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The average home buyer that walks into our office is looking for one thing – foreclosures. Having a showcase of properties in the window was once sufficient to lure pedestrian traffic into the office. Now, the same showcase must be accompanied by terms like “auction,” “short sale” and “REO.” While buyers typically have little understanding of the mechanics behind these types of foreclosure and pre-foreclosure properties, they should be weary of what they are getting themselves into beforehand.
These are “pre-foreclosures” that are in default. The bank has already filed a ‘notice of default’ on these properties and typically there will be an auction date set. Some of these are to be avoided. The auction really isn’t so much of an auction, as it’s an opportunity to rid the first lender of the second lenders interest in the property, assuming they are not the same the entity. Buyers need to be aware that many if not most of these properties will not close; real estate agents already know this and often times list these properties with the intention pf procuring buyer leads. The barrier to closing on these homes is not the loans, it’s the number of financial entities serving the loans. If you find a short sale with only one lender or small second loan, go for it. All other aspects of the transaction are industry standard with the exception of the length of closing, which can take several months.
Auction and Judicial Foreclosures
These are typically properties that were short sales, but never sold. They are going to auction where buyers and banks will bid. If no buyers come to the plate the first lender will usually bid the amount they are owed on the property in order to rid themselves of second and oftentimes third lien holders. Most lenders will not provide financing for auction properties because most title companies will not issue a policy of title insurance. This is more attractive to the cash-buyer as some of these properties will have multiple claims from contractors, angry spouses and others. The usual issue is unpaid property taxes (which will be paid upon transfer). Buyers interested in these properties need to decide whether or not they are willing to purchase a property without title insurance. Claims happen a lot, and can happen years after the initial purchase. That being said, deep discounts are to be had.
Buyers also need to understand that the word “auction” is thrown around loosely now. Agents are using it as part of their marketing and companies are hosting large “auction events.” These are not real “judicial foreclosure” auctions and financing is readily available. As long as title insurance is available these are fine. But these are not true auctions as they are an avenue for brokerages and asset managers to mass market properties at a single event.
“Real estate owned” properties are typically bank owned properties that were once short sales that did not close escrow. Then they went to auction but did not transfer. At this stage an REO is clean, title insurance is available, close of escrow is quick and you have plenty of time to get your own inspections. The only real downside to these properties is that everyone wants them and oftentimes there will be more than one offer. This is usually a fairly ‘clean’ type of foreclosure, and a premium will often be paid. That said, buyers benefit from a fairly expedient transaction and the knowledge that recourse is available for claims recorded and otherwise.
I have found the best way to explain these types of transactions to my clients without burdening their patience is to think of them as a traffic signal. REO’s are ‘green’, short sales are ‘yellow’ and courthouse foreclosures are ‘red’ (not for all buyers). As always, buyers are advised to consult a real estate professional well experienced in foreclosure transactions.
More from this contributor:
Repairing Your Credit After a Foreclosure or Short Sale