Three ways to buy a “foreclosure”

If you are in the market to buy a home, some of the properties you might be considering are foreclosures – but there are some distinctions to be aware of at different stages of the foreclosure process. It is possible to buy a home from the owner before they are foreclosed on even if they cannot pay off their mortgage – this is called a short sale.  Or, you might buy a property at the courthouse steps when it is being auctioned – this is called a trustee sale.  Finally, if a property does not sell at the auction, you can buy the property from the lender after they have taken ownership of the property – this is called a bank owned property or REO property.

Short Sales:  Some homeowners must sell their home, but market conditions won’t allow them to sell it at a high enough price to be able to pay off their mortgage(s).  In this example, a homeowner might have a $250,000 mortgage balance but can only sell the property for $230,000.  As a prospective buyer, it is sometimes possible to purchase this type of a property through a process called a “short sale.”  In such an arrangement, the homeowner petitions their lender to accept less than the full payoff of the mortgage and in return to still release the deed of trust so that ownership of the property can be transferred over to you, the new owner.  This can benefit the lender, as they skip the time delays and cost of the foreclosure process.  This can also benefit the homeowner, as a short sale will have a slightly lesser negative impact on their credit as compared to a foreclosure.  As a buyer, however, you must know that there are challenges to buying a property as a short sale.  The biggest challenges of late seem to be the uncertainty of the purchase and the time table.  Even if you and the homeowner agree to a price of $230,000, the homeowner’s lender must still agree to accept that price – since it won’t allow the homeowner to pay off their $250,000 mortgage balance in full.  This process of waiting to hear back from a lender, and then complying with all of their various terms can sometimes take 60 to 120 days – or longer!

Trustee Sales:  If a short sale does not take place, and a homeowner is behind on their payments (or not making them at all), eventually the property will be sold by the lender on the courthouse steps.  Buying a property at a “trustee sale” can be exciting, and can be a great opportunity – but there are challenges as well.  If a property to be sold at a trustee sale is also listed for sale with a Realtor, you can usually view the property ahead of time by calling your Realtor.  Otherwise, you will likely not have the opportunity to see inside the property before the trustee sale, and thus you will not know too many details about the condition of the property. Furthermore, your purchase of the property at the trustee sale cannot be contingent upon viewing the property, or inspecting the property.  In this instance, you are purchasing the property in “as is” condition, regardless of what you then find out about the property.  It is also important to note that many times the lender will have an opening bid at the trustee sale that is close to (or sometimes higher than) the amount that they are still owed on the mortgage. Thus, in the example above, they might make an opening bid of $250,000.  As a result of this opening bid process, many (or most) properties available for purchase at a trustee sale are not great opportunities.  Occasionally, a property will be foreclosed upon that has had a mortgage in place for many years, whereby the balance of the mortgage is much lower than current market value – these are great opportunities for a buyer.

Bank Owned Properties:  If you don’t buy the property before the auction (as a short sale), and don’t buy it at the trustee sale, you’ll have a third opportunity to buy it once the bank owns it.  These properties are called “bank owned properties” or REO properties (“real estate owned”).  Oftentimes, the prices on these properties are quite realistic, if not under market value.  It would not be atypical for a house such as the one mentioned above to come on the market after the trustee sale at a price of $210,000.  In such an instance, you should expect to be buying the property in “as is” condition, and you will also be buying with a slightly different contract document.  Most lenders have a long standard contract or contract addendum that spell out a variety of additional contract terms designed to protect them from any future liability – and rarely will a lender agree to have these contract documents changed in any way.  As you can see above, oftentimes buying the property as an REO property is where the best opportunity lies.

When a home goes into foreclosure it is often for very sad and unfortunate reasons – such as the loss of a job – and I do not wish such circumstances on any homeowner.  However, if you are a buyer in today’s market it is important to be familiar with different methods for buying a property when it will be, is being, or has been foreclosed upon.

For information about purchasing a property as a short sale, or purchasing a bank owned property, please e-mail me at scott@HarrisonburgHousingToday.com or call me at 540-578-0102.

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