The short sale process (see prior entry) is meant to stave off a foreclosure by the lender in first position (generally the "first mortgage"). With that said, if the short sale process fails, at some point and time that lender will go forward with the foreclosure. In order to clear title and eliminate any liens of lower priority (second mortgages, equity lines, etc.), the lender must cause an auction to be held - commonly known as a "foreclosure auction."
In my opinion, the foreclosure auction is a riskier proposition than the short sale process, or buying a property which is bank owned. In many cases, bidders not allowed entrance to the propety. The interior could be in any condition, but odds are the property has been destroyed. Owners who lose their properties at auction are not happy and quite often destroy the home and/or remove everything from faucets to flooring. In addition, the information provided by the auctioneer is not guaranteed and cannot be relied upon to be accurate. The onus is on the bidder to do his/her due diligence to verify the title, easements, right of ways and what liens will stay with the property (generally government liens and, in some states, back condo fees). This lack of knowledge, combined with the kinetic pace at which these auctions are conducted, often causes the unsophisticated bidder to grossly overpay for properties.
Notwithstanding the above, if a bidder does his/her due diligence, foreclosure auctions present an opportunity to create instant equity. My advice is to go to the auction with a maximum bid in mind, so as not to get caught up in the frenzy that the auction process creates. Real estate professionals are useful in detemining property value and a reasonable maximum bid price. They can also point you in the right direction as to researching the title and potential liens that run with the property.
As an aside, keep in mind that the lender will normally set a minimum price and send an agent to bid on the property until that minimum price is met. If no buyer outbids the lender, the lender will then take title and eventually sell the property as bank owned.
Please feel free to contact me with any questions or comments via cell at 978-423-9309, or e-mail at john@jw-realestate.com.
Monday, December 21, 2009
Wednesday, December 16, 2009
Short Sales
From a procedural perspective, when examining distressed properties, or what many refer to as "foreclosures", the first opportunity to arise is the short sale. A short sale is when a seller cannot expect to sell at a reasonable price without being left with a deficit once all costs associated with the sale are paid. Thus, the property is marketed with the intent to negotiate down the debt once an offer has beeen accepted. This means a sale will be "subject to third party approval". In my opinion, this is the most flawed process of the three opportunities (short sales, foreclosure auctions and bank owned) presented by distressed properties. However, there is upside with respect to due diligence.
(For purposes of this discussion, I will assume only one third party exists, but keep in mind there can be several and all must agree to release their security interests and accept less than the amount to which they are entitled.)
In the vast majority of instances, the third party has given no indication as to the amount they are prepared to accept for payment. Moreover, offers are accepted contingent upon third party approval. With that said, a buyer can offer over the asking price and have the offer accepted, only to be informed at a later date that the third party is unwilling to consent to the sale. From a timing perspective, most third parties take, at minimum, 60 to 90 days to respond, during which time a prospective buyer is left in limbo.
The benefit of a third party sale - as opposed to auctions and bank owned sales - is that a buyer generally has the same due diligence opportunities as a buyer would have in a traditional sale. By due diligence, I mean thorough walk-throughs (including inspections), as well as gathering of the seller's first-hand knowledge relating to the property through conversations with the seller and/or the seller's agent. Written seller's disclosures may also be available which inform a buyer as to what the seller knows about the property condition (roof, heating, electric, foundation, etc.).
To summarize, the short sale process presents a great value purchasing opportunity with minimal risk. It is most suited for investors, or home buyers with no time constraints. Any buyer who is purchasing a home to live in and needs to meet a definitive timeline should avoid short sales at all costs.
(For purposes of this discussion, I will assume only one third party exists, but keep in mind there can be several and all must agree to release their security interests and accept less than the amount to which they are entitled.)
In the vast majority of instances, the third party has given no indication as to the amount they are prepared to accept for payment. Moreover, offers are accepted contingent upon third party approval. With that said, a buyer can offer over the asking price and have the offer accepted, only to be informed at a later date that the third party is unwilling to consent to the sale. From a timing perspective, most third parties take, at minimum, 60 to 90 days to respond, during which time a prospective buyer is left in limbo.
