With all the media coverage surrounding foreclosures, auctions and short sales we hear our clients ask for clarification every day. So here are some quick answers to these confusing questions. Please feel free to contact us to explain this further.
How Do You Fall into Foreclosure?
When an owner can no longer afford their mortgage and stops making payments all together – they are waiting for the bank to foreclose on them. (Highly unadvisable course of action – contact your Professional Realtor for advice if you can no longer pay your mortgage immediately!) After about 3 months of non-payment, the bank will file a “notice of default” and inform the owner that unless they bring their account current immediately – they will be foreclosed upon. Meaning, the owner will be evicted, their credit ruined and the bank will take possession of the property. Now the bank owns the property and needs to sell it. They will either list the property with a Realtor and sell it as a “REO” – a bank owned property – or they will sell the property at auction to the highest bidder.
How Do You Buy a Foreclosure?
For those who are inexperienced in Real Estate – buying a foreclosure at auction is NOT the way to start investing. Generally, when the property goes to auction – the buyer must have liquid assets to purchase the property immediately. Generally one cannot acquire a loan to buy a foreclosed property at auction. Another concern is disclosures. A property being sold in a foreclosure auction usually does not have inspections or disclosures informing the potential purchaser of the condition of the property or the condition of title. A drive by of the property is allowed and rarely there is a date to view the property where the buyer can bring their own inspectors to view the home at their own cost. This type of transaction is truly a “Buyer Beware” scenario.
However, instead of the bank auctioning off the property – they may list the home with a Realtor and sell it as a “REO”. In this case, the home is placed on the market like any other home sale and available to view with your Realtor. Usually there are no disclosures or inspections of the property – if the buyer were concerned they would have to pay for their own inspections to determine the condition of the home. In some cases limited disclosures are available to the buyer – nonetheless, this is still a “Buyer Beware” scenario and as professional Realtors we advise all our clients to go forward and pay for their own inspections before they write an offer – or incorporate time for inspections in the offer.
Final Thoughts on Foreclosures
Though they sounds so tempting on TV, foreclosures can be a messy business and we haven’t even touched on the issues of other lien holders, tax liens, other loans remaining on the home or “investor” purchase issues. Before you get involved with a foreclosure purchase – consult a Real Estate Attorney.
What is a “Short Sale”?
A short sale is a property that will go into foreclosure if not sold before the three month “non-payment mark” and “notice of default” is filed. When an owner is in distress and they know they can no longer afford their mortgage payment – they should contact their Realtor and their bank immediately to discuss the possibility of the bank receiving less than what is owed. The term “short sale” refers to the agreement that the bank will accept less than the amount of the loan they have on the property. This course of action is the last chance an owner has to get out of the loan and keep their head above water. A bank will not agree to a short sale if the owner has other assets they can liquidate to bring the loan current.
Why Would a Bank Accept a Short Sale?
Banks would much rather not hold foreclosed property. And in a short sale they will probably receive more money than at a foreclosure sale. However, not all owners will qualify for a short sale agreement. The circumstances around a short sale vary. For example, perhaps through a job loss or other reason they have been unable to make regular mortgage payments and that balance due plus late fees are added to the total loan amount. Suddenly the owner may owe more on their loan than the home can sell for. If the owner forecasts that they can no longer manage their monthly payments they will need to contact their bank in advance to begin negotiations. However, the owner cannot have any other assets available. If so, those resources will have to be exhausted first before the bank will agree to a short sale. In this case, before the 3-month mark of foreclosure – the owner can place the home on the market and see how much they get. The home will be listed by a Realtor and advertised as a short sale – where time is very much of the essence. Interested buyers will need to act quickly in order to purchase before foreclosure proceedings begin.
Another reason a short sale can become an option is when, due to market changes, a seller owes more on the property than it is currently worth. For example – Let’s say the owner purchased the home 2 years ago and paid top dollar for it. Since buying a home is a long-term investment; 2 years generally doesn’t give the owner time for the property to appreciate. Suddenly, for whatever reason, they are unable to make their monthly mortgage payment and cannot sell their property for what they purchased it for. They find themselves “upside down”. Meaning the market has changed and the value of the property has dropped from where it was when they purchased it. As professional Realtors – we advise our clients when purchasing a property that they will need to hold their investment for a minimum of 5 years to see appreciation. In this particular case, no matter what, the loan on the property is greater than what the home can be sold for. If the bank agrees, the home will be listed by a Realtor and advertised as a short sale where interested parities will need to act quickly before foreclosure proceedings begin.
Why Should a Buyer Consider Purchasing a Short Sale?
Because the clock is ticking on short sales – it can be very advantageous for the new buyer to purchase under these circumstances. Short sales are no fault of the property. Your Realtor will do a comparative market analysis to inform you of current home values to help you better decide your purchase price. Although disclosures and inspections may not be available for the property – the opportunity to perform inspections is allowed by the bank. Time is of the essence, so a buyer will have to act quickly. The bank has agreed for a limited time to take the highest offer received – there is the opportunity for the buyer to purchase the property at below market value – thus having instant equity.
Got Real Estate Questions? The Caton Team is here to help.
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