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What is a Distressed Property?
Are These Good Opportunities
for Buyers??
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In order to understand the opportunities available for homebuyers, it’s important to first understand what is meant by the term “distressed property”. In general, distressed properties fall into one of the following categories:
Pre-Foreclosure
The home is still owned by the home owner, however it is in danger of going to foreclosure because the homeowner has defaulted on the mortgage payments. In many cases, home owners will try to avoid foreclosure by asking the lender to approve a short sale.
A short sale is a situation when the seller is “underwater” or “upside down” on the house, meaning they owe more on the loan than the property can be sold for on the market today, including the closing costs. In these cases, the owner will seek to sell the property at a price for less than what they owe on the loan. A short sale has to be agreed upon by both the seller and the lender in order for the short sale to be approved. As many home owners are currently upside down on their homes today and many have defaulted on their payments, short sales present a unique buying opportunity for potential home buyers.
Tax Lien Foreclosures
These foreclosures occur as a result of a home or property owner's failure to keep up with adequate property taxes, income taxes or other necessary payments to the federal or state government. When a property owner can no longer make payments of their unpaid taxes, or fails to do so willingly, the government owed the taxes will place a tax lien on the property. If the lien is not removed by repayment of the amount owed in full (plus penalties and interest), the government can foreclose on the property in order to recover the taxes owed. Properties that have been repossessed by the government in this way are known as tax lien foreclosures. A tax lien is made only when all other avenue of recovering the taxes owed have been exhausted. Non-payment of the following types of taxes can result in a tax lien:
- Federal income tax
- Personal property tax
- Local property tax – in virtually all cases, this tax is collected by the county where the property is located. If the owner of the property fails to pay the tax, the amount of the tax becomes a lien against the property. A lien against the property, however, does not help the county and local governments pay for the services and benefits they have promised to provide for their citizens.
The county needs the money now, not some time in the future. It needs that money in order to fulfill its budgetary obligations. By state statute, each county is authorized to collect the taxes due that remain unpaid by selling at public auction, either a Tax Lien Certificate or a Tax Deed.
Tax Lien Certificates - the tax lien debt is sold by the government as a “tax lien certificate” to an investor at public auction. The money collected at auction is paid directly to the taxing authority that is owed the money.
In exchange for the purchase, county governments offer the investors interest on the Tax Lien Certificates and the guarantee that the certificates will be paid off within a predetermined period of time. Each state has a “redemption period” which is the amount of time allowed for the property owner to pay back the investor for the amount of taxes owed plus penalties.
If the owner pays off the debt, the investor gets that money back plus the prevailing interest rate in the state. Depending on the state, interest rates can range from as low as 8% a year to as high as 36% a year. If the owner does not pay back the certificate, then the investor can foreclose on the property and often gets it for only the taxes, penalties and interest due. Why? A tax lien has priority over a mortgage lien. Upon foreclosure, the mortgage is eliminated and you do not have to pay it.
Only once the foreclosure occurs does title to the property get transferred to the investor, who is now the new owner. Note: NC does not sell tax lien certificates.
Tax Deeds - Instead of placing a lien on a property with delinquent taxes, counties in some states foreclose on the properties and sell the property at public auction to investors, sometimes for only the property taxes owed. Note: NC does sell Tax Deeds, however, they are often called NC Land Sales or NC Property Tax Sales. All comments below in this section apply to NC only. Other states that allow Tax Deeds may have different laws so these need to be checked carefully by those considering purchasing tax deeds.
As part of the foreclosure process, all interested parties (owners, mortgage holders, etc) are notified that the property is going to be foreclosed on and any legal interest they may have in the property will be terminated and extinguished if a tax foreclosure sale of the property is completed. This is because property tax liens are ahead of and superior to all other liens, except (in a limited extent) to filed income tax liens held by the North Carolina Department of Revenue. When a superior lien is foreclosed, it cuts off all junior liens and ownership rights.
At a tax deed sale, the minimum bid is generally the amount of back taxes owed plus interest, as well as costs associated with selling the property. The home is sold to the highest bidder at the public auction. When the purchase price is paid by the highest bidder, the sale is confirmed and a Commissioner's deed is delivered to the new owner.
