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.

How do I find out more about a foreclosure sale?

Several people have recently asked me how to find out more about upcoming foreclosure sales.  They realize that they can find Harrisonburg and Rockingham County foreclosure sale information on this web site, but if a property of interest is being sold, they’re not sure what the next steps might be.

Typically, very little information is available about a property that will potentially be sold at a foreclosure sale.  Sometimes, the property is also listed for sale, and you can easily check that out using the Quick Search on my real estate web site. Beyond that, you’ll need to start looking through public records (and other places) to find out whatever you can about the property.  You’ll find links to online information about properties in Harrisonburg and Rockingham County in the Resources section of my HarrisonburgHousingToday blog.

And if you’re having trouble finding the information you are looking for, feel free to call (540-578-0102) or e-mail (scott@harrisonburghousingtoday.com) me.

What is a “short sale”?

A workgroup of the National Association of Realtors recently penned this definition for a short sale:

“A short sale is one where title has transferred; where the sales price was insufficient to pay the total of all liens and costs of sale; and where the seller did not bring sufficient liquid assets to the closing to cure all deficiencies.”

Wikipedia offers us this definition:

A short sale is when a bank or mortgage lender agrees to discount a loan balance due to an economic or financial hardship on the part of the mortgagor.

As becomes clear from these definitions, it is an actual closed sale where the seller’s loan was not completely paid off by the seller.  The bank must agree to this sort of a transaction, as they are not recouping all of the money they lent to the homeowner.

Why does this matter to homeowners in danger of foreclosure?

If you are having difficulty making your mortgage payments, and find foreclosure looming, you might first think of selling your home.  But if you can’t sell your home for a sufficient price with which you can pay off your mortgage, you might think you are stuck.  A short sale (if/when allowed by your lender) can help you out of this situation without the financial (and emotional) impact of the foreclosure process.

A few things to remember — you must demonstrate a “hardship” to the lender, and the proposed short sale (with a particular buyer, at a particular price) must also be justified for the lender so that they are confident they are obtaining as much (or close to as much) as is possible for the property in the current market.

Navigating the short sale process as a homeowner can be difficult and frustrating.  I am not (yet) a short sale expert, but I’d be happy to try to answer any questions that you might have if that would be helpful.

Why does this matter to home buyers?

You may encounter a home for sale that is of interest to you, and then discover that it would only be possible to purchase it if the bank approves the short sale.  For example, if a property is on the market for $200k, and you are prepared to pay $190k for it, but the homeowner has a remaining mortgage balance of $210k, and the owner can’t bring the extra $20k (plus) to closing.  In this scenario, if the seller is willing to sell it for $190k, and will seek short sale approval from the bank, it may be worthwhile to pursue the property.

One key thing to remember — the process is often very slow, and you may have to wait several weeks to hear back from the bank as to whether the short sale has been approved.

Are we seeing this in Harrisonburg and Rockingham County?

In many parts of the country, many (many) short sales are occuring.  I haven’t heard of a tremendous number in the Harrisonburg and Rockingham County area, but I know that a few have taken place. If you have questions about the process (from either perspective), feel free to call (540-578-0102) or e-mail me.

Are foreclosures a growing problem in Harrisonburg?

Several people have recently asked if I started this web site because of the growing problem with foreclosures in the Harrisonburg area.  In fact, that is not the case — foreclosures in Harrisonburg and Rockingham County continue to take place at a very slow rate — much slower than the other parts of Virginia and the country as a whole.  This is terrific, as foreclosure is typically not an option that a homeowner hopes to end up with when they buy a home.

So — why did I create HarrisonburgForeclosures.com?

• I author another blog, all about the Harrisonburg and Rockingham County real estate market — at www.HarrisonburgHousingToday.com.  I realized that much of that reading audience didn’t necessarily have an interest in foreclosure properties.  Thus, by creating HarrisonburgForeclosures.com, I was able to segment out that content.
• I hope to educate homeowners and the general public about the foreclosure process in Virginia.  If you have questions about it, feel free to e-mail me (scott@harrisonburghousingtoday.com) or leave it in the comment section below.
• I work with many real estate investors who are looking for good buying opportunities, and while foreclosures sometimes provide a great opportunity, it is often difficult to find good information about them.  On HarrisonburgForeclosures.com, I will be sorting through all of the foreclosure properties that I am aware of, and presenting those with the best possibilities.

As an aside — if you are facing the possibility of foreclosure yourself, feel free to call (540-578-0102) or e-mail (scott@harrisonburghousingtoday.com) me.  I’d be glad to answer any questions that you may have to the best of my ability.

Types of Foreclosure Opportunities

I categorize foreclosures into three areas:

• Terrible Opportunities – where the original amount borrowed (or my estimate of its current balance) is at or above the assessed value.
• Good Opportunities – where the original amount borrowed (or my estimate of its current balance) is close to, but below, assessed value.
• Great Opportunities – where the original amount borrowed (or my estimate of its current balance) is well below the assessed value.

A few observations about the people who may be interested in foreclosure properties:

• Investors who hope to flip foreclosure homes (buy, fix, sell for profit) would likely be interested in the “great opportunities.”
• Buyers looking for a home for themselves would likely be interested in the “good opportunities,” and certainly the “great opportunities” as well.
• I have yet to meet someone who is interested in the “terrible opportunities,” mainly because they aren’t likely to be able to buy them at a reasonable price — the bank will take the houses.

Unfortunately, for those who hope to do well buying a foreclosed home, most foreclosures in this area fall into the “terrible opportunities” category.  For example, yesterday a home on Chestnut Oak Lane was in the Daily News Record with an original loan amount of $343,920 — and an assessed value of $316,700.

