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What are real estate foreclosures?
These are properties that have been acquired by mortgage lenders because the owners have defaulted on the loan payments. The lender or "mortgagee" takes the property that was pledged as collateral for the loan when the payments are behind (that is, when the payments are "in arrears" or "delinquent" and the owners are said to be "in default"). Lenders must follow the state laws where the property is located. Owners default on loan payments for a variety of reasons including divorce, illness, death of a spouse, and loss of employment. Lenders try to work out some kind of resolution with the owners to make up the payments in a process called "loss mitigation." This period is referred to as "preforeclosure." If efforts to work out a correction for the problem do not succeed, the lender will generally initiate foreclosure procedures after three months of non-payment.
There are basically three stages to the foreclosure process. At each stage, the real estate is thought of as a distinct type of property that a new purchaser can acquire:
"Preforeclosures" are still owned by the borrowers who are in default on one or more mortgage loan payments.
To summarize, a preforeclosure occurs when the lender initiates foreclosure proceedings as the result of a default. If the borrower cannot cure the default by paying the arrears, and does not sell the property, it is sold at a public foreclosure auction. If no one buys the property at the auction, it becomes REO and the lender is now the seller.
There is also a fourth stage for some properties. In the case of loans "insured" by a federal agency such as HUD or Fannie Mae, or "guaranteed" by the Department of Veterans Affairs (VA), the properties are eventually acquired by the government. When such properties are foreclosed by the mortgagees, the agencies reimburse the lenders for the loan amount and certain costs of foreclosure. The government then takes ownership of the real estate and makes arrangements to sell the properties to the public through contractors and REALTORS®.
Lenders foreclose according to the laws in the state where the property is located. There is either a "judicial" or "non-judicial" foreclosure procedure that must be followed. States that use mortgages to document property ownership follow the judicial procedure, which requires lenders to file a court case to prove default before they can foreclose. States that use deeds of trust follow the non-judicial procedure, which does not require a court case. Non-judicial foreclosures can take as little as 30 days to complete. Judicial foreclosures can take much more time because of the need to have the court approve the foreclosure action. Back to top
Buying real estate is a tricky process, whether it's a foreclosure, short sale, auction, REO or traditional transaction, which requires a good amount of knowledge and experience to ensure that it’s done right. So the short answer to this question is "No:" You are not required to enlist the services of an agent or broker to buy foreclosure properties. However, we don't recommend that you go at it alone, especially when there are REALTORS® with a CDPE designation or Certified Distressed Property Expert. Two of Team Gale’s agents, Jack Gale and Tom Gale, have this elite designation. Tom Gale also has his Short Sale and Foreclosure (SFR) designation which grants him further knowledge in this area of real estate buying and selling. Back to top
You might be surprised to know that there are several sources of investment capital available for funding foreclosure deals. These sources fall into four main categories:
You can obtain conventional financing from any number of commercial banks and mortgage companies. This type of source can be very cost effective, providing you have good credit. Many buyers of foreclosed properties use conventional financing to fund their purchase. Conventional financing sources would be the same sources you would use if you were buying a non-foreclosure property. Try your local bank or mortgage broker because both of these sources should have competitive rates and terms.
Partners are individuals, including friends, relatives, and other investors, who would be interested in providing some or all of the money in exchange for a percentage of the profits you will make when the property is resold. You can advertise by word of mouth, via the Internet, or in local newspapers. You can use existing lines of credit from home equity loans against your own property or from credit cards to fund your deals when you are first beginning.
You can also use hard money lenders who are in the business of providing loans for real estate deals. These sources require you to make monthly payments on the loan until you sell the property and pay off the balance. Check local sources, including the newspapers, for ads from hard money lenders and investor-partners, or consider advertising your interest in meeting such persons for the purpose of making foreclosure investments. Back to top
You should be aware that foreclosure properties are sold in "as is" condition. That means that neither the owner, foreclosure attorney, lender, government agency, nor their agents are required to do any property repairs. You should therefore expect and be prepared to fix up the property, either by yourself or by hiring a contractor. Occasionally, REO properties, especially VA homes, may have had some repairs or cosmetic work done to them, and in that case, you are buying that work too, like it or not, so the "as is" principle still applies.
