Tag Archives: auction

Buying out of Foreclosure

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Foreclosure Auction Signs by Niall KennedyUS News & World Report quoted me in How to Buy a Foreclosed Home. It opens, 

AS HOME PRICES SOAR IN many cities, buyers may look to foreclosures to land bargains on houses. Foreclosure happens when a borrower can no longer make mortgage payments, and the lender seizes and then sells the home to recover losses.

Foreclosed homes are often sold for less than their market value.

That discount could bring a home within reach, but the financing and the home’s condition could present challenges. Before you bid on a foreclosed home, make sure you know the risks and the limitations.

Is It A Good Idea To Buy A Foreclosure Home?

Buying a foreclosure can save you some cash, but it comes with risks. If you pursue a foreclosure, it helps to have a “stomach of steel,” says David Reiss, law professor and research director of the Center for Urban Business Entrepreneurship at Brooklyn Law School.

Expect a lot more ups and downs than the typical homebuying process, says b, whose work focuses on real estate finance and community development.

Homebuying, including financing, can be more complicated with a foreclosed home. Yet the lure of savings can be irresistible.

“It can be like a 15% discount on your neighboring houses,” Reiss says. “So, it can be significant.”

But your savings will depend on the local real estate market and the condition of the foreclosed home, says Vince Malta, a San Francisco Realtor and president of the National Association of Realtors. Properties that need a lot of work sell for less than market value because of their condition and lower demand.

Not every foreclosure is a “steal” or a very good deal, Malta says.

“The truth is, the bank doesn’t want to ‘give’ the house away or sell it for less than it’s worth,” he says. “Foreclosures generally sell for very close to the appraised value.”

How Do You Buy a Foreclosed Home?

Buyers can find foreclosures at auctions, on home search sites such as Zillow and from traditional real estate agents, to name a few sources. You can finance or use cash to pay for a foreclosed home, but the former can be tricky.

Will you need cash to buy a foreclosure? You don’t necessarily need a full cash payment, but when you think you might buy at auction, you should prepare. Have some cash ready to make an immediate down payment.

Ask the auctioneer how much you might need in cash and how long you have to pay in full. Many foreclosures close within 30 to 45 days.

If you plan to finance the foreclosure, you will want to obtain a preapproval from a mortgage lender before the auction and bring it with you.

If you’re buying a bank-owned foreclosure at auction, you might want to apply for a loan from the same bank to simplify matters. Just be sure the bank offers a competitive interest rate.

If you’re buying a foreclosure from a bank, you could get a loan from the same bank to make your purchase. It’s not required but could make the process easier. Still, be sure the bank offers a competitive interest rate, as even a slightly higher rate could cost you thousands over the life of the loan.

Fair warning: Some banks will not want to finance foreclosures or will require large down payments because they can be risky investments.

Government-backed loan programs from the Department of Veterans Affairs or the Federal Housing Administration may offer financing options, but the property will need to meet standards for approval. Fannie Mae’s HomePath program helps homebuyers purchase properties the government-sponsored mortgage buyer has foreclosed on, Reiss says.

The program provides up to 3% in closing cost assistance for buyers who complete a homeowner education course.

“I have seen Fannie Mae put a lot of money into properties to get them in the condition for an owner-occupant to purchase them,” Malta says. “But I’ve also seen properties that would only accept cash offers due to the overwhelming deferred maintenance and damage to the property.”

An FHA 203(k) loan could be another smart choice for foreclosures in disrepair. The 203(k) program allows borrowers to finance repairs and renovations into the mortgage.

What Are the Risks of Buying a Foreclosure?

Buyers can embrace the process with eyes wide open, knowing the risks involved. The biggest risks can stem from buying property sight unseen.

“The big, scary thing is that with a number of foreclosures, you can’t actually inspect the property before you actually bid,” Reiss says. “That’s in part why the prices are below the market.”

Even if you pay for a home inspection, you typically have to buy the foreclosure “as is.” This means that if you purchase the home, any problem that pops up and the cost of fixing it are yours.

You can end up with a lot more of these problems in a foreclosed home, depending on the circumstances. A frustrated family might strip the home of valuable fixtures and appliances before leaving the house.

“Or they kind of just beat it up because they were angry about having to go through the foreclosure,” Reiss says.

A home lost to foreclosure could indicate a home neglected, Malta adds. “(You) have no idea what the previous owner has done for maintenance, or in many cases, hasn’t done,” he says.

How Can You Reduce the Risks of Buying a Foreclosure?

You can take a few steps to reduce the risks of buying a foreclosed property.

Get an inspection. “Buyers should absolutely hire their own inspector and thoroughly inspect the property,” Malta says.

In most instances, the bank will disclose any defects in the house, but sometimes the bank doesn’t have these details, he adds.

