Call Us On: 416-429-9060

Buying a foreclosure property?

Buying a foreclosure property?

Foreclosure overview:

Foreclosure is a process that allows a lender to recover the amount owed on a defaulted loan by selling or taking ownership (repossession) of the property securing the loan. The foreclosure process begins when a borrower/owner defaults on loan payments (usually mortgage payments) and the lender files a public default notice, called a Notice of Default or Lis Pendens. The foreclosure process can end one of four ways:

  1. The borrower/owner reinstates the loan by paying off the default amount during a grace period determined by state law. This grace period is also known as pre-foreclosure.
  2. The borrower/owner sells the property to a third party during the pre-foreclosure period. The sale allows the borrower/owner to pay off the loan and avoid having a foreclosure on his or her credit history.
  3. A third party buys the property at a public auction at the end of the pre-foreclosure period.
  4. The lender takes ownership of the property, usually with the intent to re-sell it on the open market. The lender can take ownership either through an agreement with the borrower/owner during pre-foreclosure, via a short sale foreclosure or by buying back the property at the public auction. Properties repossessed by the lender are also known as bank-owned or REO properties (Real Estate Owned by the lender).

 

Pre-Foreclosure (NOD, LIS):

Buying a property in pre-foreclosure involves approaching the borrower/owner and offering to buy the property outright. The borrower/owner can walk away with something to show for any equity in the property and avoid a bad mark on his or her credit history. The buyer has time to research the title and condition of the property and can realize discounts of 20-40 percent below market value.
Advantages:

  • Seller will be motivated for fast sale, increasing buyer’s bargaining power.
  • Buyer can do all standard inspections, including researching title during due diligence/contingency period.

Disadvantages:

  • Unless purchase price will pay mortgage(s) and closing costs in full, lender’s approval of price and terms of sale will be required (i.e. short sale).
  • Lender may not approve price, seller concessions or closing cost credits.
  • Short sale may take 45-90 days to close.
  • Sellers still have to move out.

 

Auction (NTS, NFS):

If the loan is not reinstated by the end of the pre-foreclosure period, potential buyers can bid on the property at a public auction. Buyers often are required to pay in cash at the auction and may not have much time to research the title and condition of the property beforehand; however, a public auction often offers some of the best bargains and avoids the unpredictability of dealing directly with the borrower/owner.

 

6 steps needed to buy a home at auction: 
STEP #1 – Find and file properties
It’s important to get up-to-date auction information and act on it as quickly as possible. Develop a system to keep track of properties that interest you. A good tracking system is important since most successful auction buyers pursue several properties sometimes over a period of several months. After you find a property online, it’s a good idea to drive by the property to get a better idea of the property’s condition and the type of neighborhood. For some buyers and investors, driving by the property has also facilitated a casual meeting with the owner (you may be able to still work out a last-minute deal before the auction) or yielded a wealth of unexpected information from a talkative neighbor.

 
STEP #2 – Confirm auction status, location and bidding procedure
After a property is scheduled for auction, the owner has a chance (typically less than a month) to stop the auction by paying the amount owed to the foreclosing lender. It’s also common for auctions to be postponed without a new date being published. Although cancellations and postponements are announced at the time and location of the originally scheduled auction, you can call the trustee to find out beforehand.
Most auctions are at a public place in the same county where the property is located. In many states, all the auctions in each county are at the same location. You can typically get that information from the trustee or the county clerk. If you call the county clerk, make sure you clarify that you are looking for the location of mortgage foreclosure auctions, not tax foreclosure auctions.
The bidding procedure varies from state to state, so you should become familiar with the procedure in your area before bidding at an auction. In some states, bidders are required to bring the full amount they want to bid in the form of cash or cashier’s check to the auction. In other states, bidders are required to bring a certain percentage (10 percent is common) of the bid amount to the auction and pay the remainder of the amount within a certain timeframe if they are the highest bidder. If you get a friendly representative when you call the trustee, you might be able to get information about how the bidding works in your area, but in most cases you’ll need to educate yourself.

