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With the real estate market still deep in the foreclosure crisis, some are lucky enough to be in a position to buy. Many of these are first-time investors seeking to take advantage of cheap home prices and low interest rates. And, one question many have is, “What’s the difference between a regular foreclosure and an REO foreclosure?”
Note: We covered this subject in the fall of 2009 on this blog in the post entitled, Foreclosures for Sale: The Difference Between an REO and a Regular Foreclosure. But, as the foreclosure crisis drags on, more and more new investors are entering the market, so we wanted to give a more detailed answer here.
Hence, following is an in-depth discussion that lists the stages at which a purchaser can buy a foreclosure, broken down into three parts. Each stage comes with its own risks and rules, which we detail here as well.
PART I: WHAT IS A REGULAR FORECLOSURE?
This is when a lender forecloses on a home because the owner has defaulted on their mortgage. Other reasons a property can be taken away from the owner are failure to pay property taxes, failure to pay HOA (homeowner association) dues and failure to pay a contractor for work done on a property (contractor lien). While these are less common, they do happen.
Whatever the reason, this is considered a “regular foreclosure.” These properties are sold off at auction on the county courthouse steps. You should know that real estate experts consider this the riskiest way to buy a foreclosure. Why?
Well, let’s take a look at what buying a foreclosure at auction entails.
Buying a Foreclosed Property at Auction: Why Banks are Eager to Sell but It Doesn’t Necessarily Mean a Good Deal for You
When a lien holder (usually a bank) forecloses on a homeowner, they want to sell as quickly as possible. That’s because banks are not in the business of buying and selling real estate. They’re in the business of making money off of lending money (ie, interest). So, when they have to repossess a property, it also comes with its own set of burdens, eg, they have to pay for maintenance, upkeep, security, pay property taxes, HOA dues, etc.
This sheds light on why banks are so eager to sell, and why there are many restrictions in place when buying a foreclosure at auction. What are some of these restrictions? In many cases, you must:
Post continued below . . .
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Rules for How to Buy a Foreclosure at Auction
Pay in Cash: Banks usually sell a property for what’s owed on the mortgage. In some cases, they may sell for below that, but the bottom line is, you will almost certainly have to pay in cash (ie, have to present a cashiers check for the whole purchase price). Usually, this means on the day of; sometimes you may have a few days.
Pay Off Liens and Other Debts: If you buy a foreclosure at auction, usually you have to pay all of the outstanding liens and debts incurred by the property (eg, overdue HOA bills, contractor’s liens, IRS bills, property taxes, etc.). So while the bank may have paid these when they foreclosed on the previous homeowner, they fully expect to recoup their investment when they sell the property.
This can mean thousands of extra dollars added onto the purchase price.
No or Very Little Time to Inspect: Usually, when buying a foreclosure at auction, there is no time, or very little time to do a property inspection. This means you’re usually buying a property as is. This is one of the main reasons real estate experts advise first-time investors not to buy foreclosures at auction. It’s just too risky.
Even if you’re lucky enough to look a property over a few hours before auction, you can’t see things like hidden mold, loose/cracked support beams and a thousand and one other potential problems that can’t be spotted with the naked eye.
Right of Redemption: This is when a property owner has a right to buy back (redeem) their property, even after it’s been sold at auction. Learn more about right of redemption laws. So, even if you luck up and get a great deal, you still might lose out if the property owner somehow comes up with the money to purchase their home back.
These are the cons of buying foreclosures at auction.
The upside, of course, is that you can get a great deal. But be careful. To that end, following is some advice to help you avoid getting burned if you decide to go this route.
Learning How to Buy a Foreclosure at Auction: Some Steps to Take
If you’re hell bent on buying a property at a foreclosure auction, at least do your research first. Following are some steps to take:
Set Price You Won’t Go Above: This is best accomplished by following the steps below. Also, if you know someone who’s a realtor, ask them to pull comps for you. Comps are the prices at which “comparable homes” in the vicinity (usually within a 1-3 mile radius) have sold. This way, you won’t overpay.