Research public property records. If you aren’t allowed to inspect the property, which may sometimes be the case, Reiss recommends researching its publicly available history. A property record search can reveal information about sales, tax liens, changes to square footage and additions to the property.

You can check the county tax office, which may have records available online.

“Maybe you’ll see some good news, like a boiler was replaced two years ago,” Reiss says. “Or maybe you’ll see some scary news, like there’s all these permits, and you don’t know if the work was completed.”

Do some informal due diligence. Start by visiting the house and performing a “curbside inspection” of your own, Reiss says.

“Even if you can’t go inside the house, you want to look at the property,” he says. “If you can peek in the windows, you probably want to peek in the windows.”

Knock on the doors of neighbors and see if they can answer your questions about the foreclosure. Tell them you want to bid on the home but need to learn all you can about the previous owners, including how long they lived in the house and how well they maintained it.

Ask if the home has had squatters or recent break-ins.

“Try to get all that information,” Reiss says. “Neighbors are probably going to have a good sense of a lot of that, and I think that kind of informal due diligence can be helpful.”

Buying a Foreclosure or Short Sale

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DailyWorth quoted me in Should I Buy a Foreclosure or Short Sale? It reads, in part,

I’m looking to buy a new home, and I’ve noticed that there are a couple of “short sale” and foreclosed homes in the area where I’m interested in living. These homes are priced substantially lower than others, and I’m wondering what the catch is. I’ve heard that short sales or foreclosures often need repairs. What else do I need to know to decide whether to invest in one of these properties?

Purchasing a home through a short sale or a foreclosure process can be a way to get a good deal on a property. But it isn’t for the faint of heart. Both processes are likely to be more complicated than purchasing a home on the open market.

First, make sure you understand the differences between these categories. Both are used when a property owner is in financial distress and can no longer afford mortgage payments.

In a short sale, the proceeds from the sale will fall short of the debt owed on the property. Such a sale can only occur if the mortgage holder (usually a bank) has agreed to accept less than the amount owed on the loan.

In a foreclosure, on the other hand, the mortgage holder has repossessed the property and is trying to recoup its losses by selling the house for the amount still owed on the loan. That amount is typically still less than the market value of the home.

Here are some of the common issues you may encounter when buying a foreclosure or short sale.

Purchasing Delays
If you’re considering buying a property listed as short sale or foreclosure, keep in mind a few things, experts say.“The process for purchasing this kind of property may not be as easy as purchasing a home directly from a seller who is current on their mortgage,” says Colin McDonald, real estate agent with Berkshire Hathaway HomeServices Blake in Delmar, N.Y.For instance, it typically takes six to eight weeks to close on a normal home, McDonald says. But with a short sale or foreclosure, the property may not close for six months or even a year.“[W]hen a property is being listed as a short sale or foreclosure, you’re no longer just dealing with the seller,” McDonald says. “A bank is now involved, and unfortunately, they only care about getting what is owed to them. They will drag the process on for as long as they like.”

Short sales can also take months to get lender approval. “The seller’s bank can make things very difficult, making the borrower jump through many hoops — hoops that can take a long time to navigate,” warns David Reiss, a professor of law at Brooklyn Law School who writes and teaches about real estate.

And in the end, the bank may respond with a counteroffer that doesn’t meet your budget or terms. “So you might wait for a long time only to be disappointed,” says Sep Niakan, owner of Condo Black Book, a leading condo search website in Miami and broker of HB Roswell Realty.

*     *     *
 Potential Additional Fees
While the price of the home may be low, a foreclosure or short sale often comes with additional transaction costs. With a foreclosure, you may have to pay transfer taxes as well as any superior liens on the property. You may also have to pay an additional fee to the foreclosure company.
Typically, in a short sale, there is a negotiator involved who will require a fee, such as 2.5 percent of the purchase price, McDonald says. The buyer is usually required to pay this fee.You also may have to pay back taxes or other past dues associated with the property. If you buy a condo-foreclosure, for instance, “there may be many years of past due condo association fees that may not appear anywhere in public record, and you might end up inheriting a very large debt,” Niakan says. “Some local and state laws limit the amount you would be responsible for in those cases, but do your homework.”Purchasing a home at a price that is significantly below market always sounds like a good thing — and it can be for the right person. But keep in mind that if the property is really great, “there will be others who will also be interested in it,” McDonald warns. “This includes veteran investors who have deep pockets of cash.”If you hope to get a great home for a low price through a foreclosure or short sale, be sure to do your homework and be aware that it may take a long time and come with extra costs and repairs. And at the end of the day, buying a short sale or foreclosure isn’t for everyone.

“While you may get a good price, you will be paying for the house with uncertainty, delay, and frustration,” Reiss says. “You’ll need to determine for yourself whether it is worth it.”

