Foreclosures

Buying a Property in Foreclosure

Foreclosure is a process in which a lender attempts to recover the amount owed on an outstanding property loan once there is a default of payments. This is usually done by selling or taking ownership (repossession) of the property. The foreclosure process begins once the lender files a public notice of default (NOD), or in some states a lis pendens (LIS).

Once an NOD is filed, the property officially enters a grace period known as pre-foreclosure (length determined depending on state). Pre-foreclosure offers the borrower an opportunity to do several things before the property is repossessed and/or sold, and ultimately reported on their credit history.

  1. The borrower can reinstate the loan by paying off the default amount plus fees.
  2. The borrower may negotiate a Loan Modification with the existing lender.
  3. The borrower can sell the property to a third party and pay off the outstanding loan(s).

Should a loan remain outstanding once the pre-foreclosure period has ended, the bank then repossess the property to secure the loan. Usually, the lender takes ownership of the property with the intent to re-sell.

Good foreclosure deals are available, however buyers need to be cautious. Tax or mechanic’s liens placed on a property can drive up the purchase price. Once you have located a property you are interested in purchasing, it is important to have your REALTOR® check the property records for these kinds of contingencies.

It is also crucial for buyers to come educated about local state foreclosure laws, which differ from state to state.  Some states follow non-judicial foreclosure procedures and others require the lender to sue the borrower before taking ownership of a property in default.

Buying a Foreclosure

1. Get Financed

To be considered a serious buyer, sellers want to know that you are financially positioned to purchase the property. The best way to do this is to get pre-qualified before engaging in any negotiations. Work with a lender who has experience with the foreclosure process and who can guide you through the crucial steps of dealing with this kind of purchase (if you don’t have a trusted lender, your REALTOR® can recommend one). Your lender should provide you with a ‘loan pre-qualification letter’.  Obtaining financing information helps you understand what you can afford, and enables you to move quickly once you find a property that you want to purchase.

2. Contact Your REALTOR®

Whether you are a first-time homebuyer or experienced investor, it is always wise to work with a REALTOR® when dealing with foreclosures. When interviewing potential agents, be sure to inquire about their experience with foreclosure properties and find out if they hold any designations for buying and selling distressed properties.

3. Contact the Seller

Depending on the progression of the foreclosure, the seller will either be: the property owner in default; the trustee; or the foreclosing lender.

  • Owner in Default
    The seller will be the owner in default during pre-foreclosure. Pre-foreclosure typically offers investors and homebuyers the best bargains, but it can also be a difficult stage to purchase a distressed home, as the lender often has the final say.

Buying a property during pre-foreclosure involves making an offer to buy directly to the owner in default. The owner may or may not know they are being foreclosed upon, and will undoubtedly be under a lot of stress, making negotiations difficult. If the purchase offer is less than the secured loan(s), then the lender(s) must also be included in the negotiations.  It is important to remember that pre-foreclosure can last several months, so patience is essential when considering this purchase tactic.

Aside from the challenges of pre-foreclosure, selling the property before foreclosure can offer the owner in default an opportunity to walk away with some of the equity in their property, and avoid damaging their credit history. The buyer may also benefit here, with more time to research the title and condition of the property, and often times realize good discounts below market value!

  • Trustee
    If the loan is not reinstated by the end of the pre-foreclosure period, the property is sold at a public auction. Commonly, buyers are required to pay cash at auction and time is limited (if any), to research the title and condition of the property beforehand. Public auction can offer great bargains however, and buyers are able to avoid dealing directly with the owner in default.

When bidding on a property at public auction, you should be aware that you are competing with seasoned investors. Remember that cash is typically required to buy, and if there are any money encumbrances (i.e. tax liens, mechanics liens or second or third mortgages) you will be responsible for paying them off in full as the new owner. You’ll want to evaluate a property’s value by checking for money encumbrances before auction whenever possible.

Auctions can be postponed and/or canceled, so it is always a good idea to contact the trustee/attorney to confirm dates and times once you locate a property, as well as the day before the property is scheduled for auction. The trustee/attorney will always have the most accurate information concerning auction dates.

  • Foreclosing Lender
    If the property is Bank Owned (REO – meaning “Real Estate Owned”), you will need to contact the lender directly through their REO or asset management department. You can then inquire about viewing and presenting offers on the property. With REO properties, the lender will usually clear the title, but the potential bargain is often less than pre-foreclosure and auction properties.

Some homebuyers receive government-guaranteed financing, which includes loans guaranteed by the Federal Housing Administration (FHA) or Department of Veterans Affairs (VA). When these properties go into foreclosure, they are repossessed by the federal government and sold by real estate brokers who work for the government. Buyers interested in purchasing government-owned foreclosures must have a government-registered broker write the purchase agreement.

4. Make an Offer

To gauge the potential bargain of any property, you need the property’s estimated market value, the amount of the outstanding loan, and the total of any other money encumbrances on the property. Add together the outstanding loans and encumbrances, plus any estimated repair costs, and subtract that total from the estimated market value of the property.

You will be able to decide what you are willing to offer on the property based on your results from the bargain formula above, and your available cash and loan pre-qualification letter. An offer should fall somewhere below the market value of the property, but above the total outstanding loans and encumbrances.

