Guide to Buying Foreclosures
First, before you think about whether or not buying a foreclosed house is the right thing for you, let’s demystify some common terminology.
Then, we’ll focus on REO Foreclosures, which are the kind of foreclosures the average homebuyer is contemplating buying and some things to think about, including debunking some myths.
THE TERMINOLOGY
Foreclosure Homes
Foreclosure homes are the result of a homeowner who is unable to make their mortgage payments over a length of time. Eventually, the homeowner falls behind in payments and their mortgage goes into default. The lender, who provided the mortgage to the homeowner, typically chooses to foreclose the home to pay off the debt incurred by the homeowner. Proper paperwork is filed and complaints are made. Often times the lender chooses to auction off the home. The foreclosure home is sold to the highest bidder giving the lender an opportunity to make back as much money as possible on the foreclosed property.
REO Foreclosures
REO foreclosures are real estate owned properties that have been sent to foreclosure. When a property is listed as an REO foreclosure, the homeowner has defaulted on their mortgage. In this particular case, the property is taken back by the mortgage lender, usually a bank. Properties typically go into REO foreclosure when a buyer for the foreclosed home can not be found during a foreclosure sale. In this instance, the mortgager repossesses the property and turns around and sells it on its own. To put it simply, an REO property is for sale by the lender, not the homeowner.REO homes are also called bank-owned homes, or foreclosed homes.
Bank Foreclosures
Bank foreclosures are the result of a homeowner defaulting on a loan or mortgage they have received through a bank. When the homeowner can no longer make payments on their mortgage or follow the terms specified in the mortgage, the bank takes possession of the property, witch become a bank owned property. Once the bank owns the property they send it into foreclosure as a means to make back some or all of the money lent to the homeowner. Bank foreclosures, or bank owned homes, are sold at better rates then non foreclosed homes. The bank uses the proceeds to pay off the mortgage and any legal fees.
Repo Homes
Repo homes are sometimes referred to as REO foreclosures. When a homeowner defaults on their mortgage, the lender has the option to take the property into repossession. Most repo homes are sold at auction at cheaper rates than other homes. The repo home is sold to the person who has placed the highest bid. Repo homes are typically sold for less to allow the lender to make back as much money as they possibly can in a short amount of time. It is recommended that all potential buyers of repo homes have the property thoroughly inspected before purchasing the home.
Foreclosure Listings
Home foreclosure listings are an easy way for potential buyers and investors to find available foreclosed homes for sale. Foreclosure listings include homes in pre-foreclosure, REO foreclosures, bank and government foreclosures, and repo foreclosures. Foreclosure listings typically list the properties asking price, location including city, county, and state, and are usually accompanied by a photograph. Home foreclosure listings are a convenient way for lenders to advertise the sale of a foreclosed property and speed up the time it takes for them to make back what is owed on the mortgage and to cover any legal fees acquired during the foreclosure process.
Foreclosure Homes for Sale
Foreclosure homes for sale are the result of a homeowner defaulting on their property. To go into default means the borrower failed to meet their financial obligation to the lender and failed to meet the terms of their mortgage agreement. The lender then takes back the property, sometimes through repossession and auctions or sells the property at a discounted price. Homes in foreclosure have been taken back by a lender, mortgager, or lien holder. The money from the sale of the foreclosure home is used to pay off the defaulted amount of the mortgage and any accrued legal fees.
Pre-foreclosure
There is a period of time between when the mortgager goes into default and when the home is in foreclosure. This period of time is referred to as the pre-foreclosure period. During this period the homeowner can pay off the amount their mortgage is in default for during what is known as a grace period or they can sell the property in question to a third party and pay off the amount in default. Defaulted mortgages that are not paid off during the pre-foreclosure period are either sold at auction or taken into possession by the lender or lien holder.
Foreclosure Home Auctions
Foreclosure home auctions occur when the homeowner is in default and is unable to pay the amount in default by the end of the pre-foreclosure period. Once the home is no longer in possession by the owner the home is listed and sold at auction. The potential buyer who places the highest bid on the foreclosed home wins the auction. Foreclosure home auctions usually sell at cheaper rates then other foreclosed properties. Buyers are usually required to pay the winning bid in cash. Auctions eliminate dealings between the homeowner in default and any potential buyers.
TIPS FOR BUYING AN REO FORECLOSURE
1.) Find properties and look at them. At this stage of foreclosure, it’s more likely the property will be listed for sale on the Multiple Listing Service (MLS) used by real estate agents, so if you are working with an agent, ask him/her to check the MLS for bank-owned properties. To buy a bank-owned property that’s listed on the MLS, contact your agent or the listing agent directly. Once you identify a property, drive by it to get a better idea of its condition and neighborhood. You may find notices posted about the lender who owns the property or signs that show the property is listed with a real estate agent. Take lots of pictures and notes.
2.) Check the potential bargain. Gather this information:
Bank’s break-even amount — includes the unpaid balance of the loan, any fees and costs incurred during the foreclosure process and any other liens the bank had to pay off to take ownership of the property. Your monthly expenses as a homeowner (mortgage payment, taxes, insurance, repairs, etc.)Subtract all your costs as a buyer (break-even amount, additional liens, repair costs) from the estimated market value of the property, and use that number as a basis for your offer to the bank. This is all public information so you can research on your own with the county recorder, consult us as your local real estate agent or use online services like RealtyTrac.com.
3) Contact your friendly, professional Realtor team to express your interest in seeing the property and making an offer.