Research Property via County Records: Look for things like what were last year’s property taxes, how old is the house, are there any liens against the property, etc.; is it on county water; what’s the zoning (commercial, residential, agricultural); etc.
Check for Clear Title: You don’t want a property that has a “clouded title.” Do a title search to make sure the title is free and clear.
Arrange Financing: As stated above, when you buy a foreclosure at auction, you’re most likely going to be paying cash on the barrel. So, get your financing arranged beforehand.
Attend Foreclosure Auctions: Especially if this is your first time, go to at least one (preferably a few) auctions beforehand. There’s nothing like seeing first-hand how they’re conducted to know what to expect.
Consult a Foreclosure Attorney: It may not be a bad idea to speak with a foreclosure lawyer – in your jurisdiction – just to get a handle on what your rights are if you decide to purchase a property at auction. Because you may have very little or no recourse after, knowing what to expect going in can help you make a more informed decision.
Where to Find Foreclosure Listings – for Free
The first thing you should know is that you never have to pay for listings of foreclosure properties. Real estate transactions are a matter of public record. This means that anyone can find out information on any property (bought, sold, foreclosed on, property tax information, etc.) for no cost.
5 Places to Find Free Foreclosure Listings
Your Local Newspaper: This is one of the best places. Every county advertises the properties that are going to be up for sale at auction every month. Foreclosure auctions are usually held on the first Tuesday of every month on the courthouse steps of the county in which the property is located.
County Deed Office: You can go online to find lists of foreclosures that are posted by your county deed recorder’s office.
Lender/Bank Websites: Many list foreclosures right on their websites.
Newsletters: There are many organizations that publish lists of foreclosures. Usually, you have to subscribe to receive their free foreclosure listings. Some mail out daily; others may email weekly, or in some cases monthly.
REO Realtor Websites: Many realtors list foreclosed properties on their sites, especially those that deal only with foreclosures. To find these properties, conduct an internet search for REO realtors in your area. Then look check to see if they have websites. Even if they don’t, contact them and let them know you’re interested in buy a foreclosure(s).
It’s a good idea to build a rapport with an REO realtor, especially if investing in foreclosures is something you plan to do more than once. This is how you can get the “inside scoop” on a lot of good deals before they even hit the market.
This concludes the section on what is a regular foreclosure. Now, let’s turn our attention to bank REO foreclosures.
PART II: WHAT IS AN REO FORECLOSURE?
REO is the acronym for real estate owned. It is a post-foreclosure sale.
A bank REO is a property(ies) that the bank owns outright. They have gone through the entire foreclosure process and repossessed the property from the owner. Hence, they own it outright . . . and they hate this. Why?
If you’ll remember from our discussion on regular foreclosures, banks are not in the business of buying and selling property. They are in the business of making money . . . and the way they make their money is from interest on funds they lend for borrowers to buy property (and other goods, eg, car loans, small business loans, home equity loans, etc.).
So banks/lenders don’t want your home. They want the money you took out to buy the home (plus their interest). Hence, banks seek to sell of REO properties as quickly as possible because these properties cost them money – in maintenance fees, security fees, etc.
How Bank REO Properties Are Sold
No two banks are the same, hence, the process may vary a bit from lender to lender. But, what all banks have in common is getting the best price for each property they have.
To accomplish this, banks usually have in-house REO departments. This department is responsible for getting the properties sold. Usually they contract with local REO realtors to help them sell their properties.
And, contrary to what many think, banks won’t take just any offer. Many first-time investors/buyers are surprised that bank REOs are not as cheap as they are made out to be on late-night commercials for example.
This is because, while banks certainly want to get rid of their housing inventory, they’re not going to give it away. After all, they’re a for-profit business – just like any other. So, while good deals can be found when purchasing bank REOs, it’s not like you’re gong to get bargain basement prices in most cases.
What usually happens is, once an offer is tendered, the bank will usually come back with a counter-offer. Usually, buyers bid low, hoping to get a great deal. This is why many are surprised when the bank comes back with a higher-than-expected counter offer.
