Foreclosed Homes

The process begins with an owner defaulting on their mortgage and the lender filing a public default notice.

Then, there is pre-foreclosure in which the seller is given a grace period to catch up on their payments and reinstate their loan.

Finally, the lender repossesses or sells the foreclosed property.

The owner decides to sell their property during the pre-foreclosure period. The sale gives the owner the opportunity to pay off their mortgage loan to avoid foreclosure and a negative stain on their credit. Here, you purchase the home directly from the current owner. However, if the owner is attempting to Short Sale the property their current lender must approve it.

Pros:

• The buyer has ample time to research the title and the condition of the property.
  
• The seller is very motivated to sell the home and is likely to accept offers below market value.
  
• If the seller is not attempting to Short Sale, the process is a normal purchase transaction.

Cons:

• The seller can be emotional, under considerable stress and perhaps even in denial over their pre-foreclosure status. Dealing with such sellers can be both awkward and unpredictable.
  
• Generally, selling the home is a seller’s last resort. While they are motivated to avoid foreclosure, they might be less inclined to maintain the property. Remember, the home will still have to be appraised and inspected. With today’s tougher appraisal standards, any potential issue can pro-long or even halt the process.

The lender attempts to sell the property at the end of the pre-foreclosure period. Here, potential buyers bid on the property.

Pros:

• Buyers can find incredible bargains as banks are looking to avoid taking ownership of the property while lessening their loss.
  
• The transaction is all business. A buyer can avoid the unpredictability of dealing directly with an emotional owner.

Cons:

• Often, buyers are required to pay in cash.
  
• At the very least, a buyer must pay a non-refundable deposit (a percentage of the agreed purchase price) and prove that they are pre-qualified. A buyer must be able to close on the purchase loan within a short, but specified period of time.
  
• Some states have what are referred to as “redemption laws.” So, even when you bid at an auction, the current owner can be given extra time to catch up on their mortgage and retain their home.
  
• In some cases, current owners stay and fight the foreclosure and even bring legal proceedings against the new buyer. This will require that you hire a lawyer to represent your interests.
  
• Buyers have very limited time to research the title and the condition of the property before purchasing it. This creates more risk.
  
  • There is a risk of purchasing a money-pit. Often, the cost and headaches of buying a house at auction extends well beyond the actual purchase. Owners who are going through the foreclosure process rarely have any reason or motivation to maintain the property. Considerable rehabilitation is often required afterwards (the extent of which is rarely realized before purchase).
    
  • There is a risk of not being able to get the property approved for new financing and therefore losing your deposit. Today’s lenders have tightened their appraisal and property standards considerably. Often, lenders do not clear a loan to close until all property maintenance and repair issues are resolved to their satisfaction.
    
  • In some States, buyers are held responsible for back taxes and any outstanding liens on title. This is often something that buyers are unaware of until after they purchase the home.

Properties repossessed by a lender are referred to as bank-owned or REO (Real Estate Owned by lender) properties. A lender takes ownership of the property, usually with the purpose of selling it. They can take ownership of the property through an agreement with the seller during the pre-foreclosure period (after accepting a Short Sale offer), or after an unsuccessful public auction.

*Many Real Estate experts agree that buying an REO property is the safest way to buy a home that is in the foreclosure process. Still, it’s important to understand the pros and cons when considering an REO purchase.

Pros:

• Before attempting to sell the home, the lender will usually clear the title of any liens or taxes.
  
• The lender might be open to negotiation over maintenance and repair issues because they are looking for a quick sale.
  
• Buyers have the time to inspect the property without the inconvenience of worrying about a current owner’s schedule.
  
• Properties are generally sold at prices considered to be reasonable or better.
  
• Buyers can assume occupancy without the worry of legal proceedings from the former resident.

Cons:

• REO homes generally offer less bargain prices then homes purchased during pre-foreclosure or at a public auction.
  
• The transaction might require extra paper work
  
• The lender might refuse to carry out any repairs and sell the property “AS-IS.” This means that the buyer assumes the risk of the property condition. While buyers can inspect the property, they might miss something. Repairs will be their responsibility alone.