I originally posted this back in May of 2008 for the first time, but the real estate situation in San Francisco has only gotten worse (not by a landslide here folks, so don’t panic…) But as more and more people want a bargain, I keep finding myself answering questions about foreclosures more and more often, and so, I thought now would be a good time to revisit the topic. So, here you go…..
So you want to take advantage of the whole mortgage meltdown that’s been going on. Who can blame you? You want a deal! Deals are good! We all like saving money.
But buying property during the foreclosure process is challenging. Ask most people that have seen both good and bad real estate market and everything in between and they’ll tell you that buying foreclosures takes nerves of steel, an acceptance that there is risk involved and a strong stomach. And of course, it takes being knowledgable about the foreclosure process.
Now I’m willing to give you a little lesson, but people teach entire multi-day seminars on foreclosures and the foreclosure process – so my little blog post here isn’t going to go too far in the way of your foreclosure education, but it should give you enough information to decide if your stomach is strong enough to attempt purchasing a property in some stage of foreclosure.
So read on to learn about the various stages of the foreclosure process and the potential pitfalls of each.
Short Sale – A short sale occurs when a property owner is upside down on their mortgage (they owe more than their home is worth) AND they can no longer afford the mortgage payments. ,
Some lenders, rather than foreclose on a property are willing to settle for less than they are owed. They aren’t really being kind or generous – it’s just that banks aren’t in the business of buying and selling real estate, but rather, buying and selling money. They have no desire to keep homes in their portfolios, and in most cases, lenders would rather settle for a portion of what is owed to them and forget the whole thing ever happened.
The Short Sale purchase process starts rather simply. You see a property that you like, you make an offer on it, and the seller accepts the offer. Well – you still have another major hurdle to jump through. The offer now must be submitted to the lender, or in some cases lenders, and this is where the meditation class you took in college pays off.
Once the lender receives your offer, they rarely accept it right away. Typically it takes weeks for them to approve it (or reject it) and I’ve even heard of it taking months! During this time, the lender is reviewing the seller’s hardship package, they are reviewing your offer, and they are waiting, hoping and praying that another offer better than yours will come in. Of course, you can add deadlines and such to your offer, but the reality is that the bank will decide only when it’s good and ready.
Now, if the bank accepts your offer, then it’s pretty much like any other sale. Unless of course, the seller had a 1st loan and a second loan that they can’t afford to pay off. In this case, things get rather complicated rather quickly, because now you have two separate banks that have to agree to forgive part or all the seller’s debt rather than foreclosing on the property.
Sale Day (Courthouse Auction) – Let’s assume the bank rejected the short sale. Instead, they opted to file a notice of default followed by a notice of sale which led up to the Sale Day, where we are now. Sale Day occurs on the courthouse steps in the county where the trust deed was recorded. You can find out in advance which properties will be auctioned off on which day by looking in the local newspaper, going to the local courthouse, or contacting a REALTOR familiar with foreclosures.
The first thing to keep in mind is that your credit is no good on Sale Day. In fact, if you don’t have the money, either in cold hard cash, or in the form of a cashier’s check, you have no hope of winning the property on Sale Day.
In addition to the ALL CASH policy, you don’t have the opportunity to do any inspections, you don’t get title insurance, you don’t have disclosures from the lender, you don’t have crap. You may as well be throwing the dice. Why am I being so dramatic? Well – your property might come with LIENS ALREADY AGAINST IT – including various unpaid utilities or mechanic’s liens. If you buy the property, the liens come with it and it’s YOUR duty as the property owner to take care of them.
What about the price, you ask? Well – the lender is going to want to make back what they were owed by the former homeowner – so the starting bid will likely be the amount of the first note. Once again, you can get this information from a REALTOR.
Sale Day is frankly kinda scary. You might walk away with a ridiculous bargain, but you might walk away with a HUGE liability on your hands.
REO (Real Estate Owned) – So Sale Day often comes and goes with no offers on the courthouse steps. The bank is left with the property on their books – and as I’ve mentioned before, banks aren’t in the business of buying and selling real esate, so they want to get these properties off of their books rather quickly.
Now this is the time to find bargains! Banks usually unload these properties at a significant discount because they don’t want to hold on to them. The bank’s representatives usually respond to the offers rather quickly, and while you’re unlikely to find a property in pristine condition (former owners often take anything of value in the house from appliances to lightbulbs and doorknobs), you are likely to find a damn good deal.
But as with all things, there is a catch – you need to be ready to hustle! You have to move fast to grab one of these deals and you won’t have time to think long before you make an offer. However, if your offer is accepted, you often have the ability to do inspections (although in a competitive situation, you may not have that opportunity either.) Again, you should be working with a savvy REALTOR to make sure you don’t miss out on one of these deals.
I hope you found today’s foreclosure lesson helpful. If you want more information about Short Sales, Courthouse Auctions or REO’s, contact me. I’m always happy to help!