If you’re considering buying a foreclosure, short sale , or auction property it’s really not as ‘cut and dry’ as you may think. There is a lot to take into consideration, and a lot happen ‘behind the scenes’ that you may not be aware of. Below is a look at the anatomy of these types of homes; as well as the cycle involved that leads them to being labeled as such.
Pre-foreclosures & Short sales- this is the stage before the lender forecloses on a property. During this time the borrower may have received several notices advising to bring the mortgage current or face possible foreclosure. In response to the notices, the homeowner may be proactive and seek the lenders’ permission to do a short sale on the home. Until this happens; the property is actually a potential short sale. Note the word ‘potential’; this means that the list price is not approved by the seller’s lender and the actual sale itself cannot occur, and is not guaranteed until full approval is granted by the lien holders.
This is where most consumers are confused and misinformed. It is believed that just because an agreement was signed with the homeowner (aka the current borrower); that the terms of the contract are set in stone. Fact is; it is just the opposite. However; keep in mind that once the lender reviews your offer; they may accept it, reject it, or counter your offer with a different price and/or terms.
Since the homeowner is asking the lender to accept less than is currently owed on the property and possibly forgive the balance owed; buying a short sale property is usually a long and tedious process; especially if there is more than one lender or lien holder involved.
While you are waiting for the short sale to be approved; if you happen to find another home that you want to buy instead of the short sale property, then you may withdraw your offer and move on. If you submitted earnest money, it should be returned to you as long as you are within the terms of the agreement. If the short-sale is approved; you will proceed to closing on whatever date and time is specified in the final contract.
Foreclosures/REOs- these are bank owned properties that have been fully foreclosed, and known as ‘real estate owned’. If the lender doesn’t approve the short sale, then the homeowner is notified to vacate, and title is ultimately transferred to the lender as the rightful owner. The lender sometimes completes any necessary repairs bringing the property to move in condition and then relists it as a foreclosure/REO. The properties are sold ‘as is’, and are sometimes priced to attract multiple offers. However; it is not unusual for the list price to be near fair market value, and sometimes even above recent sales in the area. Even though a home will ultimately sell for whatever a buyer think it’s worth, this doesn’t stop sellers (in this instance; the bank) from testing the market and sometimes listing a property slightly over recent values in the area. In the end; banks are just like any other seller; they want as much as they can get for the home.
The process of buying a foreclosed property is similar to a traditional real estate transaction except with a few amendments tailored to suit the bank’s way of operating. You’re usually instructed on when closing will take place, and how much earnest money deposit is required. If you don’t close on the specified date; then you will be charged a specific amount per day (per diem) until you are able to close on the home. If you don’t close, most times your earnest money will be forfeited.
Auction- a property may be listed for auction while the foreclosure is being processed. This is why sometimes you may see a notice about the auction property urging you ‘not to disturb’ occupants. This means that if you were to purchase the property under auction terms; as the new owner you are now responsible for evicting the borrower. In addition; you will not have had an opportunity to see the inside of the property, and assess the condition. Most times, once the mortgage is no longer being paid, the property itself is no longer being cared for or maintained. Sometimes auction homes are un-financeable due to lack of equity or upkeep.
A few other things to keep in mind when buying auction properties are; they are sold ‘as is’, any liens against the property will transfer with the sale of the home, and you will be responsible for paying those off as the new owner. Ideally; you will want to do whatever inspections on the property before placing your bid; as well as a title search. There is usually an auction fee required to participate in the auction and it’s due ‘upfront’.
Additional costs may include auctioneer fees; also known as a ‘buyer’s premium’; technology fees, as well as realtor’s commission. Earnest money deposit is higher than earnest money for traditional home sales. Opening auction bid is set to encourage ‘multiple offers’; which essentially increases the price of the property. If you are using a loan to finance the purchase of the property; and the appraised value is higher than your winning bid; you will be expected to pay the difference in cash; at closing. Finally; these types of homes often require specialized financing, depending on the condition of the property.