trustee Sale. . An auction property is under the control of the foreclosure attorney who conducts the sale on behalf of the lender. These auction are normally held on the steps of the county courthouse. The auction is open to all bidders, including investors and hom ebuyers, and the property is sold to the highest bidder
Buying properties at the foreclosure auction or "at the courthouse" is an experience unlike any other in purchasing real estate. The minimum bid amount includes the loan balance, any accrued interest, plus attorney's fees and any costs association with the foreclosure process. Other bidders will be investors like you and possibly junior lien holders whose interests are otherwise extinguished by the foreclosure action.
The attorney will qualify bidders by asking to see their earnest money deposits so it is important to contact him or her in advance. You will need a cashier's or certified check that is usually non-refundable if you win the bid. This secures your purchase of the property and is not contingent on financing or inspections. The winning bidder will have to be fully prepared to close within as little as 30 days after tendering the deposit to the attorney and signing the contract.
The attorney starts the bidding at the specified minimum amount and continues to solicit bids from you and other interested parties until the winning bidder is determined. Don't picture the image of a fast-talking auctioneer with a gavel. Although, the bidding process can occur very quickly, often in as little as three minutes, it is more like a conversation among a few people, with the attorney in the center. Be vigilant in tracking the bids and watching your competition. You should always decide on your bidding strategy and your upper limit before you start bidding.
How much cash will you need to buy a home at auction?It depends on the seller. In some cases, buyers are required to pay in cash at the auction the full amount of the sales price.Contact the foreclosing attorney in advance and don't be too surprised if the requirement is for an amount equal to 10% of the minimum bid price. In some jurisdictions, the required earnest money deposit amount is specified in the sale notice either as a percentage or a fixed amount. If you are the winning bidder, you must pay the deposit in the form of "good funds" such as a cashier's check immediately after the auction. This amount will be forfeited if you fail to close.
There are three points to consider. The first point is that auctions start on time and are conducted very quickly, so make sure you arrive early and introduce yourself to the attorney to demonstrate that you brought the correct amount of earnest money deposit in the required form. Brief last minute questions may be asked and answered then. Secondly, you should expect to have some competition, even if it is minimal, so make sure you have your bidding strategy and the top price you will pay fixed in your mind in advance. The third point, as mentioned before, is that you must have cash or a cashier's check, and must be prepared to sign the seller's contract and settle the transaction shortly thereafter.
What are the negatives associated with buying a property at auction?If you are the successful bidder, you receive the property in its "as is" condition. This means that the sale could include someone still living in the property (the buyer will have to pay all eviction related costs) and there might also be secondary liens against the property which you will be liable for.These secondary liens can include a second mortgage, home equity line of credit, HELOC, IRS tax lien, mechanics lien and many others.
Since what is owed to the bank is almost always more than what the property is worth, very few foreclosure auctions result in a successful sale. Actually, most foreclosure auctions do not even result in bids. After all, if there was enough equity in the property to satisfy the loan, the owner would have probably sold the property and paid off the bank. That is why the property ends up at a foreclosure or trustee sale.If the auction is unsuccessful and the property is not sold, it "reverts" to the bank who becomes the new owner.Bank owner properties are also known as REO, or "real estate owned" property.
On the upside, a public auction often offers some of the best bargains and avoids the unpredictability of dealing directly with the borrower/owner.
Bank-owned (REO):
If the lender takes ownership of the property, either through an agreement with the owner during pre-foreclosure or as the result of an unsuccessful public auction, the lender will usually want to re-sell the property to recover the unpaid loan amount. In order to do so they will need to evict the current occupants (if any), remove any existing liens and clear the title.Some lenders might possibly perform some needed maintenance and repair, however, most of them don’t, therefore, the discount for these REO homes is typically less than a pre-foreclosure or auction property.
Bank foreclosures can become government foreclosures if the loan is backed by a government agency such as the Department of Housing and Urban Development (HUD) or the Department of Veterans Affairs (VA). In that case the government agency would be responsible for selling the property.Click here for more information on purchasing a government owned foreclosure.
A bank owned property may or may not be a great bargain. Do your homework before making an offer. Make sure that the price you pay is comparable to other homes in the neighborhood. Consider the costs of renovation, including time to complete them. Don’t get caught up in a ‘bidding war’ and pay over market value.