Another point is to arrange for your financing in advance of your foreclosure purchase. Then you can bargain with the owners from a position of strength. Contact your lenders or partners to negotiate and settle on the terms and conditions of your financing so that you will be prepared to complete the purchase once you negotiate a good deal with the owners. Back to top
Foreclosure is one of the most devastating financial challenges that a family can face and one that many times can be avoided. The options available to residents for foreclosure are many, including but not limited to short sales. Back to top
A reinstatement is the simplest solution for a foreclosure, however it is often the most difficult. The homeowner simply requests the total amount owed to the mortgage company to date and pays it. This solution does not require the lender's approval and will 'reinstate' a mortgage up to the day before the final foreclosure sale. Back to top
A forbearance or repayment plan involves the homeowner negotiating with the mortgage company to allow them to repay back payments over a period of time. The homeowner typically makes their current mortgage payment in addition to a portion of the back payments they owe. Back to top
A mortgage modification involves the reduction of one of the following: the interest rate on the loan, the principal balance of the loan, the term of the loan, or any combination of these. These typically result in a lower payment to the homeowner and a more affordable mortgage. Back to top
A homeowner who has a mortgage payment low enough that market rent will allow it to be paid, can convert their property to a rental and use the rental income to pay the mortgage. Back to top
Also known as a "friendly foreclosure," a deed-in-lieu allows the homeowner to return the property to the lender rather than go through the foreclosure process. Lender approval is required for this option, and the homeowner must also vacate the property. Back to top
Many have considered and marketed bankruptcy as a "foreclosure solution," but this is only true in some states and situations. If the homeowner has non-mortgage debts that cause a shortfall of paying their mortgage payments and a personal bankruptcy will eliminate these debts, this may be a viable solution. Back to top
If a homeowner has sufficient equity in their property and their credit is still in good standing, they may be able to refinance their mortgage. Back to top
If a member of the military is experiencing financial distress due to deployment, and that person can show that their debt was entered into prior to deployment, they may qualify for relief under the Servicemembers Civil Relief Act. The American Bar Association has a network of attorneys that will work with servicemembers in relation to qualifying for this relief. Back to top
Homeowners with sufficient equity can list their property with a qualified agent that understands the foreclosure process in their area. Back to top
If a homeowner owes more on their property than it is currently worth, then they can hire a qualified real estate agent to market and sell their property through the negotiation of a short sale with their lender. This typically requires the property to be on the market and the homeowner must have a financial hardship to qualify. Hardship can be simply defined as a material change in the financial stability of the homeowner between the date of the home purchase and the date of the short sale negotiation. Acceptable hardships include but are not limited to: mortgage payment increase, job loss, divorce, excessive debt, forced or unplanned relocation, and more. Back to top
A preforeclosure is a property whose owner has defaulted on the loan payments and whose lender has initiated the foreclosure procedure, usually starting with an official "Notice of Default" to the owner. A preforeclosure property exists during the first stage of the legal procedure, and therefore still belongs to the owner. The length of the preforeclosure period depends on type of foreclosure process mandated by state law and the applicable legal documents the borrower signed with the lender when the property was originally purchased. As mentioned earlier, either judicial or non-judicial procedures are required by law in different states. Back to top
A short sale can be an excellent solution for homeowners who need to sell, and who owe more on their homes than they are worth. In the past, it was rare for a bank or lender to accept a short sale. Today, however, due to overwhelming market changes, banks and lenders have become much more negotiable when it comes to these transactions. Recent changes in corporate policy and the Obama administration have also improved the chances of getting a short sale approved.
But to be technical, here's a more official definition:
A homeowner is 'short' when the amount owed on his/her property is higher than current market value.
A short sale occurs when a negotiation is entered into with the homeowner's mortgage company (or companies) to accept less than the full balance of the loan at closing. A buyer closes on the property, and the property is then 'sold short' of the total value of the mortgage.
For homeowners to qualify for a short sale, they must fall into all of the following circumstances:
Financial Hardship – There is a situation causing you to have trouble affording your mortgage.