Many bank REOs can sell for pretty close to the asking price (usually what is owed on the mortgage or the fairly accessed current market value). A “good” deal is usually in the 20% off range say most real estate experts. Sure, deals can be had for better than this, but they’re not as common as late nigh commercials would have you believe.
If you’re thinking, “20% off is not such a great deal,” remember, banks are for-profit businesses. And, they’re accountable to their shareholders, investors and other interested parties. So they have to show that they negotiated in good faith to get the highest possible price for a property.
Usually, once you receive a counter offer from the bank, your realtor may suggest that you counter the banks counter offer. You go back and forth like this until one or both of you either arrive at an accepted price or pull out of the deal.
Why Buying a Bank REO Foreclosure Can Take Months
Just know that every offer you tender will be reviewed by the bank and their representatives. And, know that the bank may be fielding several offers. Depending on the property, it can be 10, 15 or 20 or more competing offers. This is why buying this type of foreclosure property can take months – and why they sell for at, close to, or even higher than the asking price.
About Bank REO Inspections & Repairs
Once an offer is accepted by the bank, you can get a home inspection. However, most bank REO property is sold in “as is” condition. Hence, no matter what an inspector may find, the lender may not be willing to make repairs.
Sometimes they may give you “allowances” in order to have certain repairs made, but most times they won’t do the actual work themselves.
Financing for Bank REO Foreclosures
Have your financing lined up beforehand because most banks don’t offer financing on their own REO properties. Also, as you’ll probably be competing against other potential buyers, this can make or break a deal quickly.
Tips for Getting Your Offer Accepted on a Bank REO Property
Cash is King: If you can afford to pay all cash, this can facilitate a deal quicker than almost anything else – even a buyer who has to get financing and who may be offering a higher price.
Line Up Financing (as discussed above): The next best thing to offering cash is to prove that your financing is in order. So, give your realtor (or provide to the seller) a proof of funds letter. This lets them know you have your financial ducks in a row and can close quickly.
Team Up with an Experienced REO Realtor: This is one of the best ways to increase your chance of having an offer accepted. This is because these experts know how to submit an offer, eg, what to include, when, the price likely to be accepted, how long a bank will take to respond, etc. It’s one of the best “investments” you can make when buying bank REO property.
Don’t Ask for Repairs: Remember, most lenders won’t do them anyway. If you do your homework beforehand, you’ll know the condition of the property. If it’s something you can live with (plan to fix yourself), then you can let the seller know that you’ll take the property as is (no hassle equals “deal!”).
Failing that, agree to a . . .
Quick Home Inspection: You can get a home inspection done on bank REO properties. Agree to get yours done quickly, eg, in 7 days as opposed to 14. This could beat out your competition, who may be requesting a longer period. Remember, the quicker the deal can close, the better your chance of securing the property.
Split Transaction Fees: Every property purchase comes with fees, eg, escrow fees, title transfer fees, realtor fees, etc. Offer to split these fees with the bank and that just may seal the deal. The reason is, so few buyers offer to do this – and a lot of it is simply because many don’t think/aren’t advised to do this.
This concludes the section on buying bank REO foreclosures. Now, let’s take a look at the third option when buying foreclosure, eg, purchasing pre-foreclosures (or property that’s still owned by a homeowner).
PART III: WHAT IS A PRE-FORECLOSURE?
A pre-foreclosure is the beginning of the foreclosure process for the homeowner. They are usually alerted by their lender that they are behind on their mortgage and have been issued what’s known as a Notice of Default (NOD).
This notice not only alerts the existing homeowner to potential foreclosure, it lets them know how much they are behind, hence have to pay; and by what date the payment must be made.
At this point, the homeowner has a few options. They can catch up their mortgage, allow the bank to foreclose and/or attempt to do a short sale.
A short sale is when a property sells for less than what is owed on the mortgage. All parties must agree to it (ie, the buyer, seller (homeowner) and the mortgage holder (ie, bank/lender). Many homes are being sold this way these days because of the foreclosure crisis. And, it’s at this point where a potential investor can get a good deal.
