Understanding Foreclosures

You’ve probably stayed up late at night and heard the infomercials about all the money you can make purchasing foreclosures. I’m here to tell you, it’s not as easy as you think and that most of it is going to be based on a combination of flexibility and your willingness to take risks.

To begin with, for the most part, there is no equity in these properties. Today’s foreclosures are a product of several years of inflated home values and high financing. Banks are discovering they are saddled with loans on houses that are worth less than the notes and they need to get as much money back as possible. That means banks are aiming for market value.

If you want to get the best deal, you have to go to the bank auction. In doing so, you assume the most risk as you are purchasing the property “as-is” and it is up to you to clear the title of additional liens and issues. In addition, they require a greater cash commitment. Your willingness to take the risk, buys you the best deal.

If the bank can’t get the property sold at auction, it becomes an REO listing (Real Estate Owned). In other words, it’s the bank’s problem and they need to get rid of it. Assuming the note is greater than the value of the property, the bank wants to recover as much loss as they can for the property and they want to move it as fast as possible.

Banks are not interested in helping a company build wealth by listing their properties exclusively in a private website. They want the best offer they can get and that happens by listing the property where the most people can access the information freely. Listing the property with a realtor and placing it in an MLS is the best way that can be done. And lucky for you, Houston’s MLS is always available to the public.

Property Condition

Oftentimes, but not always, property owners are very angry that they are being foreclosed on so they retaliate by taking everything that isn’t nailed down. That includes all appliances and A/C units. I’ve seen properties where the owner removed the hardware from the kitchen cabinets and all the water faucets/fixtures. It is quite rare for a property to be in “move-in” condition, though they do exist. The worst the condition of the property, the lower the asking price.

Banks are getting smart and they are offering relocation assistance to homeowners in an effort to prevent them from stripping out the property.

You should have money put aside to cover the cost of repairs and appliances just in case.

Expectations.

Keeping everything in mind that I’ve explained up to this point, what can you expect as a return from an REO? That depends on your needs. Is this going to be your homestead or an investment property? How much of it are you financing?

The greater the number of requirements you have, the more difficult it is to get a good deal. If you have kids, you are probably trying to find a house in a great neighborhood with good schools. You are probably far less flexible regarding the geographical area and the move-in condition of the property.

If it’s an investment property that you are purchasing to lease out, then you don’t care where it’s located as long as you can be assured it will lease out at a reasonable rate.

Then of course there is resale value. Unfortunately, I don’t have a crystal ball, so I’m not able to determine what the resale value of a property will be 5 years from now.

Price strategies

When you find an incredible deal on HAR for a property that is in foreclosure, you have to act very quickly; and you have to be ready to make the best offer you can. And oftentimes, that means offering more than the asking price.

You’re probably thinking that defeats the purpose of getting a deal. Remember, the bank is trying to get the best price in the shortest amount of time. So the listing agent might be setting up a bidding war in order to make that happen. You will still most likely be able get the property at below market value, but probably only about 15 – 20% below.

Reality

Here’s the reality of the situation. If as a realtor, a bank were to approach me to list a foreclosure where the bank only had to recover $100k but the market value of the property was actually $150k - $200k, would I list it? Or would I buy it myself and then turn around and list it at market value? Would I not be on the phone calling my investor clients and letting them know about the property? And how would that property have made it past the auction block?

I’m skeptical of people who claim that they have access to information about properties that meet the scenario I just described. Because as I said, the banks want these properties off their books fast.

Summary

I don’t want you to be discouraged as I’m sure you are seeking a foreclosed property because you want a good deal. We are in interesting times and property values are about as low as they are going to be for a while. A foreclosure just seems like the best way to get that rock bottom price. I’m here to tell you that there are good deals to be had whether the house is in foreclosure or not. Limit your “must haves” and you increase your chance of getting a good deal on your purchase.

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Is this a good time to buy a house?

I get asked that question a lot.

My answer is always the same. What is your objective?

Obviously, the question is being asked as a result of recent economic events. Every day we hear more and more about foreclosures across America. We see stories on T.V. about home values plummeting across the nation.

Texas, so far, has been spared the degree of loss that our fellow Americans are facing. Home values in Houston never really inflated to the same degree that they inflated in states like California, so that means they don't have as far to fall.

Trying to find the bottom in a state like California is like the difference between paying $1 million or $500K for a house. Whereas in Houston, it could be the difference between paying $400K or $375K for a house. The risk of losing out on a really good deal because one decided not to wait for the market to hit bottom just isn't that high.

If you're an investor trying to decide if you want to buy an investment property, this is an excellent time to buy. Lease rates in Houston are excellent. A lot of first time home buyers are afraid to commit to a mortgage, don't have the required down payment or don't have the credit score needed to qualify. This means they have no choice but to lease until their situation changed.

If you qualify and have the money to put a down payment on a house, then yes, this is a good time to buy. Could you get a better deal if you waited a few months? Possibly. But it comes back to the question. What is your goal? If you are ready to be a home owner, be a home owner and just enjoy your home. I have heard it said that if you want to recoup your closing costs when you go to sell, you need to hang on to your house for at least 5 years. It all depends on how quickly your house builds equity.

Getting a good deal on a house should be only a part of your objective. Loving the house you've decided to spend the next several years is probably a better objective. An experienced Realtor can help make sure you don't pay more than the market value of your house and he or she may even succeed in getting you a good deal on it.

Short Sales

As more and more homeowners are being faced with the daunting prospect of facing foreclosure on their homes, "short sales" appears to be the new trend. If you are a homeowner anticipating foreclosure on your home you might want to consider a short sale of your property.

What is a short sale? In a nutshell, it is when the bank permits you to sell the house short of what is owed on the principal of the note. The balance of the note is usually forgiven and a 1099 is issued to the homeowner for the difference. You would need to consult with your bank to find out exactly what their policy is. Consulting an attorney would also be a good idea.

Why a short sale? By doing a short sale, you prevent foreclosure and can potentially save your credit. When doing a short sale, the bank covers the liens (i.e. outstanding HOA fees and taxes) and realtor fees. If the buyer is requesting closing costs to be covered it is also possible that the bank will be willing to cover them.

The most important thing to know about a short sale is that the process is an arduous one. If you are going to do a short sale, the best time to begin the process is before you begin defaulting on your house payments. Once you begin defaulting, the amount of time you have to find a buyer begins to diminish.

Most real estate agents today have some experience with short sales. The key is finding one who is willing to do them. There is a lot of work involved in seeing the sale to completion.

What is required? Each bank is different. For the most part, in order to have a short sale accepted by your bank you will most likely need a hardship letter that explains why you can't make your house payments. Some required items are financial statements from your bank, pay stubs and an actual offer. Again, you would need to contact your bank to know exactly what you need. In addition to this, you will need to provide the bank with authorization for your realtor to speak to them about your account.

How long does the process take? This is where your patience and your buyer's patience will be tested. Each bank is different. It can take anywhere from 2 weeks to 6 months before you will know if your buyer's OFFER is going to be accepted. Bank processes generally allow a foreclosure to be stalled while a short sale is being considered but there is no set criteria for this. Some banks may not stop the clock fast enough. This is why you want to begin the short sale process before you stop making payments.

The key point to know is that once the foreclosure occurs, it is too late for a short sale to take place.