When most people hear the words Short Sale or Foreclosure, two things usually come to mind: “There must be something wrong with that house” or “I’ll get the deal of the century on this house!” These ideas are typically false, but there is some rationale behind them. When properties become REO (Real Estate/Bank Owned,) the homes can fall into disrepair if the owners are disgruntled over being evicted and the price is often very competitive because lenders aren’t in the business of owning real estate.
There are both potential advantages and disadvantages of buying a home that is in foreclosure. The key is to understand the different stages of the foreclosure process and what the pitfalls could be of purchasing a property from a lender, depending on the particular phase of the process.
Notice of Default The first stage is where the lender files a Notice of Default/Lis Pendens, often called “pre-foreclosure,” after the owner has missed at least 3 months of payments. The borrower can still make up the missed payments at this point to avoid foreclosure or he can choose to sell the property in a short sale, where the net proceeds from the sale will be less than the debt (liens) owed by the Seller, which must be approved by all lien-holders.
Pros: Seller is motivated to sell quickly and will price the home very competitively and/or offer concessions.
Cons: Sale price must be high enough to cover mortgage(s) and closing costs and is subject to lender approval and terms, which can take 45-90 days to close (i.e. a short sale.)
Foreclosure Auction If the default is not remedied within 3 months of the Notice of Default, the lender/foreclosure trustee establishes a date to auction the property at a Trustee Sale, which is recorded with the county and is also posted on the door of the property and published in local newspapers. In Pennsylvania, there is a “right of redemption” law that allows the homeowner to pay the outstanding balance right up to the moment of sale at auction. The other option that is easiest for all parties involved is where the borrower gives the “deed in lieu of foreclosure” back to the lender.
Pros: Price is typically the outstanding mortgage(s) balance, which is lower than the short sale price.
Cons: The auction requires a cash payment, which is typically difficult for the average Buyer. Also, there is no Property Disclosure Statement provided, and no inspections allowed (sale is “as is.”) Buyer may take possession with unclear title and owe liens and back taxes, and no commissions to real estate agents or attorneys are paid by the lender. Additionally, the property may be in poor condition due to damage done by upset homeowners and the lender provides no warranties.
Post-Foreclosure REO/Bank-owned When there is no third-party purchase at auction, the bank takes ownership of the property. Since the lenders do not want to hold a non-producing loan or a vacant property, time is money. These properties are often tied with restrictions such as “No FHAHA or VA financing,” which typically takes longer than conventional financing, or “Only Cash Offers Accepted” because mortgages are a hassle.
Pros: Banks are highly motivated to sell the property and will negotiate on price and costs to some degree. The title is clear and Buyer will not take on any outstanding liens, mortgages or back-taxes. Inspections are allowed, bank will pay real estate agent’s commission, sales will close within a normal escrow period, and the house will be vacant.
Cons: Property is “as is” and bank will not agree to do any repairs and will not provide any disclosures. Since time is of the essence, a cash Buyer will often win the bid at a lower purchase price than one with a loan, making competition for these properties fierce. There is also an additional hurdle in the case of condominiums where many lenders require a minimum of 51% owner-occupancy for financing or more than 51% if the Buyer’s down payment is less than 20%.
If you are interested in learning more about the short sale or foreclosure process or would simply like to discuss what your home is worth, please contact me today. I would welcome the opportunity to show you how I go "Above and Beyond the Sale."
Frank Dolski, Associate Broker and Relocation Specialist
Coldwell Banker Hearthside, Realtors
Office: 215-794-1070 x 103