"I'm looking for a good deal!"
Who isn't? Most people believe REOs are a "good deal", and that buying a foreclosed home is the only way to get a good deal. "REO" or Real Estate Owned is the actual term for a foreclosed home - "Foreclosure" is the process of repossession by the homeowner's mortgage holder.
You can find any home listed on any home search website because these websites use public records and Realtor® MLS (Multiple Listing Service) syndications. Any time a legal action is taken against a property, a lis pendens is filed publicly. A lis pendens does not always mean a foreclosure, but many home search websites consider it as such, and homes are often listed as "pre-foreclosure". Again, this is not always the case. If a homeowner misses a few payments (usually 4 payments depending on the lender), the lender will begin the foreclosure process unless the homeowner is able to make an arrangement. A lis pendens does not always lead to a foreclosure.
In order to determine if purchasing a foreclosed home is right for you, read on to learn about the foreclosure process, and the research, risk, and costs involved.
A purchase can occur in each of the following 3 Steps of Foreclosure. Buying a foreclosed home is different than a traditional sale, and the buying process in each phase of foreclosure is different as well.
Step 1: Short Sale
Don't let the name mislead you, there is nothing "short" about a short sale! Short sales can actually take longer than a traditional sale and after the 2008 market downturn, the process could take as long as 2 years! At that time, banks were not used to handling them and were not prepared to handle the number of short sales that were occurring.
A short sale is the pre-foreclosure phase of mortgage default. Generally, 4 payments can be missed before foreclosure proceedings begin. During this time, a homeowner should be in open communication with the lender to try to come to an agreement to bring the mortgage current. If a homeowner cannot foresee the sustainability of the mortgage payments, the homeowner may elect to sell the home. If the home happens to be worth less than what is owed on the mortgage, the homeowner will need the permission of the lender to sell the home for less, thereby creating a "short" on the mortgage.
What this means to a buyer:
Short sales are usually listed by a Realtor® on behalf of the homeowner, and the value is determined by research to determine fair market value. Homes may be priced a little lower than market value because the homeowner is motivated to sell to avoid foreclosure. However, the final purchase price must be approved by the lender since they're taking the loss. The home will then be appraised. The approval process by the bank is what takes the longest; these days, short sales are not common so approval shouldn't take longer than a few weeks.
Discount on price? Not much if any, because the bank must agree to take a short on the mortgage.
Step 2: Auction Sale
If the homeowner and lender do not come to an agreement or the homeowner does not catch up on payments, the lender will file for foreclosure. The home will be then be sold at auction. Investors monitor popular sites that host auctions waiting for new events to be posted. These events are much like an eBay auction, where you must register to bid, and there may be a reserve set.
What this means to a buyer:
- Auctions are generally cash-only (can be due to poor condition of the home or just a quick sale)
- Nearly every auction has added fees, including a "buyer's premium" that can be as much as 5% of the winning bid amount.
- You don't always have access to the property to physically inspect it, and you don't have the opportunity to ensure a clear title. The home is completely as-is so any title and physical issues are yours to inherit.
Step 3: Bank-Owned
If the home does not sell at auction, the property will sell as a bank-owned property or REO. Sometimes the bank buys the home back at auction and offers it for sale. Either way, it will be offered for sale by a Realtor®. Depending on the condition of the home, if it qualifies for a loan (move-in ready with minimal repairs), buyers who require financing are eligible to purchase.
When the bank re-purchases the property through auction they usually address any liens and title issues, one less thing to worry about. Some larger banks like Fannie Mae even offer incentives to owner-occupant buyers to help combat investors.
Banks will price the home according to market value and condition. The "foreclosure discount" lies in the poor condition of the property and/or the bank's motivation to get the property off the books.
Our Value as Realtors®
The agents at Oceanside Realty Partners have experience in transactions involving short sales and REO properties. We have an understanding of fair market value, what a lender looks for in property condition, and more importantly, we can navigate all the special terms and addenda the bank provides as a part of the contract agreement.