How to Find Free Pre-foreclosure Listings
Contrary to buying “regular foreclosures,” purchasing pre-foreclosures is one of the best ways for first-time investors to buy a property according to Tom Lucier, author of The Pre-Foreclosure Property Investor’s Kit. Why?
Because, he says, it’s . . .
Your only chance to buy someone’s equity at 50 percent or less . . . [this is because you get to] deal directly with the owner in foreclosure prior to the property being sold.” He fairly warns though that it’s not easy, stating, “It’s hard work, though. Damn hard.”
If you’re interested in buying a foreclosure via this route, you can find pre-foreclosure listings by doing some research. Remember, property transactions are a matter of public record. Hence, Notices of Default are recorded at your county clerk’s office (aka the County Recorder’s Office; the County Clerk’s Deed Office).
You can conduct your search online. You can also physically visit the office and do a search for Notices of Sale, Lis Pendens and/or Notices of Default. Even though there are tons of sites online that offer these listings for a fee, there’s never a need to pay for them. You can get all the info you need for free just by doing what we’re telling you to do here.
Why Purchasing a Pre-foreclosure May be the Best Way for First-Time Investors to Buy a Foreclosure
In addition to the reason just above stated by foreclosure expert Tom Lucier, homeowners usually want to avoid an outright foreclosure. Hence, many of them are looking for another way out. As most don’t have the funds to catch up their mortgage, their options are limited.
Tips for Getting Your Offer on a Pre-foreclosure Accepted
Hence, you can be just the answer they’re looking for. But, don’t try to take advantage. Following are some tips for getting your offer accepted on a pre-foreclosure property.
Good Deal for Both: Many homeowners facing foreclosure are naturally upset. It’s a difficult time for them – emotionally and financially. So, deal delicately with them. Don’t insult them with a low offer. This can be construed as trying to take advantage when they’re down and out.
Get homeowners “on your side” by helping them to realize that this can be a good deal for the both of you. Hence, offer a fair price – one that has a chance of being accepted.
Remember, it’s not just the homeowner who has to agree to the deal. The lender does too. So, if your offer is ridiculously low, even if the homeowner accepts, the lender/bank likely won’t.
Have Financing Lined Up: See previous sections for why.
Give Homeowner Time to Move: Assure the homeowner that they will have time to move. Get everything in writing (this is a business transaction after all), but let them know you’re not trying to “kick them out on the street” with nowhere to go.
Carefully Craft Your Offer: Because you’ll have ample time to get any property inspections you want done, you should know all of the defects of the property beforehand. This can help you craft an offer that the bank/lender will accept.
Remember, the less you ask for in the way of repairs, the better chance you have of having your offer on a pre-foreclosure accepted.
We hope we’ve clarified the difference between a regular foreclosure and an REO foreclosure, and that it helps you find the perfect deal in today’s tumultuous real estate market.
Related Posts
Mortgage Foreclosure Timeline: How the Foreclosure Process Works & How Long You Actually Have to Move if You Eventually Lose Your Home
Home Foreclosure Auctions: The Biggest Advantage and Disadvantage of Them
Right of Redemption Laws: How to Get Your Home Back – Even After It’s Sold as a Foreclosure
Foreclosure Auctions Signal That an End to the Foreclosure Crisis Is Nowhere in Sight
Foreclosure Auctions: Mortgage Meltdown Brings New RE Investors to the Table
Buy Foreclosed Properties at a 40% Discount: Why This Isn’t Necessarily a Good Thing
How to Lose Your Foreclosed Home at Auction and Still Receive Thousands of Dollars
Foreclosure Auctions: Turf War Ensues Between Local Municipalities and Private Foreclosure Auction Firms (Opportunity Knocks for Foreclosure Business Owners)
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Copyright © 2011 Yuwanda Black for Foreclosure Business News. Article may not be reprinted or reproduced in any manner without the express, written consent of the author.