Every home buyer today is looking for a great deal and that has led them to consider foreclosed properties.  However, most are unaware of the life cycle of such properties and the opportunities that exist at each stage.  So here’s a breakdown of the life of a foreclosed property and the benefits at each stage.

Pre-foreclosure
A pre-foreclosure is a property that is in distress and the owner is facing foreclosure.  Often times, the owner is being foreclosed upon a mortgage but homeowners associations and bankruptcies can also force foreclosure proceedings.  A pre-foreclosure  (also known as a short sale) usually results in a seller selling the property for less than what’s owed.  The listed price of the property is set by the owner and their agent (if listed) and then later approved by the bank.  Ultimately, the selling price is determined by either an appraisal of the property or an opinion of a local real estate broker (not the buyer’s agent or listing agent).  These properties are also sold As-Is, regardless of condition or age.

The approval process by the bank can take anywhere from 2 weeks to 2 months depending on the workload of the bank’s loss mitigation staff.  Also, the paperwork can be cumbersome and you’ll need to have a participatory seller.  The bank may require them to hold a promissory note or they may face tax penalties if they agree to the terms of their pre-foreclosure sale.  Ultimately, for the buyer, pre-foreclosure properties are best in markets that have faced a substantial price decrease in a relatively short period of time.

Foreclosure Sale
In North Carolina, a foreclosure sale occurs at the local court house of the property being sold.  At this point, the bank has hired a trustee (an attorney) to sell the property and a judge has held a hearing and found in favor of the bank to sell the property.  The sales are a matter of public notice and anyone may bid on the foreclosing property.  However, before you do so, you need to do your homework.  These are auction style sales officiated by the court.  They aren’t true absolute sales as the foreclosing bank or party will secure their interest by bidding the amount owed to them.

First, understand that you are buying this property sight unseen most often and cannot have an appraisal or inspection.  If the home is listed prior to the sale, feel free to have your agent take you through.  It is a HUGE risk to purchase a home without seeing the inside.

Second, you’ll either need a hard money loan, an equity line on a current property, or cash to make the purchase.  Because you don’t have a right to access the property, you cannot have an appraisal done.  Therefore, this is inappropriate for 99% of home buyers.

Third, you need to know what is foreclosing on the property.  All too often, a novice investor will bid on a $400,000 home for the balance of the HOA dues and think they’ve purchased the deal of a lifetime.  What they’re purchased is a world of trouble as they purchased a junior lien.  That buyer would need to satisfy the primary lien or risk being foreclosed upon.  Anyone interested in pursuing these types of sales should hire someone to do a title search to find out what they’re bidding on and what else is hanging over the property (IRS tax liens, etc).

Finally is the price.  If you’re bidding on a first mortgage foreclosure, the foreclosing bank will bid the balance of the mortgage to secure their interest.  If no one outbids the bank, the bank buys the house back and it becomes a bank-owned property.

These homes are generally still occupied and it’s up to you to evict the tenants or former owners.  Again, this can be very sticky so hire a good attorney to guide you through the process.

The Foreclosure Upset Period
After the high bid has been reached in a foreclosure sale, there’s a 10 day bid upset period.  Rarely, on a home with two mortgages, the second mortgage can come in an upset the bid to secure their interest in the foreclosing property.  Anyone can upset a bid and some investors do nothing but upset high bidders.

The Bank Owned Sale
If a bank has foreclosed on a property and they are the high bidder, the property is listed for sale with a real estate agent.  That agent lists the home through the MLS and anyone may make an offer.  At this point, the home is vacant and clear of any liens.  For most buyers, this is a great opportunity to buy a distressed home however there are a few areas where many run into trouble.

First, you need appropriate financing for the condition of the home.  Many of the properties are not move-in ready and may require repairs.  DO NOT EVER UNDER ANY CIRCUMSTANCES REPAIR A PROPERTY THAT IS NOT YOURS!!!!!  I have been in properties where the only visible damage was that someone removed the kitchen cabinets.  Other times, an A/C unit is missing.  It is imperative that you obtain financing appropriate for the home you’re purchasing, which usually means Cash or Conventional.  FHA and VA are inappropriate for most bank properties with the exception being HUD and VA owned properties.

Second, you will need to do inspections.  The properties are sold As-Is, where-is, no conditions, no contingencies, no repairs.  Some feel that since that’s the case, you wouldn’t want to waste the money on an inspection.  However, you may uncover a serious issue that may result in the home a bad deal.  Hire a good inspector to know what you’re getting yourself into.

The Bank-Owned Auction
Often times, a bank will have a number of properties listed on the market without a suitable buyer.  Because they’re not in the business of owning a bunch of real estate, they will often sell their currently listed homes at auction.  These aren’t new properties but ones that have failed to sell.  Here in Charlotte, there’s an auction like this once a month or so.

Buyers can utilize financing and can do inspections BEFORE the auction sale.  Also, as with any real estate auction, there’s a buyer’s premium that the buyer pays (the auctioneers commission) that is tacked on to the highest bid.  Therefore, you will need to be aware that you may have the high bid of $400,000 but after the premium, the sales price may be $450,000.

As my advice before, utilize your agent for this type of sale.  Investigate the properties, know you’re bidding on the right home, inspect the homes you’re interested in, and get approved for any mortgage ahead of time.

Charlotte Bank Owned, REO, and Pre-Foreclosure Homes