 

STEP #3 – Check potential bargain
You need to find out as much as you can about the estimated market value of the property, how much is owed on the property and if the owner has any other liens against the property. This is all public information and you can research on your own with the county recorder. You can purchase a Legal and Vesting report or Transaction History report to check for other loans the owner may have taken out and for a history of ownership. If you want to dig further into the valuation, you can order a complete valuation report, for a comprehensive valuation report that includes comparable sales and a list of mortgages or trust deeds on the property. If there are outstanding liens on the property, the winning bidder at the auction may be responsible to satisfy these liens in some cases, so it’s important to check for any liens and the priority of the liens before you bid at the auction. The priority of a lien is usually determined by the date it was placed on the property. So a first mortgage will usually have the first priority, and all other liens will be considered junior liens. In most states, the public auction clears out any junior liens, but there are exceptions such as tax liens, which typically will continue to be in effect after the auction.
The opening bid at the auction is based on the total amount owed to the foreclosing lender and may include fees incurred because of the foreclosure proceedings. If no one bids above that amount, the foreclosing lender will take possession of the property. It’s important to know this amount so you can determine if the auction represents a potential bargain purchase when the opening bid is compared to the property’s market value.

 

STEP #4 – Determine bid amount

Based on all the factors used to determine the potential bargain – and your financial capability – you’ll need to determine how much you can and should bid at the auction. Determining your bid amount is more obviously important in states where bidders are required to bring the full amount in cash or cashier’s check to the auction. You won’t even be qualified to bid if you don’t meet that requirement. If you don’t have that type of cash lying around, you have a couple options. If you own a home, you might be able to take out a home equity line of credit, which is a cash loan. If you can’t secure a cash loan, you may consider trying to buy a pre-foreclosure or bank-owned property, both cases where you can usually obtain a regular mortgage loan secured by the property being purchased.
It’s also important to determine the bid amount even in states where you don’t need to bring the full amount to the auction. By setting a firm ceiling for your bid, you’ll avoid getting caught up in the heady auction atmosphere and overbidding, which can result in little or no bargain for you. Also, if you’re not able to pay the remainder of the bid within the time frame stipulated by state law, the deposit you paid at the auction is often nonrefundable.

A reasonable purchase amount at auction is at least 20 percent below full market value, and much better deals are often possible. Other factors to consider are the rate of real estate appreciation in the area and the potential for increasing the property’s value by making repairs and improvements.

STEP #5 – Bid at the auction

Call the trustee the day before or the day of the auction to check one last time if the auction has been canceled or postponed. If an auction is postponed, the trustee should provide the new auction date.
Arrive at the auction location early and locate the auctioneer as quickly as possible. Bidding at an auction can be intimidating, especially if you’ve never done it before. Take as many cues from the other participants as you can, but don’t let them dictate how much you bid. You may encounter investors who attend many auctions every month and who don’t necessarily appreciate new competition.

STEP #6 – Take ownership
If you are the winning bidder, make sure you get the necessary documents from the auctioneer to verify that you are the winning bidder. Clarify with the auctioneer and a real estate attorney what further steps need to be made before you take ownership and possession of the property. In some states, ownership can be transferred immediately or within a few days. In other states, you may need to wait a month or more for the sale to be confirmed by a court. Some states have redemption periods for the owner, in which case the owner can buy the property back from you if they pay the full amount paid at the auction, plus applicable fees. You should avoid spending money on repairs or improvements during the redemption period. If the trustee does not evict the current owners, you may be responsible to do this. If eviction is necessary, you can contact a local real estate attorney or the county sheriff for the proper procedure

 

Advantages:

  • Property will be sold for outstanding mortgage balance owed to foreclosing mortgage holder — this can be a low price for the property.
  • Cash payment requirements reduce competition.

Disadvantages:

  • Auction purchase price must be paid in cash on the same day as the auction — no mortgage is usually allowed.
  • No inspections allowed; as-is sale.
  • Buyer may take property and owe other liens, back taxes and mortgages. Buyer must research state of title prior to auction.
  • Bank cannot provide disclosures as to property history/condition issues.
  • If bank believes auction will not recover a good price, bank may buy the property at auction.
  • Property condition might be suspect due to damage done by upset homeowners.
  • No commissions or attorney’s fees will be paid; buyer must pay for their own representation

 

Bank-owned (REO):

If payments are not made, the bank can take ownership of the real estate property.  This can be done with an agreement in the pre-foreclosure stage or at the auction.  The goal of the lender is to eventually sell the property and use the proceeds to cover the loaned amount that has not been paid. The lender can clear the title and do some repair work.

Advantages:

  • Bank is motivated to get property sold and will negotiate price, down payment, closing costs, escrow length, etc.
  • Title will be clear; buyer will not take on any liens, mortgage or back taxes of prior owners.
  • Inspections and mortgage financing are allowed within normal due diligence/contingency period.
  • House will be vacant.
  • Property will usually be listed on MLS; bank will pay real estate agent’s commission.
  • REO sales close within a normal escrow period of time.

Disadvantages:

  • Bank will not agree to do any repairs; as-is sale.
  • Bank will usually require additional paperwork.
  • Bank cannot provide disclosures as to property history/condition issues.

