Wednesday, 21 March 2018

Just a few short years ago, the real estate market was flush with foreclosures, a result of the economic downturn and accompanying real estate bust as people could no longer afford their mortgages.

Now, with a stronger economy and tighter lending policies in place, there are fewer foreclosures on the market and at the beginning of 2018, the foreclosure market was at a 12-year low. But you can still find them — especially in areas where homeowners are “under water" after owing more than their home is worth. New Jersey, Maryland, and Delaware had the highest foreclosure rates in the nation in 2017.

What is a foreclosure?

A foreclosure is the legal process in which a lender tries to recover the balance of a mortgage loan from a borrower who has stopped making payments. When a borrower defaults on a loan, the lender can use the process to force the sale of the property. Often foreclosed properties are priced below comparable homes in the same area.

“A foreclosure offers a little more equity in the property, but there's a little more risk and there's a little more involvement in the steps that you have to take," said Bill Flagg, a broker associate with ERA Queen City Realty in Scotch Plains, N.J., a foreclosure expert.

You can find a bargain among foreclosures, but the journey to closing may be wildly different from a traditional home purchase. To make a foreclosure sale go as smoothly as possible—and do expect bumps along the way—understand the process and how it differs from a regular real estate transaction.

Get prequalified

Most of the foreclosures you'll see will be comparably priced to other homes, and you can see them on the Multiple Listing Service (MLS) and other sites, along with the owner-owned inventory.

But before you start clicking away at the possibilities, get prequalified for a mortgage: That way you'll know about how much you have to spend, and you won't waste time looking for homes outside your price range. Keep in mind there's little, if any, room for negotiation with a foreclosure, said David Krohn of Southern California's Property Masters Realty, another expert in foreclosed properties.

Krohn suggested getting prequalified by the same bank that is selling the home (or another major bank) so that the seller has more confidence in the buyer. You don't have to sign for a mortgage with the bank that prequalifies you. The seller likely will also want to see evidence of a down payment — a proof of funds letter from your bank, for instance — to show that the money will be available immediately.

Study the terminology

You will also want to make sure you understand the terminology used with foreclosure properties. For instance, foreclosures are classified under the umbrella term “distressed properties," which can (but doesn't necessarily) mean they're in poor condition. However, many of them suffer from lack of maintenance, vandalism, owners who have moved out and caused intentional damage, or simply being vacant for an extended period of time. Other terms that you may hear include:

  • Short sale: The lender agrees to let a homeowner sell a home (in pre-foreclosure) for less than is owed on it. The buyer is not able to ask for contingencies and a price reduction because of any findings from an inspection.
  • REO: “Real-estate owned," as in, owned by a bank or lender. This is the most typical class of foreclosure and usually is a cleaner transaction than buying a home at auction.
  • A home sold at auction: These auctions are typically handled by a sheriff or other trustee and can occur on courthouse steps, in a convention center, or at the property itself. These are usually all-cash deals (paid with a cashier's check immediately) and many of these properties are unavailable for advance viewing or have limited inspection/viewing times if there's still a tenant in the home. There may also be other liens or back taxes owed on the property.
  • Government-owned properties: These properties are owned by agencies such as the Federal Housing Administration (FHA), Fannie Mae, Freddie Mac, or the IRS, and require even more paperwork, but a buyer may be able to provide get financing assistance.

Hire an expert

The institutional owner may have a real estate agent who works both sides of the transaction, but you'll want to hire an agent to represent your interests only. The professional you choose should experienced in foreclosures — even if you've handled regular transactions on your own in the past.

“This is just something where if you don't have experience with a particular bank or a particular asset manager, it could come back to bite you in the end," said Michael Barbaro, president of the Connecticut Association of Realtors.

When you find the right home

When you're ready to make an offer, it's important to understand the biggest difference in a foreclosure sale: You're dealing with an institutional investor, and every step of the process on the other end goes through many layers of approvals and processes.

That means there's very little room for negotiation and missing milestones, and that hearing back on your offer can take as long as a week or two or more. And don't panic if you still haven't heard back about your offer and see the home still listed; with a foreclosure, until the home is officially off the market, it's still considered "for sale."

Krohn advises clients to wait until their offer is accepted before getting an inspection. It's unlikely that you can bargain down the home's price by leveraging the inspection findings. “You can counter, but by and large, an institutional seller or bank will lean more on its as-is verbiage," Krohn said. However, if the inspection reveals a substantial issue (say, an eroding foundation) that had been overlooked otherwise, there could be room for a price cut.

You'll also likely get an “addendum" to the contract to give the seller additional protections. Before you sign it, make sure you, your real estate agent, and a trusted legal adviser understand everything in the addendum, from potential extra fees for the buyer to refund policies for earnest money if a sale falls through.

Krohn underscored the importance of abiding by the timelines and milestones set by the seller. “Institutional sellers are less patient with delays," he said, noting that most of them try to fill their quotas of closed sales by the end of the month. If you want an extension to the next month, they'll probably move to the next buyer.

The best part about buying from a bank, however, is that most of the transactions have a clearly outlined process, though they may stretch out longer.

Take the next step in your mortgage journey

 

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