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Lawrence Taylor
So you’d like to buy a bank owned property?

You’ve watched the late-night infomercials and you’re ready to do the bank “a favor” and take a problem off their hands. Plus, you expect to make "a killing" in the process. Sounds great and it might just happen, but first you should take a look at some facts and get prepared.

Which is More Profitable: Foreclosures, Trustees Sales, Short Sales or REOs?

Foreclosures, trustees sales, short sales and REOs are all distressed sales but different from each other.

However, they are also similar because without knowledge about handling foreclosures, trustees sales, short sales and REOs, you could find yourself in dangerous territory. For example, while all short sales are foreclosures, not all foreclosures are short sales. To further complicate matters, REOs are not short sales either, but some intended short sales can end up as an REO.

What is a Foreclosure Property?

It means the owner has stopped making mortgage payments and the lender has given notice that unless the payments are brought up to date, it will sell the property to the highest bidder.

If the home owner does not bring the loan current, the lender will take the property away from the owner. The final step the lender takes after a certain period has passed is to try to auction the property at a public sale. Foreclosure sales begin with a minimum bid by the buyer.

This minimum bid has to include the following items:

·        The loan balance on the property. This is to cover the missing amount that the previous 
         owner could not afford

·        All accrued interest Attorneys fees

·        All costs associated with the foreclosure process.

In order to bid at a foreclosure auction, you must have a cashier's check in your hand for the full amount of your bid. If you are the successful bidder, you receive the property in "as is" condition, which may include someone still living in the property. There may also be other liens against the property which you will be liable for.

One of the main benefits of a foreclosure purchase is that buying from foreclosing lenders often means that they will offer easy financing to quickly get rid of a property they don’t want to own. If the property is in especially bad condition then they may even give a very favorable price.

However, since what is owed to the bank is almost always more than what the property is worth, very few foreclosure auctions result in a successful sale.

This type of purchase is more favorable to investors rather than homebuyers because normally the tenants will wish to live in the house and pay rent, rather than move (as they may not have the finances) and so buying a foreclosure property may be a good start to renting property, as you already have tenants. Real estate investors and home buyers see profit in buying foreclosures because they can often buy the property for the amount owed, picking up the home owner's equity for free. However, lack of equity is typically the reason that these properties are going into foreclosure.

Foreclosure Timeline

Day 1

Record Notice of Default

Within 10 Days

Notice of Default Mailed to trustors and

Special Requests for Notice

Within 1 Month

Notice of Default mailed to parties pursuant

to California Civil Code 2924(c)

 

After 3 Months

End of 3 month redemption period.

Trustee’s sale date can be set.

 

25 Days Prior to Sale Date

Date Notice to the IRS must be given if required

 

At Least 20 Days Prior to Sale Date

Publish Notice of Sale, Post Notice of

Sale, Mail Notice of Sale

 

Within 10 Days From First Publication

of Notice of Sale

 

Send beneficiary request for property

directions.

 

14 Days Prior to Sale

Record Notice of Trustee’s Sale

 

5 Business Days Before Sale Date

Right to reinstate expires

Sale Date

Property Sold to highest bidder

 

 

Negotiating Directly with Sellers in Foreclosure

Investors who specialize in buying foreclosures often prefer to purchase these homes before the foreclosure proceedings are final.

Before approaching a seller in distress, consider:

1.Foreclosure proceedings vary from state to state. In states where mortgages are used, home owners can end up staying in the property for almost a year; whereas in states where trust deeds are used, trustee sales give a seller about four months before she needs to vacate.

2.Almost every state provides for some period of redemption. This means the seller has an irrevocable right during a certain length of time to cure the default, including paying all foreclosure costs, back interest and missed principal payments, to regain control of the property. For more information, consult a real estate lawyer.

3.Many states also require that buyers give to sellers certain disclosures regarding equity purchases. Failure to provide those notices and to prepare offers on the required paperwork can result in fines, lawsuits or even revocation of sale.

