SW Florida Foreclosures
Are Foreclosures the way to go?
Many buyers call me daily asking about foreclosures. They hear all the hype about how so many homes are being sold for 10 cents on the dollar. I don't blame anyone for trying to get a great buy. It's the market forces and basic instinct to seek a bargain. What most people do not realize is the process and how it all works. Many believe they can go to one of the on-line sights, get a list of the foreclosures or pre-foreclosures, make an offer, wheel and deal and get a home or property at an incredible price. While this may happen, it is very rare and most people that are looking to buy a home in are looking for a personal home or a second home that may become a retirement home somewhere down the line. I would like to clear up some of the misconceptions about how the process works and hopefully save you some time and frustration. As with anything else, it appears easy but you need to know who to talk to, who you might be competing with and the best way to go about it.
For the professional, it's a wait and see at the courthouse steps and then bidding at an auction. They usually have to bid against the first lien holder or lender. In most cases, the lender ends up with the property back in their hands commonly known as an REO (Real Estate Owned). In some cases, the investor may have a good established connection and make an offer directly to the lender's Loss Mitigation Dept. Work-Out Dept., Foreclosure Dept. or the like, depending what stage the property is in through the foreclosure process. Most lenders foreclose to take control of the property and to dispose of any Junior liens. Junior liens are second mortgages in most cases and are called second mortgages for a reason. They are second in line to paid off. By the foreclosure process, the lender eliminates the second mortgage thus allowing them to sell the property at a more realistic price without having to pay off the second mortgage or any other liens except for taxes, which are always a first lien. (Tax Certificates can come into play however we will address this in a later article.)
Many ask why would the lender bid at the auction. It's very simple really; the mortgage balance owed on the property is protected by the Mortgage Company/Lender. In other words, the lender usually bids up to the amount owed on the property. This was the norm in years past and prior to the devaluing of properties that has occurred over the last 3 years. The lender has already had a BPO (Broker Price Opinion) or an Appraisal on the property at this point.
(Most areas of the nation have experienced double digit-percentage price declines over recent years.)
Let's assume the property has been foreclosed on and the lender now controls the property as an REO/Asset. What happens to the property at this point? In most cases, the property is referred to a Broker/Realtor that will then secure the property, usually take photographs, make recommendations for repairs/maintenance in some cases, get bids or estimates for said repairs/maintenance and communicate with the Loan Originator and Loss Mitigation Dept. of the lender that owns the property. (Lenders are not in the business of owing real estate and wish to dispose of the property in a timely and efficient manner.) The Realtor then lists the property for sale on the open market based on an appraisal or BPO (Broker Price Opinion). In some cases the property may be scheduled for an auction offering along with other properties. We will talk about this later in this article.
Since most properties will be listed with a Broker and placed into the MLS. The best way to find foreclosed properties, sometimes referred to as Bank Owned/Corporate Owned/REOs is to seek a professional Realtor that knows how to search the MLS Database for such properties. The MLS that most people can search on their own and through Agent Websites will not disclose which properties are bank owned or privately owned. While this may be disclosed in the comments or remarks section of the MLS viewed by the public, there are several properties that may not disclose this information. So your best bet is to call your local professional to find this information.
Once you have located a Real Estate Agent, viewed some properties and made a decision to make an offer, you may have to be pre-qualified through the lender that owns the property and use forms that are required by the lender in order to be considered. Your Realtor can walk you through this process. Keep in mind that the price is usually based on current information and can be somewhat negotiable but not to the extreme in most cases. The lender is motivated to sell to qualified buyers. They may be enticed to consider the offer from a very qualified buyer if the sale is cash or financing done through the lender that owns the property. This is the reason many lenders want to pre-qualify the buyer prior to considering the offer. If the lender can finance the property to a qualified buyer, they will mitigate some of the loss by providing the financing. (Thus Loss Mitigation Dept.) If the property is severely damaged or has extenuating circumstances that make the property a difficult sale, they may not wish to finance the sale of the property and merely try to cash out with as little loss as possible.
Another thing to keep in mind is that lenders do not wish to fire-sale their properties due to the effect it may have on the surrounding markets. If a lender has other properties in a geographic area, they do not wish to destabilize the surrounding markets which can further de-value other properties. Lenders are concerned about market values for obvious reasons.
While most properties that are Bank Owned/REOs are sold through Brokers, some are scheduled for auctions. I am a Real Estate Auctioneer as well as a Realtor and have sold over 2,000 properties over the years at auctions. The process, in short is simple. The lender(s) submit their properties (REOs) to the Auction Marketing Company that will then expose the sale/properties based on the pre-determined terms and conditions agreed upon by the Auctioneers and Lender(s). The terms and conditions of an auction, how to bid at an auction, and basic auction information will be forthcoming in a later article. (If you wish to see this article sooner, e-mail me and suggest this topic and I will publish it sooner, rather than later.)
After you have seen an auction scheduled and have an interest in a specific property or properties, you will need to gather the due diligence, schedule a showing either through your local Agent/Broker or call the auctioneers direct. In most cases, you may be able to have an inspection of the property prior to the scheduled sale at your expense, however you may be bidding on the property and buying it as is. These sales are not subject to any post sale inspections, repairs or financing.
The lender, in almost all cases, retains the right to confirm or reject the bid. This is something to keep in mind. The lender is obviously motivated however if your bid is too low or far under a discounted value, you may go away empty handed. The lenders and auctioneers expect to sell a percentage of the properties but seldom sell 100% of them. In my estimation, no matter the hype and luring advertising you may see, approx. 30-40% will sell on a good day. The lender understands this going in and may then return the property to the preferred Broker/Agent for further offering of the property for sale through conventional means.
I recommend calling your Broker/Agent with some auction experience to represent you. They will know the ins and outs of this format and in many cases, you can negotiate an offer prior to the scheduled auction date if you prefer.
If you would like further information on these topics or any real estate related information, feel free to call me at 941-235-3528 or e-mail: bill@accordingtohoyle.com
Bill Hoyle has been in real estate for over 23 years, licensed in multiple states, has won numerous awards and is a recognized speaker nationally. He has been published in Association Magazines, the National Association of Realtors Publications, The Florida Association of Realtors publications, The Wall Street Journal and others.