It’s sometimes trying negotiating a real estate purchase with a bank, loan company, or mortgage company as the seller. The institution seems non-caring and even illogical at times, but there are advantages that make it attractive; namely price. A buyer can save dramatically on current market prices by purchasing a foreclosure. Knowing what to expect helps to be prepared for the experience.
Basically a real estate foreclosure is a property that has been “taken back” by the first priority lien holder. This entity is usually a major bank, loan company, or mortgage company. The home owners have defaulted on the payments and maybe tried to sell the property as a short sale. The first priority lien holder will then start legal proceedings to “take back” or “repossess” the home. All subsequent lien holders like home equity line and second mortgage companies are out of luck with regards to debt recovery, plus the defaulting homeowners are out their initial down payment.
Most states in the US have been overwhelmed with a massive influx of foreclosures clogging the market and lowering prices drastically. It’s a great time for investors to get a great deal and there are distinct advantages and disadvantages of buying one.
Prices and interest rates are at all-time lows: The real estate market works on the basic principle of “supply and demand”. When the market is glutted with supply, demand goes down and so do the prices. Not only do mortgage or finance company’s price the foreclosures under market, they also tend to “price war” with their competitors in the same local markets. Regular home sellers just can’t compete.
- Liens: The liens are usually cleared through the legal act of foreclosure. Liens like mechanic liens, utility liens, old equity lines, and tax debts are usually cleaned up. This is different from a short sale, in which liens can pop up at any time and a buyer can easily get stuck paying them.
- Repairs: The banks or mortgage companies will pay for major defects in a home that would prevent virtually anyone from getting a loan on the property, such as major termite damage or a flooding problem.
- Timely manner: The institutions want it done and off their books. The escrow period is similar to most other real estate transactions, between 30-60 days.
- Highest bottom line: The institutions want the biggest bottom line net for their foreclosures. An offer with a net of $100,010 with the buyers obtaining a loan can easily win out over an all cash offer netting the bank $100,000.
- Condition issues: A defaulting homeowner is stressed out trying to save their home and their credit score from a foreclosure. The poor homeowner has just “had it” by the time a legal foreclosure process is underway. They can be very angry and damage the property badly. Homes are often stripped of appliances, fixtures, and major components. There have been cases where cement has been poured down plumbing drains and fires have been set.
The lending institutions holding the foreclosures aren’t excited about paying for home inspections, warranties, or even turning the utilities on for a home inspection. In fact, even if the buyers agree to foot the bill for these costs, it’s hard to get a liability release from them to proceed.
Highest and best
Numerous banks and mortgage companies wish to create bidding wars for their properties. If several buyers submit offers at the same time, the buyers might be asked for “highest and best”. Meaning, it’s back to the buyers to better the deals with higher prices, shorter inspection periods, or removing contingencies.
Buying a foreclosure can be frustrating, but well worth the extra effort.