Buying
Foreclosures
By Whitney A
Smith
Although there is a lot of publicity surrounding the
foreclosure crisis in America, there is very little real or useful
information available to people who are interested in trying to purchase a
foreclosed property. Radio and TV ads talk about buying a 4 bedroom house
for $14,000 and so forth. Obviously, it is not as easy as all that.
Foreclosure is a lengthy and painful process for the home owner. There
is usually ample time for the home owner to make everything right - and
there has been a concerted effort by the government to make mortgage
modification possible. For example, the term of the mortgage can be reset
to make it longer, the interest rate can be lowered, the principle can be
reduced, the ARM can be converted into a conventional, etc. All these
things can make the monthly payment lower and more affordable.
However, this program has been met with limited success. Banks are
pretty much unwilling to give in and, when they do, the borrowers often
fall behind again anyway.
Foreclosure laws vary by state, but this is what typically happens: The
home owner falls behind on 2 or 3 payments. This causes the lender to
issue a Notice of Default which is sent to the home owner and recorded at
the Court House, usually in the Sheriff's office. The home owner then has
a period of time - often six to eight months - to contact the lender and
make some kind of arrangement to prevent the home from being sold at the
Sheriff's sale which is generally held once a month.
Many home owners fail to do anything. They don't contact the bank. They
don't contact a RealtorŪ about putting the house up for sale or try to
negotiate a short sale. (A short sale requires lender approval because the
home owner is selling the home for less than is owed - typically around
20% - and the lender must agree to the deal).
So, the home comes up for Sheriff Sale. These homes are advertised in
the local paper once a week for a few weeks, usually in the classified
section. If you have never been to your local Sheriff Sale, and you are
interested in buying a foreclosure, you should attend one to see how it
works.
If the home owner owes more on the house than it is currently worth,
buying the home at a Sheriff Sale would not make much sense, because you
would have to cover what is owed. This is a common scenario in today's
market. In this case, the bank takes the home back and adds it to the bank
inventory of REO or Real Estate Owned properties.
When the bank does not take back the property, it becomes available for
people to bid on starting at the upset price established by the bank.
However, the home owner is often still residing in the property, making it
impossible to get into the property to see it. You are therefore buying
the property without a proper inspection. Plus, if you are successful in
obtaining the property, it will fall to you to evict the former home owner
and his family. If there are children involved, this can be an especially
expensive and lengthy process.
Sheriff Sales typically require that you put down 10% of the purchase
price on the day of the sale either in cash or certified funds. You must
then come up with the rest of the money in three weeks, so conventional
financing is difficult. Also bear in mind that departing home owners often
do damage, sometimes a lot of damage, to the property. There is currently
a bank owned property in my local MLS where the home owner took the entire
kitchen with them when they left from a 3-year old executive home.
So, the bank takes over the property. They get rid of the people. They
make sure the place is cleared out. They then hire a local real estate
broker - usually one who specializes in foreclosed properties - to place
the property in the MLS and market it for sale.
The property is generally priced a little below market price. However,
it is offered in as-is condition and no repairs will be made. One general
exception to this is a problem with an on-site septic system. In the case
of the house with no kitchen, the MLS listing clearly states that the bank
will not replace it - and that getting financing could prove difficult.
Savvy buyers, knowing it is a bank owned property, are wise to make a
low offer, much lower than they are willing to pay. The bank will then
negotiate. The final sales price will typically end up midway between what
the bank is asking and what the buyer is offering. The longer the property
has been on the market, the more likely the buyer is to get a better deal.
When deciding what to offer, be sure to factor in any and all repairs
to the home that will be required. Also be sure to select a RealtorŪ who
is willing to go in with a low-ball offer. Some RealtorsŪ are
uncomfortable doing this and are not good at playing hardball with the
banks to get the best possible deal. You should also be prepared to not
get the house if the bank is unwilling to accept your price.
Whitney Smith is a direct response marketing consultant and copywriter
as well as a licensed real estate agent and investor. You can learn more
about her real estate services at
http://www.downsizingqueen.com or her marketing services at
http://www.whitneysmith.net
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