Buyer Resources - Foreclosures

Buying Your Home – Foreclosed (REO) Properties


Is buying a foreclosed home an option?
Yes, these are sold as “REO property, bank owned, or repossessed homes. A foreclosed property is a home that has already been repossessed by the lender because the owners failed to pay the mortgage. They have already gone through the foreclosure process, have been offered at a Trustee Sale – or foreclosure sale, but failed to sell to an outside buyer, therefore the bank acquires them through foreclosure. They are sometimes referred to as REOs (real estate owned – by banks or mortgage companies). Thousands of homes end up in foreclosure every year. Economic conditions affect the number of foreclosures there are. Many people lose their homes due to job loss, credit problems or unexpected circumstances. 

What types of foreclosures are there?
Judicial foreclosure action is a proceeding in which a mortgagee, a trustee or other lien-holder on the property requests a court-supervised sale of the property to cover the unpaid balance of a delinquent debt.  Non-judicial foreclosure is the process of selling real property under a power of sale in a mortgage or Deed of Trust that is in default. In such a foreclosure, however, the lender is unable to obtain a deficiency judgment, which makes some title insurance companies reluctant to issue a policy.

How do you find government repossessed homes (VA/FHA homes)?
FHA repossessed homes: The U.S. Department of Housing and Urban Development acquires properties from lenders who foreclose on mortgages insured by HUD. These properties are available for sale to both homeowner-occupants and investors. You can only purchase HUD-owned properties through a licensed real estate agent or broker. HUD will pay the broker's commission up to 6 percent of the sales price. Down payments vary depending on whether the property is eligible for FHA insurance. Typically, you can get an FHA loan with 3% down. You may even be able to buy a HUD foreclosed property for as little as $100 down. If not, down payments range from 5 to 20 percent for conventional financing. One caution: HUD homes are sold "as is," meaning limited repairs have been made but no structural or mechanical warranties are implied. Each offer must be accompanied by an "earnest money" deposit equal to 5 percent of the bid price, not to exceed $2,000 but not less than $500. You can find a list of these homes at www.hudhomestore.com.                                                                                                                                                                             VA repossessed homes: The U.S. Department of Veterans Affairs also offers foreclosed properties which can be purchased directly from the VA, often well below market value and with a down payment amount as low as 2 percent for owner-occupants. Investors may be required to pay up to 10 percent of the purchase price as a down payment. This is because the VA guarantees home loans and often ends up owning the property if the veteran defaults. If you are interested in purchasing a VA foreclosure, call 1-800-827-1000 to request a current listing of homes for sale. About 100 new properties are listed every two weeks. You should be aware that foreclosed properties are sold "as is," meaning limited repairs have been made but no structural or mechanical warranties are implied.

What happens at a Trustee Sale?
Trustee sales are advertised in advance and require an all-cash bid. The sale is usually conducted by a sheriff, a constable or lawyer acting as trustee. This kind of sale, which usually attracts savvy investors, is not for the novice.  In a trustee sale, the lender who holds the first loan on the property starts the bidding at the amount of the loan being foreclosed. Successful bidders receive a Trustee's Deed.

How do you get financing to buy a home at a Trustee Sale?
One reason there are few bidders at foreclosure sales is that it is next to impossible to get financing for such a property. You generally need to show up with cash and lots of it, or a line of credit with your bank upon which you can draw cashier's checks.

What are some problems about buying homes at a Trustee Sale?
Buying directly at a legal foreclosure sale – a Trustee sale is very risky. It is strictly caveat emptor ("Let the buyer beware"). The process has many disadvantages. There is no financing; you need cash and lots of it. The title needs to be checked before the purchase or the buyer could buy a seriously deficient title. The property's condition is not well known and an interior inspection of the property may not be possible before the sale, says James I. Wiedemer, author of "The Smart Money Guide Bargain Homes, How to Find and Buy Foreclosures." Usually, you buy a foreclosure property as is, which means there is no warranty implied for the condition of the property (in other words, you can't go back to the seller for repairs). In addition, only estate (probate) and foreclosure sales are exempt from some states disclosure laws. In both cases, the law protects the seller (usually an heir or financial institution) who has recently acquired the property through adverse circumstances and may have little or no direct information about it.

Where can you find foreclosures?
In most states, a foreclosure notice must be published in the legal notices section of a local newspaper where the property is located or in the nearest city. Also, foreclosure notices are usually posted on the property itself and somewhere in the city where the sale is to take place. When a homeowner is late on three payments, the bank will record a notice of default against the property. When the owner fails to pay up, a trustee sale is held, and the property is sold to the highest bidder. The financial institution that has initiated foreclosure proceedings usually will set the bid price at the loan amount. Despite these seemingly straightforward rules, buying foreclosures is not as easy as it may sound. Sophisticated investors use acquired techniques, so novices may find themselves among stiff competition. It is wise to be cautious when considering purchasing a home at a foreclosure sale. Many experts, in fact, advise inexperienced buyers to hire an expert to take them through the process. It is important to have the house thoroughly inspected and to be sure that any liens, tax liens, undisclosed mortgages, or court judgments are cleared or at least disclosed.

 

 

Dina Romero
Dina Romero
Broker Associate
1071 E 16th Street Upland CA 91784