4.Determine whether you're the type of person who can easily take advantage of a seller's misfortune under these circumstances and / or put a family out on the street. Oh, critics will argue it's just business and sellers deserve what they get, even if it's five cents on the dollar. Others will feign compassion and trick themselves into believing they are "helping" the home owners avoid further embarrassment, but deep inside yourself, you know that's not true.

 

What is a Short Sale Property?

 There are many ways to lose a home but signing away ownership in a manner that destroys credit, embarrasses the family and strips an owner of dignity is one of the hardest. For owners who can no longer afford to keep mortgage payments current, there are alternatives to bankruptcy or foreclosure proceedings. One of those options is called a "short sale."

A short sale occurs when a home owner is in foreclosure but before the property goes to public auction. Under a short sale, a lender must agree to accept less than the amount that is owed on the property.  In other words, the seller's lender is accepting a discounted payoff to release an existing mortgage.

Buyers are striking a deal with the existing lender to take less than what the lender has coming to avoid dealing with a foreclosure. Be aware that just because the seller accepts your offer that does not necessarily mean the lender will accept your offer. Also, the seller might have over-encumbered, owe more than the home is worth, so a discounted price ( to the lender) might bring the price in line with market value, not below it.

Caution: It is common practice to list short sales at unrealistically low prices in order to generate interest form buyers. It is the list agent’s goal to gather as many offers on the property as possible in order to get the highest price for the bank. The hope is that multiple bidders will create an “auction mentality” driving the price as high as possible. The result of this low list price practice is that buyers get an unrealistically low concept of market values. These prices are clearly too low for the specific neighborhoods and predictably lower than the bank will accept. So, if you hear of a 2 bed 2 bath condo listed for sale in La Jolla for $200,000… consult your Realtor. It sounds like a short sale.

Here are 11 Reasons Why Buyers Might Not Want to Buy a Short Sale:

1) Sellers Paid Too Much.

If a home sold for $500,000 a few years ago and is now for sale at $400,000, that doesn't mean the buyer is picking up $100,000 of equity for free. It means the seller paid too much in a rising market and now the market has fallen. It means the seller has no equity.

2) Sellers Borrowed Too Much.

Banks that were eager to lend money in appreciating markets sometimes allowed borrowers to over-mortgage the home, meaning the borrower's loan balance exceeded the value of the property.

3) Stringent Lender Qualifications.

Sellers must prove a hardship and submit evidence of the hardship to the lender for approval. Some agents list homes as short sales prior to ever talking to the lenders to confirm the short sale status of sellers.

4) Homes Sell at Market Value.

Lenders aren't naive or unaware of the value of a home. Lenders will insist on a comparative market analysis known as a CMA, or broker price opinion, known as a BPO. If a lender believes a better price can be obtained by taking the property back in foreclosure over a short-sale offer, the lender may hold out for a higher price. That price will be close to market value.

5) Homes Sell "As Is".

If a mortgage company agrees to a short sale, it is most likely also paying the closing costs in the transaction. Lenders ask buyers to purchase the home in its present condition. Lenders typically will refuse to pay for:

·                     Suggested repairs disclosed on a home inspection.

·                     Pest inspections or work necessary to issue a clear pest report.

·                     Roof certifications or roof repairs.

·                     Home protection plans for the buyer.

·                     Deferred maintenance.

6) Length of Time to Close.

Depending on when the Notice of Default was filed, the lender's back-log of foreclosures and how much paperwork the seller has already submitted, it could take anywhere from two weeks to two months to get a response on a purchase offer from a lender. In addition, if two lenders are involved because there are two loans secured to the property, it could take longer to satisfy the demands of the second lender.

7) Lenders Can Change Conditions.

Some lenders reserve the right to renegotiate the terms of the short sale at the last minute. If the market changes, new laws pass or new information crosses the lender's desk, the lender can attempt to change the terms of the contract. Lenders generally have lawyers at their disposal, and ordinary buyers do not.

