The foreclosure market is starting to heat up in a big way, and more foreclosures are on the way. Being a smart foreclosure shopper, or at least including foreclosures in your search, is a smart move, but you must approach these homes carefully. Here's a brief primer on the topic. You may also want to read this FAQ that talks specifically about auctioned properties. For more details, please contact us.
First, you should know about the different types of foreclosure options, and the benefits & risks of each:
1. Short Sales: A short sale isn't exactly a foreclosure, but actually a seller who can't sell his home for enough to cover the mortgage due on it. Short sales didn't used to happen much because people used to put at least 20% down, but in the last few years, with many of the more exotic loan programs, people were able to buy homes for no money down, or even in some cases, where the loan was as much as 107% of the home's value. As you can imagine, in a market where prices have been flat and even declined in many areas, that was a recipe for disaster.
In a short sale, the seller is negotiating with the bank to allow them to sell the home for less than is owed. The bank agrees to take less than the mortgage amount because they know the alternative is likely that the seller won't be able to keep up with mortgage payments, which can lead to foreclosure - and that's an even worse option for the bank.
One of the biggest risks to short sales is that the seller won't be able to successfully negotiate with the bank to have them reduce the money due on the seller's mortgage. Because of this, you need a savvy Realtor who can ensure you're protected if that happens. Yes - a shameless plug to call us, but in all seriousness, we're talking many tens of thousands of dollars at stake here.
Additionally, as with all foreclosure type sales, the banks can take a long time (months - yes, months - in many cases) to respond to your offer, which can be very frustrating. There are a lot of steps the seller has to go through to complete a short sale.
2. Courthouse Foreclosure Sales: A foreclosure sale is usually held on the courthouse steps. Most of these homes are sold at auction. In the past, the banks could almost always unload a property at auction because the bank only needed to recover the mortgage amount, and thus, many properties sold for less than their market value because the mortgage was less. But again, the exotic loans of the past 10 years have made this a much less certain thing - often now, a bank needs to recover just as much or more as the property can sell for on the open market, meaning many of these homes won't sell at all. Who would want to bid on a property at auction for more than you could buy it via traditional means? Us neither. In fact, we feel buying a property at auction is often the most dangerous of the three options listed here, because you usually have little or no inspection rights, and you can't have any contingencies. Plus, you most often have to buy the home with cash, or if not all cash, at least with a substantial cash deposit. And lastly, there are few lending sources for auctioned properties - no bank is going to loan you money to buy a home if an appraisal hasn't been done, for example. Here is a great Washington Post video of a foreclosure sale happening, as well as videos we took on the foreclosure and auction process.
3. REO (Real Estate Owned) Sales: REO is just a fancy term for "Shucks, I still own this property because I couldn't sell it at auction" that the banks have. Remember how we said above that many foreclosure properties aren't selling at auction because the amount owed on the mortgage is as much or more than the market value of the home? Well, when the property doesn't sell, and the bank has evicted the owners from the home, it goes to REO status. This is where we think a lot of the value to buyers is, because the bank at this point must sell the property. It's vacant, and the bank has no hope of getting any mortgage payments while it sits vacant. Plus, REO properties are handled much like traditional sales, where you are not pressured to move fast (like you would be in an auction setting). You can take your time, perform your inspections, and make sure this is truly the property you want.
Sometimes, the owner still lives in the property even though it has been foreclosed upon. In those cases, the bank often offers the owner a "cash for keys" agreement where the ex-owner is paid a sum of money - between $500 to $2,000 - to leave immediately, and give them the keys. The bank figures this is cheaper than evicting someone. Here's a sample of what the document looks like (this one was posted on the ex-owner's door).
In fact, we have a website that is really good at helping you find foreclosure properties, called www.TheBestHomeSearchEver.com or www.TBHSE.comfor short. That site searches all of the MLS listings by all Realtors in the DC metro area - usually about 100,000 listings. And we have a special checkbox which allows you to search short sale, foreclosure, and REO properties in the "bargain hunters" tab. To learn exactly how to use this feature, you can watch the video tutorial. And of course, we're available to help. You can contact us any time at 1.800.705.2782 or email us at info@DROdio.com. Better yet, submit a contact using the form at right and we'll respond right away.
4. Post-REO Auction: If the banks can't sell their inventory as REO inventory, they use a private auctioneer to auction it off (often at hefty discounts). You can see a YouTube auction video here. These auctions can be tempting, but you face risks here as well. One issue is you usually cannot inspect the interior of the property before bidding on it at auction. It can also be difficult to obtain financing for these types of properties, since you can't perform the usual inspections & contingencies to ensure the property is in livable condition. The properties are also sold in "as-is" condition and you have to pay a premium above the final winning bid price (usually 5% to 10%) to the auction house. Here is a sample auction contract you can read to learn more. You can also see a list of homes that were auctioned off recently.
If you'd like to get really technical, you can download this PDF complied by MBH that discusses VA Foreclosure procedures in detail.