Avoid pitfalls when buying foreclosures
Avoid pitfalls when buying foreclosures
President’s Message
Chris Sloan
Even with all the uncertainty in our economy today, we know one thing for sure: bargains abound. From vacationers to car shoppers, consumers in good financial position are scooping up low prices and big incentives on everything from new pants to cell phone service.
Real estate is no exception. Not only are homes priced to move, but other incentives are adding even more reasons to buy. Combine 50-year low mortgage rates, the government’s $8,000 tax credit for first-time buyers and the state’s $6,000 grant program for newly constructed homes, and buyers are seeing thousands upon thousands in savings.
For particularly price-conscious buyers, one area of interest may be the foreclosure market, where buyers have the chance of picking up super-competitively priced homes. With the downturn in the economy, this market has expanded, with more than 1,800 properties in Utah in some phase of the foreclosure process in February, according to RealtyTrac.
But buyers should beware. A foreclosure purchase is not your typical real estate transaction, and there is no guarantee you’ll save money by buying one. There are risks involved as well as the possibility of significant delays. This article will discuss some of the items of which to be aware before you start your foreclosure search.
The first step you should take is to contact a Realtor who has experience in helping clients buy foreclosures. Not only will your agent be able to help you identify properties, but he or she will help guide you through a particularly complicated real estate transaction.
The next thing to do is get pre-approved for a mortgage. This will help you determine what you can afford and will make the buying process go smoother. Some lenders may be particularly picky about financing foreclosures or properties with serious defects, so you’ll want to know ahead of time the type of properties for which you’ll be able to obtain financing.
The foreclosure process basically consists of three buying opportunities: during pre-foreclosure, at a public auction and from the bank.
Pre-foreclosures are homes where a notice of default is publicly filed and the property owners are in default on their mortgage. In Utah, owners have about three months to remedy their problem. It’s during this time or before that the seller may try to sell the property or participate in a short sale, where a bank forgives a portion of the seller’s mortgage debt.
Foreclosure auctions are known as the second state of foreclosure. A sheriff or trustee sale notice is publicly filed and the foreclosing lender “hosts” an auction, which takes place at the county courthouse. The foreclosure sale begins with a minimum bid that includes the loan balance, any accrued interest, plus attorney’s fees and any costs associated with the foreclosure process. Successful bidders receive the property in “as-is” condition, which may include someone still living in the property. There may also be liens and other debts against the property. This is the most risky type of foreclosure property because there is little opportunity to inspect the property or its title. The other drawback is the fact that these properties must be purchased with cash.
REO properties are the result of unsuccessful auction sales. Since what is owed to the bank is almost always more than what the property is worth, very few foreclosure auctions result in a successful sale. Then the property reverts to the bank.
In this stage, the bank will handle the eviction, if necessary, and may do some repairs. It will negotiate with the IRS for removal of tax liens and pay off any homeowner’s association dues. Once any title issues are cleared up, many banks will put the properties back up for sale through a traditional real estate brokerage. Other banks will elect to auction these properties through an auction house, selling the real estate without any liens or debts — unlike the foreclosure auctions at the courthouse.
Regardless of which type of foreclosure property you choose, it is imperative that you research home values to see if you are really getting a good deal, especially when you factor in the cost of repairs. Your Realtor will be an excellent resource in helping you determine whether the property is a good value. For more information or help finding a Realtor, visit UtahRealtors.com.