8) Lenders Discount Commission.

I don't know of any lenders who are paying traditional real estate commissions to real estate agents. They will want a discount. Moreover, agents end up doing two to three times the work of a conventional transaction and don't appreciate getting paid less to do more work.

9) Higher Buyer Closing Costs.

Because lenders rarely will pay for any extras, like a seller would be willing to do, if you want any of those extras, you will pay for them yourself. Sometimes lenders will refuse to pay for standard seller closing costs such as transfer taxes, too. If you want specific inspections, you will probably pay for them out-of-pocket.

10) Lose Control of Transaction.

If you need to close escrow by a specific date, lots of luck with that. A short sale home closing process takes an indefinite amount of time. The seller's lender calls the shots, not the buyer nor the buyer's lender. If you are trying to close escrow concurrently with the sale of your home, it might not happen.

11) Little Seller Motivation.

When the seller discovers that the short sale effect on credit is identical to that of a foreclosure, there is little incentive for a seller to cooperate with a short sale. There is no benefit to a seller to consider a short sale and move out before the foreclosure is concluded, except for peace of mind that the nightmare is over.

 

Buying a Home at the Trustee's Sale

Check with your local county office to find out how sales in your area are handled, but common threads among most of them are:

·                     Cash purchases

·                     No loan contingency

·                     No inspection contingency

·                     Proof of financial qualifications

·                     Purchase property "as is"

Oftentimes buyers are not allowed to inspect the house before making an offer. The problem with buying a house sight unseen is you can't calculate how much it will cost to improve the structure or bring it up to habitable standards. Nor do you know if the occupant will retaliate and destroy the interior. On top of that, you may need to evict the tenant or owner from the premises after you receive title, and eviction processes can be costly.

Use extreme caution when buying at a Trustees sale. If you are the successful high bidder, YOU WILL OWN IT.  You need to know everything you can about the property!

Inside the Trustee’s Sale

The auctioneer will ask if anyone wants to qualify, either before all properties are announced or before individual properties are announced. To qualify, you will need to show the auctioneer cash or cashier's checks sufficient to cover any bids you will be making. Some Trustees specify checks are to be made out to them, usually you can get cashier's check made payable to you, then if you are a successful bidder, you endorse them payable to the Trustee. Common practice is to have large checks to cover most of the expected bid, with smaller checks to cover increases in the bidding. Once you sign your check over, you will not have the surplus funds available for a while. When bidding and qualifying, keep in mind that anyone around you is a prospective bidder, if you allow them to see the maximum amount you can bid to, you have weakened your position. Keep your information private!
If there is a property you are interested in, your bid should be a penny over the opening bid. Know the maximum bid you are willing to place and do not exceed that number. It's very easy to get involved in a contest of who's going to win the bid, if you are investing, you need to make a profit, not prove you can bid higher.

The Successful High Bid

If you are the successful bidder, you will need to sign checks over to the Trustee. Usually, after all sales are complete, the auctioneer will write you a receipt, ask how title is to be held and you'll be done. The Trustee can record the Trustee's Deed for you or they will send you the deed along with any excess funds from your checks. Sales are sometimes invalidated by legal reasons. If so, you will receive your funds back. Expect to have everything completed one to two weeks after the sale.

Finding Foreclosures and Government-Seized Homes

Finding foreclosures is fairly easy in depressed markets, but it's also simple to find foreclosures in strong real estate markets. The difference between the two markets is you will find a greater number of foreclosures in falling real estate markets.

Some foreclosed homes are diamonds waiting to be polished. Inexperienced foreclosure buyers might want to hire a real estate agent for guidance and assistance.

Real Estate Agents

Consumers do not enjoy direct access to MLS like agents. You can ask your buyer's agent to search for REOs. You will find a ton of foreclosures at your fingertips this way.

