Tag Archives: market value

Buying a Foreclosure or Short Sale

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DailyWorth quoted me in Should I Buy a Foreclosure or Short Sale? It reads, in part,

I’m looking to buy a new home, and I’ve noticed that there are a couple of “short sale” and foreclosed homes in the area where I’m interested in living. These homes are priced substantially lower than others, and I’m wondering what the catch is. I’ve heard that short sales or foreclosures often need repairs. What else do I need to know to decide whether to invest in one of these properties?

Purchasing a home through a short sale or a foreclosure process can be a way to get a good deal on a property. But it isn’t for the faint of heart. Both processes are likely to be more complicated than purchasing a home on the open market.

First, make sure you understand the differences between these categories. Both are used when a property owner is in financial distress and can no longer afford mortgage payments.

In a short sale, the proceeds from the sale will fall short of the debt owed on the property. Such a sale can only occur if the mortgage holder (usually a bank) has agreed to accept less than the amount owed on the loan.

In a foreclosure, on the other hand, the mortgage holder has repossessed the property and is trying to recoup its losses by selling the house for the amount still owed on the loan. That amount is typically still less than the market value of the home.

Here are some of the common issues you may encounter when buying a foreclosure or short sale.

Purchasing Delays
If you’re considering buying a property listed as short sale or foreclosure, keep in mind a few things, experts say.“The process for purchasing this kind of property may not be as easy as purchasing a home directly from a seller who is current on their mortgage,” says Colin McDonald, real estate agent with Berkshire Hathaway HomeServices Blake in Delmar, N.Y.For instance, it typically takes six to eight weeks to close on a normal home, McDonald says. But with a short sale or foreclosure, the property may not close for six months or even a year.“[W]hen a property is being listed as a short sale or foreclosure, you’re no longer just dealing with the seller,” McDonald says. “A bank is now involved, and unfortunately, they only care about getting what is owed to them. They will drag the process on for as long as they like.”

Short sales can also take months to get lender approval. “The seller’s bank can make things very difficult, making the borrower jump through many hoops — hoops that can take a long time to navigate,” warns David Reiss, a professor of law at Brooklyn Law School who writes and teaches about real estate.

And in the end, the bank may respond with a counteroffer that doesn’t meet your budget or terms. “So you might wait for a long time only to be disappointed,” says Sep Niakan, owner of Condo Black Book, a leading condo search website in Miami and broker of HB Roswell Realty.

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 Potential Additional Fees
While the price of the home may be low, a foreclosure or short sale often comes with additional transaction costs. With a foreclosure, you may have to pay transfer taxes as well as any superior liens on the property. You may also have to pay an additional fee to the foreclosure company.
Typically, in a short sale, there is a negotiator involved who will require a fee, such as 2.5 percent of the purchase price, McDonald says. The buyer is usually required to pay this fee.You also may have to pay back taxes or other past dues associated with the property. If you buy a condo-foreclosure, for instance, “there may be many years of past due condo association fees that may not appear anywhere in public record, and you might end up inheriting a very large debt,” Niakan says. “Some local and state laws limit the amount you would be responsible for in those cases, but do your homework.”Purchasing a home at a price that is significantly below market always sounds like a good thing — and it can be for the right person. But keep in mind that if the property is really great, “there will be others who will also be interested in it,” McDonald warns. “This includes veteran investors who have deep pockets of cash.”If you hope to get a great home for a low price through a foreclosure or short sale, be sure to do your homework and be aware that it may take a long time and come with extra costs and repairs. And at the end of the day, buying a short sale or foreclosure isn’t for everyone.

“While you may get a good price, you will be paying for the house with uncertainty, delay, and frustration,” Reiss says. “You’ll need to determine for yourself whether it is worth it.”

What Is a HUD Foreclosure?

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Mike Licht

Realtor.com quoted me in What Is a HUD Foreclosure? A Home That’s Below Market Value. It reads,

“Foreclosure” is a scary word with a simple definition: It’s the process of a lender attempting to recoup the balance owed on a loan after the homeowner fails to pay the mortgage. Mortgage lenders can be banks, private institutions, or the Federal Housing Administration. The FHA is the world’s largest insurer of mortgages; FHA loans are managed by the Department of Housing and Urban Development. So any foreclosed house that was purchased with an FHA loan is called a HUD foreclosure. But what exactly is a HUD foreclosure?

What is HUD?

HUD is a federal agency with the mission to help low-income and first-time home buyers. Through mortgage assistance and subsidized housing, it helps make the dream of owning a home a reality for many Americans.

A major division of HUD is the FHA, which is the world’s largest insurer of mortgages.

“A HUD foreclosure is the foreclosure of a loan that was insured by the FHA,” says David Reiss, professor of law and research director at the Center for Urban Business Entrepreneurship
 at Brooklyn Law School
.

When a homeowner defaults on this government-backed loan, HUD pays off the mortgage and becomes the property’s de facto owner. To recoup financial losses, HUD then puts the house on the market.

The benefit of buying a HUD foreclosure

The upside for bargain home hunters is that HUD-owned properties are usually sold well below market value.

While anyone can buy a HUD home, “the agency has a special program for teachers, police officers, firefighters, and EMS personnel called the Good Neighbor Next Door program,” says Reiss.

This program allows people in those professions to purchase a HUD property at a whooping 50% discount if it’s in a “revitalization area” and the owner occupies it for three years. Revitalization areas are neighborhoods with very low income, low homeownership, or a high concentration of foreclosed homes.

How to buy a HUD foreclosure

HUD foreclosures are not sold in the typical manner, according to Reiss. Instead of open houses and offer letters, he explains, HUD foreclosures are sold through a bidding process that favors owner-occupants (people who actually want to live in the house) over investors by giving them priority in bidding.

Prospective owners working with a real estate agent authorized to sell HUD property submit bids but have no idea what the other bids are. If the property fails to sell to an owner-occupant, the HUD foreclosure is then open to investors.

How to find a HUD foreclosure

According to Reiss, HUD maintains the HUD Home Store, an online database that lists all its foreclosures. And unlike some foreclosed properties that may have liens (a notice attached to your property that means you owe a creditor money), HUD homes are for sale lien-free.