State law provides that any owner, mortgage holder or defendant in a filed tax foreclosure proceeding can stop the foreclosure process at any time by redeeming the property. The redemption price is equal to the taxes, interest, fees and costs of the foreclosure proceeding to the date of the redemption. Parties wishing to redeem property from tax foreclosure and stop the foreclosure process must contact the tax office or the attorney for a redemption payoff figure. Redemption can even occur after a sale, as long as the sale has not been confirmed by the Court. However, once the foreclosure property sale has been completed with a confirmation order and delivery of deed, all rights of redemption are terminated.
In all cases, no representation or warranty of any kind is being made about the property or the status of title being delivered. Under state law, it is up to each bidder to carefully check out the title and status of the property being sold before placing either a public sale bid or an upset bid. In most cases, only a quitclaim deed is provided at the sale, which is usually insufficient for title insurance. Therefore, a “quiet title” action must be filed in court to obtain an insurable title. In the event the property is not purchased, title may revert to the county government. Some states allow investors to buy properties not sold at the auction over the counter (through the mail).
Homes in Poor Physical Condition
The lack of regular home maintenance over time has caused the physical condition of the property condition to deteriorate significantly. Regardless of the actual physical condition of the property, foreclosed homes are normally sold in “as is” condition so it is not uncommon for the new owner to have to make repairs. Some potential homeowners shy away from considering homes that have been foreclosed on due to concern of not having enough money to purchase the home and also make repairs to it. This concern can easily be addressed by using a FHA 203(K) Rehab Loan as this government loan program will cover the cost to both purchase the home and rehabilitate it.
Bank Owned (REO)
After the property becomes distressed, the tax collector, debt collector, government, or bank begins the necessary proceedings to sell the home in order to collect the mortgage payments or tax payments the homeowner owes. The legal process by which a defaulted borrower is deprived of his or her interest in the mortgaged property is known as foreclosure. A home that is owned by the lender as the result of a foreclosure is called a REO (real estate owned) property.
Banks are not in the business of wanting to keep foreclosed properties on their books so they want to resell them as quickly as possible. Purchasing a foreclosed property from a bank or government agency (FHA or VA) offers potential home buyers a tremendous opportunity to buy a home in good condition at a fraction of the cost for a comparable non-foreclosed home in that same area.
Who Purchases Distressed Properties and Why?
Simply put, distressed properties have entered the mainstream of real estate transactions. Respondents in a recent nationwide Keller Williams survey revealed that 45 percent of all homes sold in the United States are currently “distressed properties,” and an estimated 300,000 foreclosures are entering the market each month. In NC, it is estimated that 21-30% of total home sales are currently distressed properties.
Price is the biggest motivating factor for those seeking to purchase a distressed property. While the average distressed property sold for 20 percent below current market value, the discounted purchase price on short sales and REOs tends to range between 10 and 40 percent. A recent Keller Williams survey revealed that 40 percent of survey respondents indicated that the desire to stop paying rent was a prime motivator in the property home purchase. Distressed properties have simply lowered the financial barriers to entry.
In 2009, 47 percent of all REO purchasers 52 percent of all short sale purchasers were between 18 and 35 years old. The surge in distressed properties entering the market has boosted affordability for millions of buyers. In 2009, there was a significant uptick in home sales among first-time buyers.
Married couples account for 53 percent of distressed property purchases, but below-market bargains are opening home ownership opportunities to an increasing percentage of single men and women.
Often, distressed properties are in excellent conditionand in very desirable locations. Homeowners in every price bracket are affected by the economy. Bidding wars happen in some markets, but they mainly occur in the most distressed ones. As in any market, the most competitive offers are most likely to win.
What is an SFR?
The complex details involved with short sales and foreclosures are unique calls for specialized expertise. Contact an agent such as myself that has earned the Short Sale and Foreclosure Resource (SFR) Certification through the National Association of Realtors and who is committed to guiding you through the process, setting realistic expectations, and streamlining your path to homeownership. Call me anytime at (910) 787-2160 to set up a free, personal consultation.
If you are considering buying a short sale or foreclosure, there could be drawbacks that I, as a real estate agent, cannot advise you on. For your protection, I suggest that all borrowers:
- Obtain legal advice from a competent real estate lawyer to discuss title issues, changes to land use, sellers right to redemption and a host of other issues.
- Call an accountant or CPA to discuss short sale and foreclosure tax ramification.
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