Many investors and even some families looking for a home want to purchase a foreclosure. The information about properties being in some stage of the foreclosure process are public court records. Zillow lists properties that are in the foreclosure process as “Pre-Foreclosure”, “Foreclosure”, and “Foreclosure / Auction”, for example. There are a number of steps in the foreclosure process.
Foreclosure and Pre-Foreclosure
The lender has filed notice with the court that they plan to initiate the foreclosure process. The homeowners are typically three or more months behind on their payments. The homeowner can pay the arrears in full and the home will no longer be in pre-foreclosure status.
The legal process by which the lender takes possession or ownership of the property. At the end of the process, if the arrears in principle, interest, and late and legal fees is not paid, the judge orders a foreclosure sale. It is a public auction in which anyone, including the bank itself, can purchase the home. In some counties, the home is literally sold “off the courthouse steps”. In others, it’s held in a courtroom or other venue open to the public. Any proceeds from the sale are used to pay the default judgement on the loan attached to the property.
This can mean the public, court ordered auction or an auction that the bank is holding to sell the property to the public. The mortgage lender itself can be the highest bidder at a court ordered foreclosure sale because they believe the value of the property is higher than the highest bidder. Sometimes the bank wins the foreclosure sale for $100 because there are no other bidders for the property. At some point over the next several months, they put it on the market to sell it to the public. This can be on a real estate foreclosure auction site, with a Realtor to list in the MLS, or both.
How to Purchase a Foreclosure Property
Directly From the Homeowner
Once a home is listed as pre-foreclosure or foreclosure, a buyer could make an offer directly to the homeowner via letter, phone call (if the number can be found and not on the federal and state do not call lists), or by knocking on the door. If the homeowner is open to selling and buyer and owner agree to terms, they would enter into a contract and proceed to closing. Potentially complicating this process, however, is if the home, after costs of sale, is worth less than what is necessary to pay of the mortgage lien and any inferior liens. Additionally, it’s not uncommon for there to be liens superior to the mortgage lender foreclosing, such as a superior mortgage, homeowners’ association lien, or tax lien place by the county, state, or federal governments. Buyers should always have a professional title search done.
All terms of a real estate contract must be in writing. You could have an attorney write the contract. Or, if you would like assistance for the entire process, offer, negations, inspection, appraisal, and all the other details through to closing, hire a Realtor to help you. Realtors in Florida use a standard state contract designed and approved by the Florida Bar and Florida Realtors for Realtors’ use. Realtors can advise you on terms of an offer and points of negotiation. Always consult with an attorney if you have any legal or contract questions, or need legal advice.
Realtors typically earn 2.5% – 3% of the purchase price for their service. That includes helping a buyer find the home to purchase. If you have that part – 1/3 of the job – done yourself, a Realtor may be willing to help you for a reduced fee to handle the last two parts, negotiations, and all the details contract to close. That would include coordinating with your lender and the title company, home inspector, appraiser, and the home owner, and providing advice and perspective based on his or her training and experience. A good Realtor will always earn more then their commission in bottom line cost savings through their negotiation skills, experience and advice, and time saved by taking care of all the details for you.
In a Court Foreclosure Auction
This process varies by county. Typically, the home is sold as-is and site-unseen, except from the outside from the street or sidewalk. Often, the home is still occupied. Even if not, entering onto the property and certainly into the home without the owner’s permission could be considered trespassing or breaking and entering. The buyer would have the winning bid and would have to have a certified bank check at the time of the winning bid or within a few hours.
WARNING: This is not for the faint of heart or weekend warrior. The people bidding at foreclosure auctions are seasoned, real estate professionals and contracts who do this as part of their full time business. They know with a high degree of certainly what is involved to get a foreclosure home into condition so that it can be sold to the public. That includes having the resources – money and relationships – to get the job done. Their maximum price that they are willing to pay includes any risk or uncertainty on the condition of the property. They know the value of the home once the work is completed and transaction costs associated with that. There are a a few good shows on HGTV such as Flip or Flop that follow real professionals at this in action. It’s not as easy as it looks.
When the Home Comes Back on the Market
When the bank takes back a property in a foreclosure auction, they assess it and sometimes make repairs. This can be the bare minimum to make it marketable to a family willing to do some work. Or, it can be a full renovation. The bank makes a calculation and judgement to determine how they can recover the most money to make this decision.
After the home is ready to go on the market, they work with their Realtor partners to put it up for sale in the MLS. It’s typically called an REO – real estate owned – property. One common misunderstanding is that these homes are great values. Considering condition, they typically are not and are priced comparable to other homes like that in similar condition or a fair market adjustment is made for that. For buyers who have the time, resources, and money to renovate an REO that’s being sold in poor condition, there it typically money to be made. Often, such as when the mortgage note is owned by Fannie Mae or another government agency, the home is made available to owner-occupants only for a period of time, locking out investors.
Buying a foreclosure property can be a good investment for many people. There’s a lot of knowledge, experience, skill involved, and the right relationships required to be successful. It’s not always the best way to make a successful home purchase.
If you are looking to purchase a home for your family to live in or as an investment, we can help! One of our Realtors will sit down with you to learn the details of the type of home that you are looking for and what real estate goals you are looking accomplish. Then, work with you on a plan that can best get you there.
For more information, give us a call today at 407-765-2912.