The benefit of a third party sale - as opposed to auctions and bank owned sales - is that a buyer generally has the same due diligence opportunities as a buyer would have in a traditional sale. By due diligence, I mean thorough walk-throughs (including inspections), as well as gathering of the seller's first-hand knowledge relating to the property through conversations with the seller and/or the seller's agent. Written seller's disclosures may also be available which inform a buyer as to what the seller knows about the property condition (roof, heating, electric, foundation, etc.).
To summarize, the short sale process presents a great value purchasing opportunity with minimal risk. It is most suited for investors, or home buyers with no time constraints. Any buyer who is purchasing a home to live in and needs to meet a definitive timeline should avoid short sales at all costs.
Wednesday, December 9, 2009
Significant Distinctions
Over the last week or so, I have been seeing many articles and receiving inquiries which blur the distinctions between types of sales and/or ownership interests. Here are certain distinctions which may eliminate some confusion.
An auction is a way to facilitate a sale and has no bearing on who owns the property. Any party who owns a property, or a lien holder (usually the holder of a mortgage, or a government entity) may cause a property to be auctioned. Most auctions garnering attention today are being caused by holders of liens through the foreclosure process.
A short sale is subject to third party approval and involves a process wherein a homeowner tries to negotiate with the lender(s) to take accept less than what is owed on the loan(s). Thus, any sale needs to be approved by one or more third parties (lenders and/or lien holders).
REO (Real Estate Owned), bank owned and lender owned are synonymous terms which mean that a bank and/or lender owns the property. This almost always results from a mortgage default and a foreclosure auction wherein the lender has bought back the property at auction, thus clearing title and eliminating any loans in second position (of lower priority). In some instances, a lender will take ownership in lieu of a foreclosure at the request of the property owner.
(It is my understanding that many people are using the term "foreclosures" as a catch-all and this is where some of the confusion lies. By way of example, "I want to buy a foreclosure" or "My friend is making a ton of money in foreclosed homes.")
Both short sales and REO's are most often handled by real estate brokers such as myself and the process is similar to the purchase of any other home listed for sale with a broker. Auctions may or may not involve real estate brokers and, depending on the circumstance, you could have the option of being represented by a broker without adding costs to the transaction.
All of the above ownership interests and/or sales procedures present opportunities and pitfalls for potential buyers too numerous and detailed to delve into here. However, if in the interim you have any questions, do not hesitate to contact me (john@jw-realestate.com or 978-423-9309).
An auction is a way to facilitate a sale and has no bearing on who owns the property. Any party who owns a property, or a lien holder (usually the holder of a mortgage, or a government entity) may cause a property to be auctioned. Most auctions garnering attention today are being caused by holders of liens through the foreclosure process.
A short sale is subject to third party approval and involves a process wherein a homeowner tries to negotiate with the lender(s) to take accept less than what is owed on the loan(s). Thus, any sale needs to be approved by one or more third parties (lenders and/or lien holders).
REO (Real Estate Owned), bank owned and lender owned are synonymous terms which mean that a bank and/or lender owns the property. This almost always results from a mortgage default and a foreclosure auction wherein the lender has bought back the property at auction, thus clearing title and eliminating any loans in second position (of lower priority). In some instances, a lender will take ownership in lieu of a foreclosure at the request of the property owner.
(It is my understanding that many people are using the term "foreclosures" as a catch-all and this is where some of the confusion lies. By way of example, "I want to buy a foreclosure" or "My friend is making a ton of money in foreclosed homes.")
Both short sales and REO's are most often handled by real estate brokers such as myself and the process is similar to the purchase of any other home listed for sale with a broker. Auctions may or may not involve real estate brokers and, depending on the circumstance, you could have the option of being represented by a broker without adding costs to the transaction.
All of the above ownership interests and/or sales procedures present opportunities and pitfalls for potential buyers too numerous and detailed to delve into here. However, if in the interim you have any questions, do not hesitate to contact me (john@jw-realestate.com or 978-423-9309).
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