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Foreclosures 101 - The Basics

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Buyers/Investors who want a good deal in real estate invariably think first about pursuing foreclosures. Purchasing a foreclosure allows buyers to gain a strong equity position immediately rather than waiting years for your home to appreciate. Below is information to understand the foreclosure process and start you on your way to finding your dream home!

What is a foreclosure?

Foreclosed houses are real estate properties that have been foreclosed by the lending companies or the government because of the failure of the owner to pay their loans or mortgages.

 
As such, whenever a banking institution or an agency end the long and complicated legal process with the foreclosure, they have to sell it off right away to get the proceeds and apply it to the terms of the contract.
 
This reality is actually one that most households face nowadays because of failure to properly manage finances and due to the difficulty in the economy.
 
Despite the sad picture of foreclosure, it should not keep you from purchasing these properties. Actually buying foreclosure houses is a good way to turn a sad thing into a wonderful opportunity. Make some good out of it.

The Foreclosure process

Foreclosure proceedings vary from state to state. In states where mortgages are used, homeowners 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. Tennessee is a trust deed state. The right of redemption occurs before the property is sold at the trustee sale.

In Tennessee Banks or Loan Servicers must  file a notice of default in an approved publication. Notice of default filings indicate where a property is about to be sold at the trustee sale and when the sale is to take place.

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:

  • No loan contingency
  • Sealed bids
  • Proof of financial qualifications
  • Sizeable earnest money deposits
  • Purchase property "as is"

Sometimes 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.

Banks and Loan Servicers will have a representative present at most trustee sales to protect their interests. These representatives will be there to bid exactly what the mortgage balance is on the property to cover their costs associated with the mortgage.

Foreclosures on the Open Market

Generally there are two types of foreclosures on the open market. Government owned and bank owned. When a property is sold at the trustee sale and the winning offer is the bank itself, these properties are now REO properties. REO is Real Estate Owned. These are now considered assets of the banks. REO’s are monitored by the government as a bank is only allowed so much in REO Assets periodically.

Bank owned properties are where banks such as Countrywide, Wells Fargo, and Bank of America have retained these properties at the trustee sale. These are now REO properties.

Government owned properties are properties where the government has insured the mortgages and the homeowner has gone into default. The government has already paid the bank the cost of the mortgage and is now holders of the property. These are HUD,VA, and Fannie/Freddie REO’s.

How to find Foreclosures on the open market

First contact me! Once a property becomes an REO the bank must now get the property on the market for sale. The property is assigned to and listed with a Real Estate agent. Not all properties are listed on the open market. They are advertised internally to investors or sold in bulk to investment firms. Eventually they will be kept as rental properties or make their way to the open market. Some foreclosures that have been on the open market for extended periods of time will be sent to an auction company for liquidation.

Bank Foreclosures

Many banks maintain online lists of foreclosed properties. Here are a few national lenders who maintain Web sites of bank-owned properties:

Government Agencies

Some government agencies require you to retain the services of a real estate broker to make an offer to purchase. Others will let you submit offers on your own.

Asset Management Companies

Some lenders hire an asset management company to handle foreclosures on the lender's behalf.

Auction Houses

Auction companies hold huge auctions, sometimes selling as many as 100 homes or more in a single day. While many experts agree that auction companies often get higher prices due to the auction frenzy created among its bidders, sometimes you can find a gem in their inventory.

Pricing

Banks and/or Asset Management companies utilize Listing Companies to re-sell the property Listing companies will prepare BPO’s to suggest pricing to the owner of the REO property.  The price entering the market will sometimes already reflect a significant reduction.

Government Properties such as HUD and VA will appraise properties that they retain and price according to the appraised “AS-IS” value. “AS-IS will mean a reduction in value to be determined by the appraiser.

Bidding

Pricing is generally tied to what acceptable “net” banks or government agencies are seeking. Some entities are more flexible with the desired “net” than others. All are seeking to secure an acceptable bid on the property that will give them the desired “net.”

Banks or Asset Management companies seek to re-sell the property. The longer they hold the property the more losses they incur. There is no way to determine what will be an acceptable bid. Factors such as price, condition, location, and days on market will influence a banks willingness to accept bids below listed price.

Government owned properties generally have internal formulas on what will be an acceptable net. The price is merely a starting point. There policies are much stricter on bids and they do not change acceptable bid parameters based on each individual property. What they will accept will be consistent for all their properties.

Repairs and costs.

Inspections-are your friend. When buying “AS-IS “ properties, you MUST get an inspection to protect yourself.

Types of issues:

Cosmetic- Routine repairs such as paint, carpet, light fixtures, and minor drywall repairs etc.

Performance/functional- electrical, plumbing, AC unit, furnace etc.

Structural- Foundation, Roof, Driveway etc.

Benefits of Buying Foreclosures.

Equity at close- in today’s market you can achieve 30K-40K in instant equity on After Repair Value”

Cash flow- when you pay less for a property, it means a lower cost for you. The rent command will be the same once repairs are made. Lower cost for you means a higher rental income.

Foreclosures can be purchased 30-50% below market Value. Buying a foreclosure can strengthen your financial stability through instant equity. Equity can be used to fund college tuition, purchasing a car for your children, or as an emergency fund for life’s misfortunate times such as medical emergencies

Investors can achieve the best of both worlds. Portfolio properties with cash flow and a good equity position will strengthen you portfolio. A low loan balance gives you a strong Real Estate portfolio and options

Whether you are a savvy investor or looking for your primary residence we can help you find a foreclosure deal. Our expertise comes in locating these homes and determining where to bid to get you the best deal possible. For questions on the process or to request more information please fill out the form below:

Read 5793 times Last modified on Friday, 03 May 2013 16:59
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