This seems simple enough, but it is a complicated process that takes the expertise of experienced professionals and we recommend REALTORS® with a CDPE designation or Certified Distressed Property Expert. Two of Team Gale’s agents, Jack Gale and Tom Gale, have this elite designation. Tom Gale also has his Short Sale and Foreclosure (SFR) designation which grants him further knowledge in this area of real estate. Together, we can identify all possible options and, when possible, assist you in the quick execution of a short sale transaction. Back to top
There are two primary points to consider. The first is that all of the debt that encumbers the short sale property remains against the property until it is sold at the foreclosure auction. This means that any "junior" or subordinate debt stays in place, including trusts, second and perhaps even third mortgages, tax liens, assessments, and judgments. Any of these debts incurred by the owner and secured by the real estate, which may exist against the property, must be paid off. Most of the time, there is only one trust deed or mortgage on a property; however, it is of vital importance that you find out about any other possible indebtedness before you spend too much time and money pursuing a purchase of the property.
The second issue is that only the individuals who are named on the title can sell the property. This seems obvious, but it can go overlooked and valuable time can be wasted. All of the owners of the property must agree to sell it to you before a legal sales transaction can be completed. Make sure that you know who ALL the owners are and that they are all interested in selling before you start negotiating a deal. Most homes are owned by individuals or couples, so finding them and negotiating with them should be straightforward. Owners who have co-signors or non-resident partners, and owners who have abandoned the property and may have moved out of the area will obviously take additional time and effort to locate, negotiate with, and get documents signed. Back to top
An REO is "real estate owned" by the mortgagee, usually a property that was not sold at the foreclosure auction to a bidder and was therefore acquired or "taken back" by the lender. Back to top
Using our “Search Properties” feature, be sure to check the Property Type of “Foreclosed or Bank Owned” when selecting your options. Or you can view all currently foreclosed properties for sale here. Back to top
You can buy an REO by submitting a written contract directly to the lender or through the lender's REALTOR®. As in the case with preforeclosures, find out all you can about the REO and determine whether it is a good deal before you submit the offer. Back to top
Lenders will generally request an earnest money deposit to be submitted with the offer. The deposit may be up to $5,000 or more, depending on the lender and the value of the property. Once you have successfully negotiated with the lender and have agreed to the terms and conditions of the deal, you then need to obtain your funding in order to close or "settle" the purchase of the property. Whether or not the lender will carry financing is an important consideration. Other key terms to negotiate include whether contingencies are allowed based upon professional inspections, the amount of time you have to close, and so on. Back to top
Some lenders will be interested in offering you a loan to buy their REO; others will not. Some will provide financing to investors; others will only provide financing to owner-occupants. You must communicate with each REO owner to determine its loan policies, along with its financing terms and conditions. Back to top
The U.S. Department of Housing and Urban Development (HUD) is a federal agency that insures mortgages to homeowners through its Federal Housing Administration (FHA). HUD acquires properties from lenders that foreclose on FHA-insured mortgages and HUD then offers them for sale to the public. These properties are properly referred to as "HUD owned." Technically, they are not "HUD foreclosures" or "HUD repossessions" because HUD is only the receiver of the property AFTER the mortgage lender has completed the foreclosure. Although HUD becomes the owner and sells the property, it did not foreclose, because only the mortgagee had that legal responsibility. Back to top
The U.S. Department of Veterans Affairs (VA) is a federal agency that guarantees mortgages to homeowners who have served in the military. VA acquires properties from lenders that foreclose on VA-guaranteed mortgages and offers them for sale to the public. Back to top
Fannie Mae is the popular name used to identify the Federal National Mortgage Association (FNMA). Fannie Mae was established by the government to purchase FHA and other mortgages in order to bundle them for sale on the secondary market as "mortgage-backed securities." Fannie Mae acquires properties from lenders that foreclose on such loans and offers them for sale to the public. Back to top
Freddie Mac foreclosures are homes that are now owned by the Federal Home Loan Mortgage Corporation (FHLMC). When a homeowner does not pay back a Freddie Mac loan, Freddie Mac forecloses the property. Qualified Freddie Mac foreclosures are sold through their Homesteps program. Back to top
An auction property is one that is sold or about to be sold at a public auction, usually at the county courthouse. This means that the property owners could not payoff the arrears or sell the property before the date of the auction. The auction is open to all bidders, including investors and homebuyers, and it is sold to the highest bidder. An auction property is under the control of the foreclosure attorney who conducts the sale on behalf of the lender. Back to top