Real Estate Signs

Driving through neighborhoods where you want to buy is another great way to find foreclosures. The riders on the sign posts might say:

·                     Foreclosure

·                     Bank-Owned

·                     Bank Repo

If you are working with a buyer's agent, you can ask your agent to get this information for you.

Major bank Web sites

Many banks maintain online lists of foreclosed properties.

 

The Drawbacks to Buying Foreclosures

The Condition of Foreclosed Homes

Price-conscious home buyers are lured by the low prices advertised for properties in foreclosure. They hope to show up at the auction and be the lowest bidder. However, many of these homes are not available for inspection prior to purchase. Is it smart to buy a home that you cannot inspect? Could be if the price was low enough to compensate you for the amount of work that might be required to bring the condition of the home to market standards.

Before you rush forward to buy a foreclosure, stop to think about some of the drawbacks and repercussions if you can't get in the house to inspect the interior.

Who Is Living at the Property?

If the property is occupied, the successful bidder is typically responsible for removing the occupants, who may not be the previous owners. They could be relatives or friends of the owners, renters or squatters. You might have to evict them.

·         If you are unfamiliar with eviction processes, you should hire a lawyer.

·         Be aware that tenants who are sued for eviction sometimes retaliate.

·         A better solution might be to pay or bribe the occupants to leave.

Condition of Foreclosed Homes

Because these homes are purchased "as is" from the lender or HUD, there is no guarantee of condition. Sometimes it is possible to inspect these homes prior to making an offer but sometimes, access is not granted. When sellers realize they are about to lose their homes through foreclosure, it's not uncommon for them to stop caring about the home.

·                     If something breaks or malfunctions, they aren't going to fix it.

·                     If they are angry or desperate enough, it's possible they might actually destroy the house.
                      An effective way to flood the home is to turn on all the water faucets, plug the drains and
                      leave. Others smash out walls then pull out the copper pipes and wiring to sell as scrap
                      metal.

·                     Owners will also sell the appliances and kitchen cabinets.

·                     Some horrible-excuse-for-human beings even leave animals behind locked inside without
                      food or water.

Buying foreclosures is not for the faint of heart. It's best handled by the pros and is not recommended for first-time home buyers. Be sure that you are realistically prepared for the process.

 

REOs - Real Estate Owned

An REO is real estate owned by the bank, and many investors consider an REO property to be money just waiting to happen. An REO is different from a foreclosure property in that the bank has already tried to sell it at a foreclosure auction and has had no luck getting bids. Most foreclosure auctions do not even result in bids. After all, if there was enough equity in the property to satisfy the loan, the owner would have probably sold the property and paid off the bank. That is why the property ends up at a foreclosure or trustee sale. Because the property was not bid on, the bank then became the owner of the property. Naturally, the bank does not want to keep the REO any longer than possible, and this makes it a great opportunity for an investor.

·         Buying an REO is similar to buying a short sale except the property is already owned by the
          lender.

·         The property was acquired by the lender through a foreclosure action.

·         Often lenders will sell repossessed homes for less than the past loan balance.

·         Bank-owned properties are called REOs, meaning real estate owned by the lender.

REO homes are often considered the best way to buy a distressed property because the seller is already out of the picture. It's just the investor, the investor's agent, the bank and the bank's agent who are negotiating the transaction.

 
The bank now owns the property and the mortgage loan no longer exists. The bank will handle the eviction, if necessary, and may do some repairs. They will negotiate with the IRS for removal of tax liens and pay off any homeowner’s association dues. As a purchaser of an REO property, the buyer will receive a title insurance policy and the opportunity to investigate the property.
Making an Offer

Before making an offer, have your agent contact the the listing agent and ask the following:

  • Are there any inspection reports?
  • What work has the bank agreed to?
  • Is there a special "as is" form?
  • How long does it take the bank to accept an offer?
  • How does your agent deliver the offer?

