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BUYING FORECLOSURES
Survival Facts
I would like to provide you with some insight into buying real estate from the bank. I use the term "bank" to refer to all of the financial institutions that are selling real estate that they have taken back from a defaulted loan. It seems that almost everyone that is actively looking for a house to buy is looking at foreclosures. Whether they're called a Short Sale, REO, pre-foreclosure, or bank owned, they are really all the same thing. You're going to be dealing with the bank, and dealing with a bank is better than dealing with the traditional owner, right?. The bank is more professional and does not have the emotional baggage that an owner has, right? WRONG WRONG WRONG; remember that this is the same "professional" institution that gave the original owner a loan that they couldn't pay for. Banks are not easier to deal with, banks are bureaucracies. There is no single person at the bank that will make the decision, it's a committee. And they ARE emotionally involved; their jobs are on the chopping block.
You can't just ignore foreclosures, they are the driving force in the real estate market. They are usually priced at least 10% to 20% less than anything else that is comparable. On a $200,000.00 house you can be looking at saving $20,000.00 to $40,000.00. That's just too good of a deal to pass up. Well maybe?
I have valued dozens and dozens of these properties for banks, and the saying "if it's too good to be true it probably is" should be followed.
The following is my condensed version of the foreclosure process, this is just an example, some will be better and some will be worse;
1. First, the original home owner begins to realize that they are in trouble. They know that their loan payments are going to "balloon" or they realize that they are paying on a mortgage for a house that is only worth half what the loan amount is. During this period, maybe 6 months or more, they continue to make their mortgage payments but all non-emergency expenditures on the house ends.
2. At some point they stop making their mortgage payment. They either just do not have the money or they have decided that it is just not worth throwing more money away. They know that they have at least 3 months of free rent and with the government now getting involved they might be able to stretch the time out an additional 6 to 9 months. They usually stop all maintenance on the property at this point, and even emergency expenses to the property are usually stopped. The house is usually put up for sale and advertised as a "short sale". The idea of a "short sale" is to get the bank to let the owner sell the house for less than what the bank is owed. This is supposed to be a win win for both the bank and the owner. Unfortunately, the banks are bogged down in red tape and they don't want the owner to be able to walk away with out a judgment being filed against them for the amount of the loan that wasn't paid. The owners are in no hurry to sell because they are living rent free and will have to start paying rent when they move. The owners also will stall the process by trying to get the bank to forgive the unpaid balance of the loan; which explains why "short sales" are not short.
3. The bank will finally get possession of the property after they couldn't get anyone to buy the house during the pre-foreclosure period and no one wanted it when it was sold by the court. The owners are evicted and the bank hires a "preservationist" to break into the house and change the locks. The house has had the electric, gas and water turned off. The landscaping is ruined, and unfortunately the house is often gutted by either the owners or neighbors of anything and everything of value. This is the stage that I usually see the property. The exterior has had a year of neglect and the interior will have had all of the appliances removed, and sometimes even the faucets, sinks, kitchen cabinets, and A/C compressors are taken. Mildew and mold have grown on the walls, floors and ceilings. The eviction process is not done gently and often it is done with obvious anger.
4. The Preservationist is then hired to "fix" the property. The bank has never seen the house and the instructions for the preservationist are very strict and by the book. The main objective is cheap, the bank has already lost a large amount of money and they have no intention of losing any more. The garbage is removed, the lawn is mowed once, some cheap carpet is installed and the interior is painted with cheap paint to cover the mold and mildew. The bank will then have the house listed by one of their "approved" Realtors. The banks only allow a select few realtors to list their properties. They don't want to open up the process to the free market. These "approved" agents do not represent the consumer, or the tax payer, they represent the bank.
5. When the consumer decides to purchase a bank owned property they are subjected to a very different procedure than when buying from a traditional owner. The bank will usually have a number of "conditions" that the buyer will have to agree to. These are non-negotiable conditions; unlike a traditional owner where everything is negotiable, these bank conditions are written in stone. One of the most important is the issue of "disclosure". Most real estate companies require the seller to answer and sign a disclosure agreement before they will list the property, but the banks refuse to sign a disclosure agreement. They claim that since they didn't live in the property that they are exempt from having to disclose known defects and their "preferred" realtors agree to this in order to get the listing. They may also require a specific type of contract, or they may require that you use their mortgage department. They also set their own time frame; they will take as long amount or short amount of time as they want to answer a buyer's offer.
6. You also need to be aware that frequently when the property is finally offered to the public that it has already been offered, by the listing agent, to a private group of investors who have already rejected the property.
I am in no way trying to suggest that bank owned properties are a bad investment or that buyers should avoid these homes. There are some very good deals available, but be careful and understand what you are getting into before you start. You may have to replace the lawn, repaint the interior and the undisclosed issues will surface eventually which can very quickly erase the initial savings obtained by a low sales price.
Good Luck and Happy Hunting!
John Henline
J R Henline Realty
407-451-5154
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