4) Negotiate a purchase agreement. Arrange to walk through the property with your agent to make sure it fits your criteria as a buyer. If both you and the bank agree to proceed, negotiate the terms of the purchase agreement. The bank’s primary goal is to at least break even on all the costs that it has sunk into the property. That includes the unpaid balance of the loan, the expenses associated with the foreclosure proceedings, other liens and repairs to the property.Your goal as a buyer is to purchase the property below market value, minus any estimated repair costs. This is often possible if you contact the bank quickly and are a prepared buyer ready to make a purchase.
To get a better bargain, consider these:
Buy the property “as is.”
Prove you have the financing and can close quickly. Pay with cash or show your pre-approval letter. Be ready to show proof of income.
Work with lenders that have a glut of foreclosures. These are non-performing assets from their perspective, so unloading them is to their benefit.
5) Close the deal.The purchase agreement should make closing the deal contingent on 1) a full title search conducted by a title company or attorney and 2) a professional inspection of the property (even if you’re willing to buy the home “as is,” you may find out there’s a foundation problem and choose to end the deal). An escrow company, which acts as a third party, can manage the transfer of money and property ownership. Assuming that you have your financing secured, this should be a fairly smooth process. There is no set time frame within which the banks must sell their REOs. However, banks often want to get REOs off their books rapidly. As a result, many REOs sell quickly.
FAQ – COMMON QUESTIONS
How does a home become an REO?
Typically, the owners will fall behind on their mortgage payments, or may even intentionally stop making payments. They may have the opportunity to sell the home at a break-even price, or for less than they actually owe (this is called a short sale). If the owners cannot sell the home or make their payments, the bank will try to sell the home at auction. If that fails, the bank will take ownership of the home. This is known as foreclosure.
What’s the difference between an REO, bank-owned, and foreclosed home?
There’s no difference between an REO, bank-owned, or foreclosed home. They all mean the same thing: a home that has been repossessed by a bank. Some of these homes may be listed with the local MLS. Bank-owned homes that are not listed may still be in the process of getting prepped for sale, or the bank may be holding these homes back to wait for a more favorable time to sell.
Is an REO home the same thing as a short sale?
No. Think of a short sale as an owner’s last-ditch effort to sell the home before the bank forecloses on it. If the owner can make a successful short sale, the bank will collect at least a portion of what it’s owed. If not, the bank may eventually foreclose on the home, and attempt to recover its money by re-selling the home to another buyer.
Are REO homes always a great deal?
In real estate, there’s no such thing as a surefire great deal. Every home is different, and every purchase is unique. REO homes can represent a good opportunity for a home-buyer, but they can offer unique challenges that may not be for everyone. You may also be responsible for extra fees and expenses when shopping for an REO home, whether or not you end up closing the deal. These fees can really add up if you end up touring and making offers on multiple homes.
What is it like to tour a REO?
Touring an MLS-listed REO home is similar to touring any other MLS listing. The home will be represented by a listing agent, who will meet you at the home. You’ll show up with your agent, look around, and ask questions. There are a few key differences to be ready for, however. For one, the home is likely to be without power, water, and heat. This is because banks shut off these services to protect the home and save money on maintenance. Secondly, an REO home may not be in pristine condition — some homeowners will purposefully sabotage a home after they’ve been foreclosed upon, or may strip the fixtures, door knobs, appliances, and even the copper plumbing on their way out. Even if the previous owners left the home in pristine condition, some REO homes fall victim to squatters or thieves. Some banks will restore or repair a home if it’s been trashed by a previous owner, but the quality of repairs may vary. Some banks will not repair their REO homes at all, and will sell the home as-is. If you tour an REO home, be on the lookout for signs of damage, half-hearted repairs, or other trouble. And remember that a thorough home inspection is a must-have for this type of purchase.
How long does it take to buy an REO home?
It varies. When the glut of REO homes first hit the market, the process of buying them was usually long and prone to failure. Most banks simply didn’t have a good process for selling large numbers of REO homes. However, many banks have streamlined their process to the point where buying an REO home doesn’t take much longer than a standard home purchase — around 45-60 days.
COMMON MYTHS
- 1. Foreclosures need a huge amount of work.
Some do and some don’t. We’ve seen foreclosures that are in near perfect condition – that’s because just because someone could no longer pay their mortgage (and thus foreclosed) didn’t necessarily mean the owner did not care about their property. Other people strip their houses of items that are valuable or deface it because they are angry. You have to view every foreclosure thoroughly and calculate the cost of any repairs to the market price and value of the home.
- 2. Foreclosures sell at massive discounts, compared to other homes.
Not usually true – although, depending on location, condition and the amount of inventory a bank has to move, good deals can be had. However, many times, banks price their homes competitive with the market so there may be some discounting to help the inventory move fast, it may not be “massive” discounting. Usually when people hear about the great deals in buying foreclosures they are hearing about houses purchased at the courthouse steps or in pre-foreclosure.
3. Buying a foreclosure is risky.
Yes, – buying a foreclosure at the auction on the county courthouse steps can have risks, including the risk the new owner will take on the former’s owner’s liens and other loans. But most buyers looking for foreclosures are looking at bank-owned properties, which are listed on the open market with other, ‘regular’ homes. Buying these homes is really no more risky than buying a non-foreclosed home.
4. You can’t get inspections on the property when you buy a foreclosed home.
Virtually all bank-owned properties for sale on the open market not only allow, but encourage buyers to obtain every inspection they deem necessary. This is because almost every bank sells their foreclosed homes as-is, and they want to avoid later liability. It’s in everyone’s best interests to make sure that the buyer has full information about the property’s condition before they close the deal.
There is a lot of information to consider when purchasing a foreclosed property – luckily, you have the benefit of knowledgeable real estate professionals to help you through every step of the way. Contact us at The Doorway Home Team to learn more.