Why blog about foreclosures?

Here is why I post notices of foreclosure sales:

• To the best of my knowledge, the only way to monitor upcoming foreclosure sales is to pore over the classifieds section of the Daily News Record each day, and tear out any notices that you find.  Not too convenient, especially in an age where more and more people would prefer to find and consume information online.
• I have several clients who are always interesting in acquiring a property via a foreclosure sale, and have asked me over the past few years if there is any better way to keep track of upcoming sales and the results of past sales.
• Given the need described above, I have started posting details of all Harrisonburg and Rockingham County foreclosure sales (that I can find).  To check back solely on the foreclosure sale content of my blog, use this address:  http://www.HarrisonburgForeclosures.com.

I hope the information is helpful, not only in regards to the availability of these properties, but also to begin to understand over time how often properties actually make it to the foreclosure sale, and what they typically sell for in relation to their assessed value or current loan amount.

How & Why To Buy Property At A Foreclosure Sale

Buying a property at a foreclosure sale (a.k.a. trustee sale) can be a great opportunity to acquire a property under market value, but there are risks that accompany any potential for reward.

The Risks:

• In almost all cases, you will not have the opportunity to see the interior of the property before the sale.  This is a tremendous risk, as the interior condition could greatly affect the value of the property.
• Related to the above risk, you will not have the opportunity to have a home inspection, well inspection, septic inspection, termite inspection, etc.  You will be buying the property “as is, where is.”
• A very quick closing (often 15 days) is required by almost all Trustees.  This is a tight time frame, which must be adhered to.
• A deposit is typically due at the time of sale of anywhere from $10,000 to $30,000.  This must be in cash or certified check, and can prohibit some potential buyers from participating in a foreclosure sale.

The Rewards:

• Sometimes banks are willing to take some money, any money, just to sell a property.
• There is often less competition (amongst potential buyers) at a foreclosure sale.  The information about these sales are not promoted very heavily, and many buyers do not know about the availability of such properties.  With fewer buyers on the scene, the sales price will likely not be as high.
• If the mortgage that is being foreclosed upon is not a recent mortgage, the owner will have likely paid down the balance of the loan, and the property will have appreciated.  This means that what the bank needs to recoup from the Trustee Sale could be quite a bit lower than the market value of the property.  Of note, most of the sales in the past few months have been on mortgages issued within the last 2-3 years. This has not provided for too much of a cushion to allow for a great deal.

Buying A Foreclosure Property Before The Sale

Can it be done? YES! Is it easy and fun? NO!

Properties in Harrisonburg and Rockingham County that are being foreclosed on are almost always advertised in the Daily News Record as an upcoming “Trustee Sale.” When I see good opportunities in these notices, I post details here at HarrisonburgForeclosures.com.

Oftentimes, information about these foreclosure sales is available several weeks before the actual sale, and thus interested buyers sometimes wonder if it is possible to short circuit the foreclosure proceedings, and buy the property before the sale. The simple answer — yes, this is possible. However, there are typically a few obstacles:

Owners in denial — or seclusion — or anger!

Being in situation where you can’t pay your mortgage any longer, and the bank is foreclosing on your home is not AT ALL a fun situation to be in. I don’t at all intend to make light of the unfortunate light that some homeowners find themselves in. And thus, if you are hoping to purchased a foreclosure property prior to the trustee sale, it is important to consider the perspective of the homeowner.

Many such homeowners are in denial — thinking or hoping that they will catch up on their mortgage payments such that the sale will not take place. Others will be very difficult to reach, and it won’t be possible to discuss a way to help them sell their home without being foreclosed upon. And some homeowners will be downright angry if someone contacts them about their home, and it’s status as a pre-foreclosure property.

The lender can’t sell you the home before the trustee sale, so if you are to attempt to purchase it beforehand, you’ll have to deal with the homeowner. Be careful how you broach the subject, and be sensitive to a time of difficult life circumstances!

The timing will be tight!

While there are often several weeks between the first notice of a foreclosure and the actual foreclosure sale, if you are financing the purchase, you will need every last day of it if you hope to purchase the property before the sale takes place. If you are purchasing the property with cash, or if you already have your financing lined up, you may not have as much of a time crunch.

Sometimes the lender will postpone the foreclosure sale if they can be assured of a pending successful sale of the property that would pay off their loan. If they have doubts as to the buyer’s performance, or doubts as to whether the purchase price will pay off the remaining balance of the loan, they may foreclose as planned.

If you are going to attempt to buy a foreclosure property before the sale, be sure to have all of your financing details arranged ahead of time!

Those second lenders don’t like being in second place!

Finally, it is important to recognize that there is sometimes a second mortgage or line of credit on the property being foreclosed upon. If a primary loan of $180,000 is being foreclosed on, it won’t necessarily work for you to swoop in and offer the owner $181,000 because you know this will pay off their first mortgage and because you know the property is worth $200,000. If a second mortgage (of perhaps $10,000) is in place, the owner won’t be able to sell the property to you unless they have other funds in place with which to satisfy the second loan.

The potential existence of second mortgages doesn’t mean you shouldn’t pursue a foreclosure property prior to the sale, but it does mean that it will be worthwhile to do some preliminary research before making a proposal to the homeowner.

It can be beneficial for multiple parties to purchase a home before it is foreclosed upon. You, the buyer, can get a good deal on the house. The seller can avoid a foreclosure scar on their credit history. The lender can avoid the hassle and cost of foreclosing on a property. But if you are going to attempt this feat of real estate acrobatics, be sure to review the factors above and consider how to adjust your proposal to make the scenario work best for all involved parties.