Foreclosures occur when a home owner has fallen into arrears on their mortgage payments and the bank is taking over. Banks don’t really like taking over. They prefer to remain in the money lending business, not the home ownership business. If you are falling into arrears, or anticipate the possibility of not being able to meet future payments due to some change in your financial status, reach out the your lender immediately. Don’t wait until you are months in arrears. I don’t know of any that won’t work with you to come up with a solution that will keep your credit in good shape and keep your payments coming until you can get back on your feet. But that isn’t the topic of today’s blog. Today we will discuss the stages of foreclosure and whether or not buying a foreclosure is a good idea for you. The pros and cons of buying a home involved in foreclosure vary with the phase of foreclosure the property is in when purchased.
More for Less
Buyers interested in purchasing foreclosed homes can often buy more house for their money. That’s because foreclosures are usually priced below market value. The banks and other financial institutions that take over foreclosures want to sell the properties as quickly as possible. They often price them low so that a greater number of buyers will make offers.
Lower Down Payments
Foreclosures may also present opportunities for first-time home buyers. Traditionally, down payments can prove a serious hurdle to new home buyers. Most conventional mortgage lenders require buyers to come up with down payments of 10 percent to 20 percent of a home’s purchase price. Because foreclosures tend to have lower price tags, buyers have to come up with smaller down payments when purchasing them.
Buyers may be able to move into higher-priced neighborhoods that they otherwise might not be able to afford. A house in a neighborhood of $250,000 homes might go on the market for $190,900 when it is sold as a foreclosure.
The foreclosed home can be an ideal investment for the amateur or professional handyman. You can often make a number of improvements to the property yourself before selling the house for a handsome profit. If you have experience fixing up homes, the foreclosure auction is a place where you can get your foot in the door of real estate investment. Your sweat equity can pay off in real dollars when you sell the house.
Phases of Foreclosure
1. The Owner has started missing payments.
In this case, a seller wants to sell before the lender gets involved. They will be motivated to achieve a fast sale and may create an opportunity for a below market purchase price. In this case the seller may be more likely to do repairs and might even be able to assist the buyer with some major closing cost credits or other concessions. As a buyer, you can use use regular mortgage financing and you can obtain desired inspections within standard due diligence/contingency period. The seller must legally provide a complete history of property’s condition, problems, repairs, etc.
Having said that, the seller probably won’t be able to negotiate a price below the outstanding balance of their mortgage. And since they are likely living in the home, they still have to find somewhere to move in which case you will not be able to move in on closing day and will have to rent the house to the previous owner until they move out.
2. Pre-Foreclosure/Short Sales
In this case, the missed payments have gone on long enough that the Lender has filed a Notice of Default (NOD) or Lis Pendens and the Seller is now attempting to complete what is known as a Short Sale. This seller will be motivated for a fast sale, increasing the buyer’s bargaining power. As before, the Buyer can do all the standard inspections during the due diligence/contingency period. Unless the purchase price will pay the mortgage and closing costs in full, the lender’s approval of price and terms of sale will be required (i.e. short sale). The Lender may not approve the price, seller concessions or closing cost credits and short sales generally take longer to close. They may take 45-90 days longer than a normal purchase. And in this case, the sellers still have to move out.
3. The Foreclosure Auction
If the bank believes the auction will not recover a good price it may buy the property at auction.
4. Post-Foreclosure. The Bank now owns the property.
This is known as an REO property (Real Estate Owned by Lender). Remember I said banks don’t like to be in the property owning business so they are generally motivated to get it sold and will negotiate prices, down payments, closing costs, escrow length and a myriad of other concessions. The title will be clear, so the buyer won’t have to worry about any other liens or back taxes. Inspections and mortgage financing are allowed within normal due diligence/contingency periods. The house will be vacant and can be moved into immediately after the closing ceremony. REO sales close within a normal escrow period of time.
The properties are usually listed on MLS and the bank will pay real estate agents’ commissions.
What is the down side? Well although you can do normal inspections, they are just for your information because the Bank will not agree to do any repairs treating this as an as-is sale. Banks will usually require additional paperwork. And because they have never lived there, they cannot provide disclosures as to property history/condition issues.
Alternatives to the Foreclosure
When you purchase a new home you are protected by a warranty. Builders provide a one-year limited warranty on workmanship and materials, as well as a ten-year structural warranty.
When buying a new home, many builders have special incentive programs to assist buyers. These incentives may include below market financing or help with closing costs and they can save you thousands of dollars and make it easier for you to qualify for your home purchase.
If you need a quick response to your offer, a new home is a smart way to go. In most cases, you’re dealing directly with the builder, which ensures a prompt reply and as long a the new home is ready for you to move in, you can expect to close in a timely manner and move in.
Of course, the main benefit of buying new is that everything is pristine, sparkling, and brand new. In many cases you can work with the builder customize the home, selecting items like cabinetry, countertops, and flooring.
By law, conventional sales on new or resale homes require full disclosure of any known details or drawbacks on the property. The seller can be held liable if a problem arises as a result of an issue that wasn’t fully disclosed at the time of the sale. With foreclosures, it’s always “let the buyer beware.”
Resales homes are generally in pretty good shape. The sellers are moving because they want to. Perhaps they are moving up in size or downsizing, or maybe they are moving because of better paying job opportunities or to be closer to an aging family. Whatever the reason for selling their home, they normally work with an agent to sell it at fair market price and take a little profit out to use as a down payment on their next home. Real Estate Agents working with buyers help determine what is a good price to offer, walk them through the inspection, and work with them through every step of the home buying process. The inspection will point out everything from major to minor issues a home buyer should be aware of and offers an opportunity to re-negotiate the terms of the sale or for the seller to make repairs before the closing ceremony. And you can always get a home warranty to cover unexpected equipment malfunctions within the first year of purchase. I recommend to my buyers that they make the purchase of a home warranty a condition of the sale. It actually benefits both the buyer and the seller since it covers the house on behalf of the seller up to the day of closing and then one-year after that for the buyer.
Hopefully, this has given you something to think about. Just remember – whatever your decision, I am here to help you with you Real Estate needs.