Benefits Of Buying REO
A bank, or mortgage lender, does not want to have a house or property on its books for long.The business of a bank is to make money and an unsold home on a bank’s books is not generating any money for the bank.As the result, banks want to sell their REO properties as fast as they can.Some of the major benefits of buying an REO property are listed below:
- Savings of up to 15-20% off home market values
- Generating a quick sale for the lender is of paramount importance. Some large lenders have entire departments specifically for this type of work and therefore want to move through the backlog of properties as efficiently as possible. Added to this idea all of the problems that having a property on its balance sheet can lead to for a bank (as outlined above) and the lender will always offer a lower purchase price for the property, sometimes as large as 20% off the comparative market price of the property.
- Most simple way for first time homebuyers and experienced investors to buy properties
- Due to the need for a quick sale the lender usually covers all taxes and other problems, such as evictions etc, making the purchase as straightforward as possible for the homebuyer.
- Prospective buyers have immediate access to a property for inspections
- All homebuyers have the right to have a house inspected by a qualified assessor or appraiser. Sometimes the sellers may only allow the inspection at certain times, due to commitments and other factors. These problems, and various others, are not of concern with a REO purchase and therefore make having an appraisal carried out easier and faster, than would normally be the case.
- No back taxes or liens to worry about
- Basically this benefit means the following: No tenants to evict and no financial instrument secured by the property. This is good as it avoids all of the possible hassle and stress of hiring a company to evict any tenants.
- Negotiable rehab costs, interest, closing points, loan amount, etc.
- All of the above factors may be important to the buyer and therefore, as the lender wants a quick sale, all of the costs, interest etc can be negotiated, usually for better terms than in a normal purchase.
- Almost 100% risk-free
- When a bank repossesses a home it always provides a good, clear title. What this means is that when you buy the house you know that it is yours and not someone else’s i.e. there is no ambiguity about the ownership of the property.
- Less than normal down payment
- A lender looking to sell the home may accept a less than normal initial down payment from an interested buyer, to secure the sale of the home.
How Banks Sell REO’s
Each bank/lender works a little differently, but they all have similar goals. They want to get the best price possible and have no interest in "dumping" real estate cheaply. Generally, banks have an entire department set up to manage their REO inventory.
Banks normally hire local real estate agents to provide them with a ‘broker price opinion’ (BPO) which the bank will use to determine the listing price.Real estate agents are hired by the banks to market and sell the property.The agents will enter the listing in the local MLS system and advertise it for sale just as they would a non-foreclosed property.
Some banks that have taken back property in foreclosure have wised up in regards to setting the list price. Rarely will you see a home priced right at market value. Much of the time, the REOs are underpriced, sometimes by many thousands of dollars. Banks do this to create a bidding war among buyers. And it's working.It is not uncommon in many areas of the country like Florida, Nevada and California for banks to receive 20-30 offers on any given listing.Pricing of these properties varies widely from bank to bank and it largely depends on the overall financial condition of the bank itself, how long they have owned the property, what shape the property is in as well as a host of other factors.For that reason, you really have to look closely at the list price and determine if it’s really a bargain or not.
First-time home buyers are competing with investors and often against investors who can afford to pay all cash. If an investor pays cash, there is no appraisal, no loan contingency, and very little else that could prevent the transaction from closing. So, where does that leave home buyers who need to get a loan? Generally, at the bottom of the rejected pile. But there are ways to spice up your offer and make it more attractive, without overpaying for the home . . . read more about Tips for Buying REO Properties.
Once you make an offer to purchase, banks generally present a "counter-offer." It may be at a higher price than you expect, but they have to demonstrate to investors, shareholders and auditors that they attempted to get the highest price possible. You should plan to counter the counter-offer.
Your offer or counter-offer will probably have to be reviewed and approved by several individuals and companies. Even once an offer is accepted, the bank may insert wording like “..subject to corporate approval with 5 days."
Property Condition
Banks always want to sell a property in "as is" condition. Most will provide a pest certification, but not unless you include it in your offer and negotiate the point. They will allow you to get all the inspections you want (at your expense), but they may not agree to do any repairs.
Your offer should include an inspection contingency period that allows you to terminate the sale if the inspections reveal unanticipated damages that the bank will not correct.
Even though you agreed to “as is," always give the bank another opportunity to make repairs or give you a credit after you’ve completed your inspections. Sometimes they’ll re-negotiate to save the transaction instead of putting the property back on the market, but don’t take it for granted.
If there are real estate agents involved, either representing you or the bank, those agents are required to provide you their disclosure statements.
Most banks will not provide financing on their REOs but it doesn’t hurt to ask. Especially if the property has extensive damage and you are purchasing it "as is."If the home is a fixer upper, you may want to investigate an FHA 203K Rehab Loan. |
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