How you make an offer will depend on the status of the property and who is currently holding ownership. If the property is in pre-foreclosure, your offer will be presented directly to the owner in default and/or the foreclosing lender. If the property is selling at auction, your offer, or bid, will be made at the auction. If the property is bank owned, offers will be presented to the lender via their REALTOR® representative.

This information is meant as a guide. Although deemed reliable, information may not be accurate for your specific market or property type. Please consult a REALTOR® professional for more information on making a written offer.

 

Facing Foreclosure

Foreclosure is a process in which a lender attempts to recover the amount owed on an outstanding property loan once there is a default of payments. This is usually done by selling or taking ownership (repossession) of the property. The foreclosure process begins once the lender files a public notice of default (NOD), or in some states a lis pendens (LIS).

Once an NOD is filed, the property officially enters a grace period known as pre-foreclosure (length determined depending on state). Pre-foreclosure offers the borrower an opportunity to do several things before the property is repossessed and/or sold, and ultimately reported on their credit history.

1. The borrower can reinstate the loan by paying off the default amount plus fees.

2. The borrower may negotiate a Loan Modification with the existing lender.

3. The borrower can sell the property to a third party and pay off the outstanding loan(s).

Once the pre-foreclosure period has ended and the loan remains outstanding, the bank then repossess the property to secure the loan. Usually, the lender takes ownership of the property with the intent to re-sell.

Local foreclosure laws will differ from state to state. Some states follow non-judicial foreclosure procedures and others require the lender to sue the borrower before taking ownership of a property in default.

Facing Foreclosure

1. The First 30 Days

Your troubles actually begin as soon as you miss the first payment. Some lenders may not contact you until a second payment is missed, however the initial late payment and every succeeding delinquency will be reported on your credit. Each time you miss a payment, your credit score depresses and the lender tacks on late fees, which are in addition to your delinquent payment(s).

If you intend to repay missed payments, the sooner you contact your lender, the better. Most lenders will work with you as a measure of protecting their own investment, and are likely to reconsider the foreclosure process if you make efforts towards righting your delinquency.

Many lenders today offer several solutions (depending on the validated circumstances) for people who have fallen behind on their payments including:

  • Temporarily reducing and/or waiving payments
  • Adding the unpaid balance to the principal of your loan, which may increase your payments or extend the loan term to cover the deficit
  • Setting up short-term repayment plans

2. 90 Days

As soon as you become 90 days delinquent in your payments, the bank can file an NOD. Some lenders may take longer to file depending on their individual procedures and/or your current work out progress. The lender will also send you a letter stating that the foreclosure process will initiate if you do not make good on your delinquent payments.

3. Another 90 Days

Again, foreclosure regulations vary from state to state. Once the NOD is filed, borrowers typically have another 90 days before the lender files a notice of sale (NOS) to repay the delinquent payments, late fees and any legal fees the lender has incurred. At this time, if you are able to repay the delinquency in full, some lenders will re-instate your loan while others may insist that you re-finance with another lender (which will be challenging due to negative results already on your credit report).

4. Your Final Options

If a loan modification or refinance isn’t possible, your final options are as follows:

Sell the House

A quick sale (before the NOS) could be your best option if you have enough value in your home to pay off your mortgage in full. You’ll preserve what’s left of your credit score and possibly walk away with some equity (cash), leaving you in a better position should you want to purchase another property in the future.

Offer the Deed

If you cannot payoff your loan with the sale of your property, but are not severely delinquent on your payments, you can propose giving the lender the deed to your home in return for being released from your loan. Some lenders will agree to this in order to limit further legal costs, which are commonly associated with foreclosures, from being incurred. Lenders may require you to make a serious effort towards selling your home before they will consider taking a deed in lieu of foreclosure.

Negotiate a Short Sale

A better option than foreclosure, short sale can be a solution for paying off your loan if you owe substantially more on your home than it’s worth. You must negotiate with the lender to accept less than is owed on your outstanding loan. You effectively sell the property for what you can get, and the lender agrees not to go after you for the deficit.

It is important to understand that a short sale can still damage your credit score, often appearing as a “settlement” which indicates that you paid less than you owed. You could also be presented with a tax bill for the unpaid debt, which is generally considered as debt forgiveness, or income to you. An experienced attorney may be able to avoid, or at the least minimize these consequences, so consider getting professional (legal and/or accounting) help.

This is a stressful time for many families. A REALTOR® can certainly help you make the best of this situation. If short sale is an option you are considering, a seasoned REALTOR® should be part of your professional team. When interviewing potential agents, be sure to inquire about their experience with short sales and find out if they hold any designations for buying and selling distressed properties.

Proceed with Foreclosure

Educate yourself with professionals. Foreclosure is usually the worst option and in some states, lenders can take you to court for any deficit between the outstanding loan and what the home sold for during foreclosure. Regardless of worst-case scenarios, you are not alone and the damage to your credit is not permanent. If your financial situation should improve, you may be able to get another loan, with a reasonable interest rate, in a few years.

This information is meant as a guide. Although deemed reliable, information may not be accurate for your specific market or property type. Please consult a REALTOR® professional for more information on making a written offer.