What Is a Probate Sale?

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Charles Dickens' Bleak House

Charles Dickens’ Bleak House

Realtor.com quoted me in What Is a Probate Sale? A Home You’ll Have to Win in Court. It opens,

If you’re looking to buy a home on the cheap, you might have stumbled across a probate sale. But what exactly is a probate sale? Basically it means that the homeowner died without a will bequeathing the house to an heir. In most cases, this means that an estate attorney or representative has to sell the property in order to liquidate the asset and distribute the money to family members—and that can spell a major bargain for you.

Probate sales can be attractive to buyers because they’re often priced below their market value, much like foreclosures. But since a court has to supervise and approve the home’s sale, the process is more complicated—and lengthier—than usual.

Here’s a look at the legal hoops you’ll have to jump through to make a probate sale happen.

How A Probate Sale Works

In a probate sale, the estate attorney or other representative hires a real estate agent to post the listing and sell the home. While buyers may be drawn in by the budget-friendly price, probate homes are not for everyone, starting with the fact that the homes are typically sold as is.

“Usually the estate doesn’t have an interest in renovating the property, either because of logistics, timing, or available funds,” says Richard Witt, owner of Long Island Cash Home Buyer. So, don’t expect the estate owners to make any repairs before you move in; what you see is what you get. That said, those in the know advise getting a home inspection just to make sure there aren’t major problems that would deter you from moving forward.

Here’s another difference with probate sales: If you decide to make an offer, that must be accompanied by a deposit totaling 10% of the price of the home. That’s in addition to your down payment, although this deposit can be folded into your down payment if the deal goes through.

Once your offer is accepted by the estate’s representative, that’s not where the negotiations end. From there, the estate attorney has to petition the court to approve the sale. And as you might expect, courts move at their own pace; expect to wait 30 to 45 days (or even longer) for your day in court when you can claim your home.

Playing the waiting game isn’t the only frustrating aspect of probate sales. In certain states, even as your offer is making its way through the courts, the home can remain listed and be open to other bidders who may be allowed to show up at your hearing and outbid your offer.

“In California, for instance, probate homes typically do go up for auction at the courthouse after the offer comes in,” says David Reiss, research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. “This builds a lot of uncertainty into the process for the bidder who gets the ball rolling in the first place.” All that said, you also have a right to counteroffer and, even if you do lose out, you should at least get your 10% deposit back. 

Evicted by Homeowners Association

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photo by respres

Realtor.com quoted me in Homeowner Evicted for Not Paying HOA Dues: Can This Happen to You? It opens,

Who knew? Even if you pay your mortgage on time every month, your home can still be foreclosed on and sold from under your feet. That, at least, is what Triss McQuiston from Tomball, TX, learned recently when she was notified that she’d have to vacate her place. Why? It turns out she was evicted for not paying her HOA dues.

According to ABC13, McQuiston admits that she was guilty of procrastinating on paying her HOA fees to the Canyon Gate at Northpointe Owners Association in 2014 and 2015. Because she was opening a new business, her HOA bills slipped through the cracks, for a grand total of $1,800 in unpaid dues.

An attorney for the HOA claims that since March 2014, they’d sent McQuiston 12 notices by first-class certified mail to collect these assessments, warning her what would happen if she didn’t. When they received no response, they proceeded with the foreclosure, and sold the home at auction back in September.

Yet McQuiston argues that she’d received no warnings, and was made aware of her dire straits only when she received an eviction notice on her doorstep on May 20. She has since hired an attorney to help fight the case and remain in her home.

“I would never have thought in my wildest dreams that an HOA … would go to these lengths and they’d have this much power,” McQuiston told ABC13.

If this story has you viewing HOAs in a harsh (and terrifying) new light, we don’t blame you. And while the laws vary by state, it turns out that in most cases, HOAs really do have the power to foreclose on your home for unpaid dues, as do condo owners associations.

“Contrary to common perceptions, even if a person is current on a mortgage, the HOA or COA may foreclose,” says Bob Tankel, a Florida attorney specializing in HOA law. “What’s the moral of the story? Pay your assessments. These are not huge amounts. People apparently think that just because assessments are small there’s nothing bad that can happen. But that’s not true.”

To know specifically how your HOA or COA handles late payments, homeowners should “check the Declaration of Covenants, Conditions & Restrictions (CC&Rs),” says David Reiss, research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. You should check not only what constitutes a late payment, but also how you’ll be penalized; additional fees could include late charges, fines, interest, as well as attorneys’ fees.

It’s also smart to check what rights and recourse you have in your state if you end up unable to pay these assessments. “Some states have enacted some procedural protections for homeowners,” says Reiss. “It’s worth figuring those out if you are not able to pay off your HOA right away.”