What is a foreclosure property?
A foreclosure property occurs when the owner defaults (does not make payments) and the owner’s lender takes the title of the home through the foreclosure process as prescribed by the Deed of Trust. The owner’s lender then proceed with selling the property in an attempt to recoup the funds borrowed for the purchase. These properties are also referred to as REO (Real Estate Owned) which is an accounting term used by banks to identify the foreclosure properties they own on their books.
#1 What differences are there in foreclosures?
- When an owner defaults on the loan the trustee is directed to enforce the Deed Of Trust. The Deed of trust provides for taking possession of the property or selling it on the courthouse steps.
- A FHA or VA loan is insured by the government and if the holder of the lien wishes to apply for this protection the government pays the insurance and takes possession of the property. These properties when insured by FHA are what are commonly referred to as HUD Foreclosures or if insured by the VA are VA Foreclosures.
- On other types of loans which are commonly referred to as conventional the bank that held the loan rretains the property for sale.
- Typically the banks hire an Asset Manager to handle the sale of the properties.
#2 Here’s what you’re looking for as the buyer in a foreclosure transaction:
- Clear title and no prohibitive liens or claims against the property. These are typically cleared by the foreclosing authority prior to sale.
- Patience with the communication process. The “seller” is an entity not a person and they have set processes that must be followed and should not be a major concern. As long as you get title insurance this issue is addressed.
- A current valuation. With government sales an appraisal has been prepared to determine the list price. With a HUD sale if you are using FHA financing the appraisal that has been provided by HUD must be used by your lender. In any case, you Century 21 Judge Fite real estate professional can provide you with a comparative market analysis.
#3 You’re a good candidate for a foreclosure purchase if:
- You’re patient. You are dealing with an institution and delays will happen.
- Your financing is in order. If you’re preapproved, have a large down payment, and can close at any time, your offer will be viewed more favorably than that of a buyer whose financing is less secure.
- With an FHA/HUD or VA property a PreQualification letter will be required prior to making an offer. Most asset managers selling foreclosure properties also require this.
- You don’t have any contingencies. If you have a home to sell before you can close on the purchase or you need to be in your new home by a certain time a foreclosure may not be for you. Lenders like no-contingency offers and flexible closing terms.
#4 Some of the risks faced by buyers of foreclosure properties include:
- Purchase of a foreclosure property is not unlike the purchase of an owner occupant other than the fact that the seller has no emotional attachment to the property.
- If you are using FHA or VA take the condition into account prior to making an offer. Lenders geerally will not do repairs and FHA/VA will have repair requirements that cannot be completed prior to closing.
- Potential for rejection.
- Typically the properties are listed at a price with the condition taken into consideration. Offering a lower price for repairs will not improve your chance of purchasing the property.
- Lenders want to minimize their losses as much as possible. If you make an offer tremendously lower than the fair market value of the home, chances are that your offer will be rejected and you’ll have wasted time.
- Bad terms.
- No repairs or repair credits. In some cases the bank repairs and refurbishes the property but if not it is being sold as is.
In general, you are making one of the largest purchases of your life. It should also be one of the happier times for you. However, the purchasing process includes several hurdles and frustrations. If you can keep the end in mind and be patient it will be a very exciting process. As always, having a CENTURY 21 Judge Fite Company real estate professional guiding the way and following their advice will reduce your stress. Let your Realtor do the worrying.