Buying foreclosed homes

[Sandi Egan]

Like many fellow Prof. Piggington’s students, I hope to buy a home in San Diego some day. Even though that day might be several years away, I think it will be a good idea to go for a foreclosed home.

Is buying such properties any different than regular resales? Are there any specific rules, like stricter loan requirements or higher interest rates? How do one start? Anything to watch out for? Can regular RE agents handle such purchases, or is it a better idea to find a foreclosure specialist?

Any advice will be greatly appreciated.

[hipmatt]

Just wait at least 3 years, and you will do fine!

[SD Realtor]

Hope this is helpful…

There are a couple different classifications for distressed property sales.

1 – Short sale. This is when the owner of the home sells the home for a price that is lower then what is owed on the mortgages. In this scenario the owner has taken the proper steps with the lender or lenders so that these lenders will accept a short sale. Without going into to much detail the lender actually has final approval on this transaction. Most qualified Realtors can represent you when trying to buy a home that is a short sale.

2 – REO (Bank owned) homes have been owned by the lender. The home has made it through the foreclosure process and is now for sale. In general again, your Realtor can represent you. Know that since the bank owns this property they may impose conditions that are more stringent. For instance, since the bank owns the property but never occupied the property, they will not be able to give you very accurate disclosure information. They will most likely insist that you sign liability releases that absolve them of any liability concerning disclosures. You can still work with the lender of your choice however they will give the nod to people who are coming in with more of a downpayment then those who finance a large portion or all of the purchase in the event of multiple offers.

Auctions – Prior to a home becoming bank owned, it moves through the foreclosure process. The home will be placed in an auction and can be purchased by you or any other private party at the auction. Auctions are attended by lots of people most of them who are very experienced at attending them and who have purchased homes through that process.

SD Realtor

[Sandi Egan]

SD Realtor,

Thank you very much for detailed answer. It is most helpful.

So the property goes through an auction BEFORE it becomes a REO? Does that mean that all listed REOs failed to sell on the auctions?
Is there a website that describes the rules of these auctions?

Thanks again.

[SD Realtor]

I do believe the answer to the first two questions is yes. Not 100% sure but pretty darn sure.

I am sure there are on line resources for finding out more about the auctions but off hand I do not know of them. I know some of the basics about them but I don’t know more then I know.

Google San Diego County auctions or something like that, foreclosure auctions, and such and I am sure something will come up. I bet other posters here know alot about it.

[moneymaker]

Actually I’ve been to a few home auctions and was very surprised to see very few people there bidding. Out of say 100 houses that went up for sale, maybe 40 were bid on and of those 40 I saw competitive bidding on maybe 2. I should probably note that the people there bidding were actually there representing other interests(i.e. they were there to bid ,that was there job,they were constantly on there cell phones conferring with the boss .

[SD Realtor]

Mike92105 you make a very good point. As you said a vast majority of the homes at the auctions do not even get bid on at all. Prices are still to way to high even at auction.

SD Realtor

[an]

SD Realtor, are you saying the starting bid of those houses are still way to high or do they have a reserve price that’s way too high?

[SD Realtor]

AN essentially yeah. Remember these homes are foreclosed right? So the opening bid is usually the outstanding loan balance… perhaps even more if there are multiple loans… So yeah at least when I look at the list from of REOs I see that the auction price is usually the loan balance and the property received no bids, thus the lender was stuck with it… I guess the lenders think they can still get more for the homes by putting them on the MLS and marketing them… Just my guess.

[robyns_song]

Even if the winning bid sells third party (to someone other than the borrower and the bank), the bid still has to be approved by the bank in the end. So, there is always a chance that even though you walk away from the auction the highest bidder, the bank could still reject your bid. This happens in instances where the bank may not have placed a full credit bid (a bid less than the amount owed). Also, keep in mind that you need cash in hand at these auctions. In a few instances (usually advertised before hand) you can pay within 30 days of the sale as long as a certain percentage is put down as a nonrefundable deposit, but in general, you need to show up with a cashier’s check. There’s also always the chance that the foreclosure sale could be recinded and you could no longer own the home as well…this sometimes happens if the borrower files bankruptsy the day (or a few days) before the sale and the bank is unaware.

[SD Realtor]

Very good points… The scariest thing of all is that the private parties that do make bids are REALLY well connected. They have done diligent research on the homes, title searches, investigated everything etc… Again, it is useful stuff to learn, but honestly I wouldn’t do it personally, I am just to intimidated and would wait until it went REO and buy it then.

One thing I would recommend would be to try to contact the distressed seller right after the notice of default is issued and try to negotiate a deal directly with them.

SD Realtor

[Sandi Egan]

Thanks again for helpful insight, SD Realtor.

I would recommend would be to try to contact the distressed seller right after the notice of default is issued and try to negotiate a deal directly with them.

Will the seller at that point have rights to negotiate? I guess, the lower limit of the price they would accept is the amount they owe (which must be a very high percentage), and even in that case the seller will not be motivated to sell for that much, since they will lose their entire downpayment. Right?

[robyns_song]

A few things…

The seller would have some rights to negotiate. Of course, the borrower would want to recoup some of his/her loss. They can get authorization from their bank to accept an offer for less than the principal balance (what they owe), but not all lenders will do this.

In the event that they owe more than the property is worth, they can *sometimes* (depending how deep they are) sell the house for a lower price and eat the rest to try (take out a loan for the remainder) and save their credit.

In either circumstance, the benefit for the seller would be that they could salvage some sort of dignity out of their credit…however much is left. Having delinquent payments is better than having a foreclosure.

You would be suprised, though…sometimes a loan is delinquent because the borrower has passed on. In these circumstances the property sometimes goes to a trust or probate…though there are times that you would be able to negotiate a price with the next-of-kin who would want to just get the property off his/her back.

[Nancy_s soothsayer]

The San Diego Daily Transcript (with paid subscription) would tell you the date, time, place, etc. of scheduled auctions way in advance. It even tells you the homedebtor and those with vested interests (the lenders!!! whose reps are definitely going to be at the courthouse steps either bidding or simply carefully watching the bidding process). I think it also tells you the reservation price. I can imagine private parties bidding against lenders who won’t go way below reservation price. Knowing this in advance would probably help bottom-fishers out there. They can contact the homedebtor directly before the scheduled auction, perhaps.

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