Buying Foreclosure Property

In this dowImagen economy, I often get asked if bargains can be had by buying foreclosures. First, let’s define foreclosure.  The act of auctioning off the property is the foreclosure.  Anything before that is pre-foreclosure.  If the home does not sell at auction and winds up being bought back by the bank, it is considered REO property.

Getting a deal on foreclosure property is not as easy as you would think.  The process goes roughly like this:

PRE-FORECLOSURE

  • Bank send a Right to Cure notice. This can happen as early as the first late payment. This letter states that the owner has 150 days to get caught up or be foreclosed on.
  • Owner attempts to catch up or get a loan modification.  The number of people who manage to catch up in the first 30-60 days is extremely high (80-90%).  Once someone is 90 days or more overdue, the number goes way down as the owner is typically too far behind at that point.
  •  An owner may be willing to sell at this point, but not for a price way under market value.  In strong markets, such as we have in the greater Boston area, they can put their home on the market and get a fair price.

LOSS MITIGATION

This is the owner’s attempt to prevent foreclosure.  It is worth trying as a person’s credit score can take a 100 point hit for defaulting on a mortgage.

  • Deed in Lieu
  • Short Sale
  • Loan Modification

Loan modification is the only one that is any chance to keep the home.

A loan modification involves asking the bank to change the terms of your loan (interest rate, length, etc) to bring the payment down to work with your lowered income.  You typically have to show a hardship in order to be able to do this.  And be able to make the new payment. If the owners do not have income to make even lowered payments, the foreclosure process continues.

If anyone you know is in this position and has questions on what to do, have them contact me.  I am glad to educate and connect them to resources that could help.  A useful resource for learning about modifications – www.makinghomeaffordable.com

Sadly, approximately 40% of people who get a loan modification still wind up in foreclosure as they are simply in over their heads, despite the modification.   These are tough times and we live in an area where a person’s mortgage payment (or rent) can wind up being close to half their take-home pay.  So it only takes one job setback or medical issue to put someone behind.

It is important to talk to a trusted Realtor and Attorney at the same time that you are talking to the bank.  If you will need to sell your home to avoid foreclosure, you should be proceeding down both paths in parallel.  It is possible to put your home on the market when you are behind in payments.  And getting the house under agreement will stop the pre-foreclosure process.

  • If successful in catching up or getting a modification, the owner keeps the home.
  • If not successful, the process continues with public announcements of the intent to foreclose.  THIS IS A POINT AT WHICH YOU CAN TRY TO BUY.  If you know the homeowner, you can approach them.  But you can imagine this has to be done delicately as this is a sensitive and embarrassing time for the owner.  There is no shame in falling behind on your debts, but knowing it is public information is upsetting.
  • At this point, if the owner has enough equity, they can and should sell the home.   An owner should never walk away from the equity in the home.
  • If the owner cannot sell because the are under water, they can try for a SHORT SALE.  But most owners would just assume walk away as a short sale is a stressful process.  And the number of short sales is greatly decreasing as property values are increasing.
  • The owner can do a DEED IN LIEU, which means you just willingly give up the deed and keys and walk away. This is preferable to going through the whole foreclosure process.  However, I have known owners who have tried to do this, but wound up walking away in disgust because the bank could not make this happen in an easy and timely manner.  The bank will make the owner show all their finances, agree to make some nominal payment and fill out all kinds of paperwork – possibly multiple times.  Owners rightfully think – “fine, just take the house the hard way then”.
  • Owner gives up and foreclosure process starts.   The bank goes to court to get permission to close.
  • Once the bank has successfully obtained the court’s permission to foreclose, they will start the eviction process if the owner has not yet left the premises.  In a total mystery to me, some of these go quickly, some take years.  I have no idea if that is because the now squatting owners have some rights I don’t know about or the banks are too overwhelmed and their systems are too broken to move the process along.  There are times when the bank will sell the home with the previous owner still in it and let the new owner evict, but this is happening less and less.
  •  The next step is auctioning off the property – this is the literal foreclosure – when the bank is selling the property to satisfy the debt.  THIS IS A POINT AT WHICH YOU CAN BUY. The property is usually given to an auction company to handle, so you would need to be following foreclosure announcements and auction websites to see when they will be auctioning.  Or ask your Realtor.  Savvy Realtors know how to find and follow these properties.   The foreclosure  literally will be an auction on either the front steps of the home or the registry.  You typically must bring a bank check for $5K-$10K with you – the instructions are provided by the auction house.  You must sign in and show the check.  If you win the bid, the check is turned over at the auction.  Often the bank will make no repairs or concessions.  So this is not for the inexperienced or for those who do not have the money to fix up the house.  Some buyers try to buy Foreclosure property with rehab loans so they can get money to fix them up.  This is not as easy as you would think and is a topic for a future blog.   But feel free to reach out if you have questions on that process.
  • If the home does not sell at auction, which happens about 80% of the time, the bank buys the property and it is then an REO (real estate owned).  It then goes on the MLS (Multiple Listing Service) via the bank’s REO agent and becomes much like any other sale.  THIS IS A POINT AT WHICH YOU CAN BUY.  The process is similar to buying any other house but be forewarned that the bank can take their time getting you a response and can often spend weeks collecting offers.  It is frustrating and there is not much you can do about it.  So this type of purchase is best for those who do not have a sense of urgency to get into a home. And better for people who will have the money to fix up the home after purchase.

If you have any more question on the process or want to know how you can find pre-foreclosure and foreclosure properties, please contact me

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Michelle J. Lane

Michelle J. Lane
Century 21 Commonwealth
CELL: 617 584-3904