 

 

While buyers have found few large discounts among bank-owned foreclosures, opportunities for bargain hunters are likely to improve if mortgage defaults continue to increase. Across the country, a staggering number of homeowners are entering theforeclosure process and many are losing their properties to the bank or lender. As the inventory of bank-owned properties grows, lenders nationwide will be more open to negotiate price and other terms. And prospective homebuyers and investors are looking to cash in on rising tide of foreclosed homes.
Caught in the turmoil of the sub-prime mortgage meltdown, a growing number of banks nationwide are scrambling to dispose of their rising inventories of foreclosed homes. Investors and homebuyers who specialize in the bank-owned properties, known as real-estate-owned, or REOs, are having a field day.
Once a home goes up for auction, a bank typically will send a representative to bid as much as the bank is owed. The lender generally will let it go if they are outbid — since they’ve then recouped their investment. But if the bank is the highest bidder, the property becomes an REO home.
While there are bargains to be found, REO properties aren’t selling far below market value yet. One reason is that bank-owned sales transactions can be more complicated, in part because the sale terms must be approved by the lender or the lender’s attorneys. Another reason it is difficult dealing with bank-owned properties is that some lenders are in offices far away from where the loss-mitigation department is struggling to process the listings. And with layoffs occurring within the industry, banks are even more understaffed than before.
Here are a few tips for foreclosure investors and homebuyers seeking bank-owned properties:

  • Real estate investing, like any investment strategy, is part of an overall financial plan. Before jumping into buying bank-owned real estate, understand the real estate laws, tax ramifications and other financial issues.
  • Consult with a tax or financial adviser who can help you assess your financial situation. Get your financial house in order first — that way, you know how much house you can buy.

Don’t think that foreclosure investing is easy. For every successful real estate investor, there are countless others who have failed. Make sure you spend time studying the market

 

Overall Advantage and disadvantages of buying a foreclosure property
Advantages of Foreclosed Properties
There are many advantages to purchasing foreclosures for property development. One is that there are many different properties to choose from. Unfortunately, many people were forced to default on their mortgage payments due to a number of factors. A sudden spike in interest rates, widespread unemployment and other external factors led to many properties being foreclosed on.
The next advantage is the price of the foreclosed properties. A lending institution wants to get at least a portion of their money back and they do not want to be involved in the maintenance of a property that has been foreclosed on. Until a property can be resold, it is still a financial loss for a lending institution. Because of this they are often willing to let the property go for much less than it would if it was on the market for any other reason.

 

Disadvantage of foreclosure properties
With the cost of purchasing a home rising seemingly by the minute, many thrifty buyers are enticed by the prospect of buying property at less than market value. One of the most common ways to do this is to purchase a home that has been foreclosed on by the mortgage lender. Most of the time, you will get a great deal on your house. However, there are still some things you should keep in mind when buying foreclosed homes.

First and foremost, foreclosured homes are auctioned off to the highest bidder. Interested bidders are generally required to show proof of financing and must have a minimum ten percent cash deposit before they are qualified to bid. If you are not prepared to shell out a lot of cash before you leave the auction site, then plan to attend the auction just to watch.
Second, and probably more importantly, you are purchasing the foreclosure property AS IS. This means that any repairs that the home will need, and any code violations that the code may have are completely your responsibility. Bear in mind, that if the previous owner was unable to meet the financial obligation of their mortgage, they may also have been financially unequipped to deal with basic property maintenance. As such, you may be purchasing a home with could require a substantial investment before it is even in livable condition. Some foreclosure sales do not allow an inspection of the property, and, if you can do an inspection, you may have to do so with all of the electrical, water, and gas systems shut off as the mortgage company will not generally pay to keep the utilities on. Therefore, you will have no way of knowing what shape the home’s major utility systems are in.
Third, if the mortgage lender has not initiated the process of eviction, it will fall to you as the new owner of the property, to evict the previous owners, tenants, or whoever else may have been occupying the property. In some cases, the previous residents have already vacated the premises, but have inflicted intentional damage upon the property before doing so. It is not uncommon to purchase a foreclosure that not only needs to be cleaned out, but has been completely stripped of its interior.
Although the benefits of buying a foreclosure are numerous, there are also some drawbacks that may keep some eager buyers from taking the bait. Buying a foreclosure is a gamble that pays off for some and not for others and it is certainly not for the faint of heart. However, buying properties at foreclosure auctions can also be a great way to pick up a valuable property for a fraction of its value making the process more appealing to a wider number of home buyers.