Offers are usually FAXED to the bank. The listing agent needs your originals. There is no formal presentation. Keep in mind: nothing happens evenings and weekends (banks are closed).

Since there is no face-to-face presentation to the bank, provide the listing agent with a pre-qualification or better yet, a pre-approval letter and buyer biography. Make your offer easy to accept.

Once you make an offer to purchase, banks generally present a "counter-offer." It may be at a higher price than you expect, but they have to demonstrate to investors, shareholders and auditors that they attempted to get the highest price possible. You should plan to counter the counter-offer.

Banks always want to sell a property in "as is" condition. Your offer should include an inspection contingency period that allows you to terminate the sale if the inspections reveal unanticipated damages that the bank will not correct. Even though you agreed to “as is," always give the bank another opportunity to make repairs or give you a credit after you’ve completed your inspections.

 

Advantages of REO vs. Foreclosed Property

When you are thinking of buying an REO you have to distinct advantages that a buyer does not have with a foreclosed property. The first is that you are able to buy on your schedule, as you do not have an auction date to work with and around. You can make an offer of the home any time; you don’t have to wait for bidding to begin. Another big advantage of an REO compared to a foreclosed property is that you can inspect it before you buy, when you cannot do this with the majority of foreclosed homes that you think about purchasing. Being able to inspect the property before you buy will let you know how big of a project you will be dealing with.

 

Which REO’s you should not purchase

Just because the bank owns a property does not make it a good deal. In fact, when you see that a home or property is an REO you have to wonder exactly what IS wrong with it. The house was not bid on because no one saw the worth in it. Did the home just not have enough equity? Were their IRS liens against it? Was the property just too badly damaged? You need to ask these questions. If the bank cannot answer the questions then you need to be even more skeptical.

 

Take advantage of your right to inspect the REO so that you can see with your own eyes what may or may not be wrong, hire professionals if necessary as well.
One must also be sure that if they are purchasing an REO to fix it up and sell it, that the property is located in a desirable part of town.

 

Why the bank will sell an REO cheap?

Basically, a bank is not set up to deal with real estate.

What this means is that they are losing money hand over fist and the federal government often penalizes them for each and every REO that they acquire.
In fact, banks commonly sell an REO property for well under market value. Sure, they end up losing money on the deal, but they end up losing less if they sell cheap now than they would if they kept the property for another six months while they try to sell the property.
Banks want to make money; more over they want to invest money to make more money, as is the nature of the finance world.


The great thing about working with the bank with an REO is that you aren’t buying site unseen. Because you can walk through the house and make all the inspections that you want, you can deal with them in a way that will give you the best deal,

 

Generally REOs are a great investment as long as you know what you are getting into. The bank simply wants to get rid of these homes, and if you find the right property and are ready to make the serious investment, it can be a great way to get off and running in the real estate business.

Most real estate agents and realtors will back the idea that for novice homebuyers, the idea of buying a REO property is a good one for many reasons. Lenders will always highlight the fact that purchasing an REO from them is “the safest way to buy” real estate, generally as a result of there being no risk to the buyer, and no tenants to evict. In fact statistics show that when it comes to buying a home that has been foreclosed on, REO purchases are the more popular method of purchase.

 

  • No back taxes or liens to worry about
  • No tenants to evict and no financial instrument secured by the property
  • Negotiable rehab costs, interest, closing points, loan amount, etc.
  • When a bank repossesses a home it always provides a good, clear title.
  • Less than normal down payment

 

Buying distressed properties is an excellent way to get started investing in real estate. Foreclosures, trustees sales, short sales and REOs are unique. Educating yourself on the benefits and challenges associated with each type of purchase is essential in determining which type you wish to pursue. Statistics show that when it comes to buying a home that has been foreclosed on, REO purchases are the more popular method of purchase. Consult with a Realtor or a real estate attorney to inform yourself of your rights and to be sure that you are legally protected.

Happy House Hunting!

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