One way to help an ailing housing market regain its health is to clear the books of foreclosures. Buying foreclosed properties can help mitigate this sad chapter and turn to a promising new one by ensuring a neighborhood maintains its value and property tax revenues. But before you head down this street, arm yourself with knowledge. A foreclosed home may be a good deal for buyers but the process can be complex.
When a home is foreclosed on, the lender in the first position on the liens takes back the property from the homeowner, usually at the sheriff's sale, says Leslie Ebersole, Realtor with Baird & Warner, Fox Valley office, and certified by the National Association of Realtors as a Short Sale and Foreclosure Resource.
The home that has been foreclosed on is called a foreclosure or REO, which means Real Estate Owned, says Ebersole. The seller of the property is the owner who foreclosed on the note, which could be:
a lender like a local bank who owned the mortgage
a semi governmental organization that had guaranteed the mortgage or bought the note on the open market, like
an asset manager who represents the owner of the note.
Most large banks have a separate department to manage the process and properties. "Generally, the decision makers are known as asset managers," says Brian Dempsey, vice president of
Home Loans in St. Charles. "The asset manager acts as the liaison between clients and Realtors making offers on properties and the investor who actually owns the note. Smaller banks may have one or two individuals who are responsible for the distressed properties."
Large lenders typically contract a Realtor and put the property for sale on the open market, listing the properties in the MLS. A few factors go into pricing the home. "The price is generally determined by a combination of an appraisal, a BPO (Broker Price Opinion) performed by a Realtor, and consideration of the amount of the actual debt on the property," says Dempsey. "As foreclosed homes have become a larger issue over the last few years, more weight has been given to the BPO, as this is sometimes a better indicator of 'what it will sell for' as opposed to 'what it may be worth.'"
While owners of the note would like to get close to the "what it's worth," they strive to find the sweet spot between what the property is worth and what it will sell for. "An important term to remember with REO is 'managing the loss,'" says Dempsey. "Once a property has been foreclosed on and becomes REO, the banks are looking to 'manage the loss.' This incorporates how fast a property can be sold, and for what price the property will yield."
Banks can either own the loan or are the servicer of the loan. "The bank may have sold the actual note to many different investors including pension funds, hedge funds, etc.," he says. "So while the client and the public deal with the bank [the servicer] the bank may actually need to have decisions approved by the actual investor who owns the mortgage."
The price, therefore, is negotiable. "Each individual investor has a different threshold for loss, and therefore some investors may take a bigger loss than others," he adds.
However, Ebserole cautions that the list price is usually very close to what the asset manager will need to sell the house.
"Buyers who are used to making aggressive or lowball offers are usually disappointed when the offer is refused," she says.
John Clery, a Schaumburg attorney specializing in real estate, recommends working with a Realtor to find a foreclosure.
"Get a good Realtor that specializes in foreclosures," he says. "I would always advise buyers to consult with a knowledgeable Realtor, especially since the seller pays the commission."
A licensed Realtor has full access to the MLS and can easily determine properties listed as REOs, says Ebersole. "Broker websites such as bairdwarner.com have a place for buyers to search for REO listings," she adds.
The "Search Chicago-area foreclosures" link is found on the first page of the website and it leads buyers to an easy to use search tool with the most current foreclosure information available.
National listing sites such as Trulia.com, Zillow.com, and Realtor.com have the ability to search for REOs, although the quality of the information depends on the quality of the feed from the local MLS, she adds.
Vince Scott, Broker Associate with Sudler
International Realty in Chicago, has 37 years in the real estate business and is a designated agent for Bank of America in Chicago handling the bank's foreclosures.
"An experienced Realtor knows a variety of buildings and has good insight to what a client wants and will be able to provide that client with a particular product instead of going piecemeal," he says. "A Realtor is invaluable not only to save a client time but to make money for the client in the far end."
Scott's listings -- foreclosure and non-foreclosure -- run the price point gamut from $50,000 to $2 million dollars and property types from row homes to condominiums. Right now he says there aren't a lot of high-end foreclosures on the market. "It's cyclical. When banks were making loans for high-end homes the criteria was a little tighter and people in them can make the payments. We do get our share, though, as they become available."
Consulting the experts is particularly useful in buying foreclosures. A Realtor with experience in closing REO sales can help the buyer move quickly (if necessary) and make a great offer in a timely fashion, says Ebersole.
"A Realtor in an REO seller usually doesn't help the buyer decide what house to buy, but can be invaluable in deciding what house not to buy," she adds.
Once you've found a foreclosure you're interested in, Clery says it's imperative to get it inspected.
"All foreclosure contracts state that the lender acquired the property through the foreclosure sale and they disclaim all liability regarding the condition of the property including but not limited to mold, radon, lead based paint, inadequate foundation, or leaky roofs," he says. "Just like any other real estate purchase, the purchasers need to hire a reputable home inspector. Though the foreclosure lender will not make any repairs, the buyer is still able to walk away from the transaction." Clery says it's also important to hire a good real estate attorney, experienced with foreclosures.
"Call an attorney before signing any contract," he says. "The biggest mistake in buying foreclosed properties is proceeding without an experienced real estate attorney. There are so many things to be aware of. Most buyers are not aware of the following: If a buyer purchases a foreclosed condominium, the buyer may have to pay six months of condominium dues that were due before the foreclosure sale and reasonable attorney fees of the Association attorneys. This is not written in the contract. For instance, you go to the closing and the letter from the Association states that you must pay $650 of monthly dues for the six months prior to the foreclosure plus attorney fees of the Association -- this could be $10,000 extra for the buyer. This must be addressed during the Attorney Approval period to avoid a closing disaster."
The purchase of an REO requires that a buyer establish his own level of tolerance for risk, says Ebersole.
"For example, if utilities can't be turned on, a buyer can't determine if the pipes burst over the winter," she says. "If the buyer feels like the house is a good enough deal he may be willing to incur that risk. The level of risk is a personal decision that should be made with advice from a home inspector, an attorney and sometimes input from contractors."
Economics is a prime reason for buying a foreclosure.
"The buyer is generally acquiring a property at a value point well below the previous value of the property, and often below the current value of other similar properties," says Dempsey.
Scott has seen the tangible proof of this type of sale. "I sold a foreclosed property for which someone had previously paid $1.8 million. It sold for $900,000. That's what it is worth in today's market. However, since real estate is cyclical, if you're buying something that's 2,500 to 3,000 square feet in a great neighborhood you will find over a period of years there is a growth to that property. As a nation, we are in tough economic times, but we will get through it and down the road that property will be worth considerably more than they paid for it."
For the diligent, informed buyer the benefits of buying the right foreclosure are solid.