In the current real estate market you often hear about buying Foreclosures, which can cause some confusion, because this word can refer to 3 distinctly different situations with any given property. It's important to understand that the circumstances about each one result in very different possible purchasing opportunities.

Buying Pre-foreclosures:

In the first case, a homeowner may be experiencing financial difficulties and wants to sell to escape the ongoing mortgage and related payment obligations. There may or may not be Notices of Default (NODs)  issued by one or more mortgage lenders who have outstanding loans against the property. Also, the property may or may not be listed for sale with a real estate broker.

In any case, a key consideration will be whether or not the seller has enough equity in the home (the difference between an obtainable selling price and the total of the selling and loan pay-off costs that the seller must pay). If not, as is often the case, the seller will need to secure approval from any and all secured lenders for a "short pay-off", meaning they agree to accept less than the full amounts owed. If this is done, it is commonly referred to as a "short-sale", and when advertised for sale, is often noted as "subject to lender approval".

These transactions are typically very time-consuming and intricate with respect to the detailed communications and documentation required, and they are often unsuccessful, even after lengthy waiting periods and extensive efforts to satisfy all parties. Since it is not uncommon for the lenders to require the sellers to contribute funds to close the transaction, the sellers' motivation to escape actual foreclosure may diminish or vanish completely, leaving lenders, potential buyers and agents with nothing to show for their considerable efforts.

Nonetheless, there are potential opportunities, especially if a seller is open to selling while there is still available equity to work with. Its important to do your research to either determine or do the following when pursuing such opportunities:

1)      Locate properties that are in default (NOD lists are available for sale, and many such homes are listed in the local MLS)

2)      Decide on target property(ies) by studying factors such as location, external condition and comparable sales

3)      Make contact with the seller either directly, or through your real estate agent (making sure to select one who is experienced with short-sales), and arrange to view or inspect the property and determine the seller's motivation and likely level of cooperation with the lenders.

4)      Determine both the current and projected market value, based on the potentially obtainable price plus the repair and upgrade costs

5)      Conduct all necessary negotiations and provide all required documentation to reach a conditional sales agreement that will allow all parties to move forward to a hoped-for lender approval and closing of escrow

Buying property at a Trustee's Sale:  

Whether a seller has marketed a pre-foreclosure home or not, if it is not successfully sold after the NOD (Notice of Default) is issued, the seller must either cure the default by paying off all overdue loan amounts and related costs, or the home will eventually be offered up at a Trustee's sale, normally held on the local courthouse steps. This can mean great opportunities for the willing and prepared bidder, since there is often a significant difference between the market value and the remaining loan & costs amounts needed to satisfy the lender. The highest bidder wins, or the lender takes the property back if no one offers enough to buy it at auction.

For the prospective buyer who is a successful bidder, being prepared means having cash available for the required deposit, typically 10% of the price, and being able to close escrow in 30 days, typically. Loan contingencies are normally not acceptable, and such properties are sold as-is, meaning any and all repair costs are the buyers' responsibility.     

Since this is generally the riskiest way to buy a pre-foreclosure property, the following guidelines are suggested:

1)      Research trustee sale auctions in your area to learn how they work and how much deposit will be needed and in what form, as well as when the balance will be due.

2)      Work with your lender to arrange for pre-approval of your mortgage loan, eliminating all potential roadblocks to eventual funding of the loan.

3)      Identify target property(ies) and learn all you can about condition and potential repair and rehab costs so you can evaluate how it pencils out at your pre-set high bid offer price.

4)      Track the property up to its sale date and attend auction with your deposit ready.

Buying REO (Real Estate Owned) Properties:

In the event that the lender takes the property back at the Trustee's Sale, it becomes known as "real estate owned", or REO. Factually it is also a completed foreclosure. As soon as feasible, the bank or lender will determine what re-hab or repairs are needed to obtain an optimal sale, and what selling price is realistic. Time is usually on the side of a willing and able buyer, since lenders do not want to hold onto such properties, particularly if they have many of them, as they are non-performing assets. This translates to great opportunities to negotiate very desirable buys in a buyers' market, such as we are now experiencing.

In most cases, REOs can be found in the local MLS listings, as lenders know that this is by far the best way to maximize exposure and selling potential. This is one reason that buying REOs can be the easiest and least risky way to capitalize on foreclosures. However, it's advisable for a buyer to work with a real estate agent who is experienced with REOs, since disclosure and determination of various possible property defects works differently than with a conventional seller.

And while the lender has effectively removed the possible concerns about any outstanding loans, liens or taxes due on the property, a buyer should expect to perform their own due diligence with physical inspections. However, re-hab and upgrade costs can often be worked into the purchase negotiations with this type of motivated seller.

Here are the important steps for a buyer to take in maximizing their REO-buying experience:

1)      Research and select an experienced real estate agent to assist in the process of identifying good potential properties to consider.

2)   Work with your lender to arrange for pre-approval of your mortgage loan, eliminating all potential roadblocks to eventual funding of the loan

3)      Study the available possibilities for a desirable location, area and combination of physical amenities, as well as list price. Review both comparable sales and listed properties to determine market value, both as-is and with desired repairs or upgrades

4)      Select your most-desired home and work with your agent to develop and negotiate a realistic purchase offer

5)      Perform your due diligence as recommended once offer is accepted

In summary, there are different ways to profit from the broad array of opportunities made possible by the dynamic and shifting market. As always, due diligence and experienced assistance are the best tools to use in your search for the one that is best for your circumstances and acceptable level of risk. Happy hunting!

By Dick Hamer, e-Pro

Broker-Owner

Regency Real Estate Brokers

(949) 887-3048 (cell)

(949) 215-3310 (fax)

www.DICKHAMER.COM

TopAgent@DICKHAMER.COM

"Real Estate With Real Results!"