The savvy home buyers’ guide: foreclosures, short sales and more

Real estate, Money

We all know home is where the heart is. Unfortunately, home is also often where our debt is. In an effort to curtail the crushing debt that often accompanies the purchase of a new home, many families are considering alternative home purchase options, including properties in foreclosure, short sales and government-owned properties.

In today’s economy, new home purchases are no longer limited to the most affluent with the highest credit scores. In fact, new home purchases by young, savvy buyers are on the rise, allowing dwindling communities to reflourish and regain their footing despite the devastating blow of the 2008 housing crisis.

The following are several ideas for buyers interested in inexpensive ways to purchase property, as well as general suggestions for buyers to protect themselves from costly scams and fraud.

Foreclosures: Understanding the basics

Most people have heard of a foreclosure, but many are unsure exactly how the process unfolds. Keep in mind, the foreclosure process is heavily guided by state statute, and each jurisdiction approaches the procedure in its own way.

In all states, however, a foreclosure occurs when homeowners default on their mortgage note and are no longer willing or able to make monthly payments. Once the default occurs, foreclosures continue on either a judicial (court-supervised) or non-judicial route.

The non-judicial procedure is common in many states and generally occurs when borrowers sign a mortgage containing a power of sale clause. Basically, this clause gives the lender the power to initiate a foreclosure sale upon the occurrence of a default, and no court approval is necessary.

In the absence of a power of sale clause, lenders are usually required to petition the local court for permission to proceed in foreclosure and must present evidence to show the borrowers are actually in default.

Once the process begins, the lender must publicize the upcoming sale in the newspaper for approximately three weeks prior to the scheduled auction date. This requirement serves the dual purpose of providing notice to the borrower of the sale as well as informing the general public that the property will be available for purchase.

Foreclosure sales often take place at the county courthouse; however larger auctions spanning several properties may occur at an alternative location. The sale is conducted by an auctioneer who opens the bids at a certain dollar amount, and the highest bidder wins the property. Oftentimes, the bank is present at the auction to bid on the property, and in many foreclosure sales the original lender ends up reclaiming the home. 

Shopping at foreclosure auctions

Purchasing a home at a foreclosure sale can be a great way to snag an unbeatable deal. However, these sales often bring about shrewd, tactful purchasers, and buyers interested in purchasing at a foreclosure auction are well-advised to attend several sales ahead of time in order to observe the process.

One important requirement of purchasing a home at a foreclosure auction is that most states and lenders require the winning bidder to place a certain percentage of the purchase price in escrow immediately following the conclusion of the auction. Therefore, if you are seriously considering bidding on a home, bring cash or a certified check along with you. Otherwise, you risk losing your bid.

From there, the balance of your bid is usually due within 30 days of the sale and must be paid in full, which means that you will generally not be able to finance the purchase with a mortgage loan. 

Short sales

Short sales occur when a home is almost in foreclosure, but the bank has agreed to sell the property at a reduced rate in exchange for the borrower’s release from the loan.

For example, if a borrower owes $200,000 on his home, but an interested buyer has agreed to pay $175,000 for the property, the bank may waive the remaining $25,000 balance and accept the purchase price. Short sales are usually win-win-win in that the buyer gets a great deal, the defaulting borrower gets a reprieve, and the bank avoids the costs and losses associated with a public foreclosure auction of its repossessed property.

If you are purchasing a home in a short sale, you will likely be allowed to finance the transaction through a traditional mortgage.

Also, despite the name, short sales often involve several lenders who are negotiating various issues back and forth, and the bank can take up to 120 days in some cases to approve the transaction. 

Government- or bank-owned property

It is often possible to get a great deal on property owned by a local government or the bank. These entities are often eager to eliminate the costs and hassle of maintaining the property, such as shouldering the tax burden or paying for lawn care, and may release the home or parcel for a steal.

Of course, great deals often come with a catch, and purchasers considering these options should definitely arrange for a home inspection and an appraisal before committing.  These steps may be required by the mortgage lender anyway.

Remember, a property that seems too good to be true probably is, and a seriously competitive price could indicate major structural defects or an undesirable location. 

Attorney representation: A necessary expense

Lastly, one area you should never skimp on when deciding to purchase a foreclosure, short sale or government- or bank-owned property is the involvement of a competent real estate attorney. Your attorney can help identify potential problems with the title, as well as alert you to nefarious attempts by the seller to avoid traditional buyer protections, like encouraging you to waive your right to a home inspection.

Attorneys’ fees for real estate settlements are generally not too high and are worth every penny if it means avoiding the pitfalls of purchasing a property with attached liens, zoning issues or a termite infestation.

Once your attorney gives the green light that your intended purchase is safe and savvy, you could be on your way to a healthy real estate investment with potential for a great return.