Foreclosure Properties

At the post-foreclosure, the property has been foreclosed and taken back by the lender. These pieces of property are known as “real estate owned” or REO. The easiest way to buy foreclosed property is by buying REOs. These “real estate owned” homes always have a clear title, which saves time, expense and general worries about foreclosures. Also, the lender or bank will most likely pay the property taxes in arrears (an unpaid debt). The lender may either repair the property or give a discount to the buyer to make repairs.

REO Purchases

Real estate property owned by banks (REO) refers to a property that has gone through the foreclosure process. The bank or loan company has foreclosed on the property and it has reverted back to the lender. Any attempt to sell at pre-foreclosure or foreclosure auction has failed.  When the bank owns the property, there is no longer an existing mortgage loan. If the property is still occupied, the bank will handle the eviction process. The bank will also pay off any amount due to homeowners associations. In addition, they will negotiate with the IRS for removal of taxes owed.  REO purchases should not be considered free of risks. The bank may make some minor repairs but in the majority of situations, the property will be sold in an “as is” condition meaning it will remain in the condition it was in when initially repossessed. Considering that the prior owners obviously had financial difficulties for at least three months, potential buyers of REO should keep in mind that any major repairs needed would not have been done during this time. 

Property Inspections

It is important to have the property inspected by a professional to find out its actual condition and market worth. A comparison market value should be carried out. You should also keep in mind the amount of money renovations will cost you to add to the amount of the purchase price to the bank.  If you are satisfied with the information provided by the home inspector, now is the time to make an offer to the bank.  It is important to include a Section 1 – Pest Certification – to be sure there is not a termite problem on the property. The bank will probably not pay for it but if all inspections are not completed by the time you make your offer, your offer should include a contingency clause that allows you to terminate the sale if unanticipated damages are found – within a specified period of time – that the bank will not correct. Additionally, banks do not usually provide financing on their REOs. However, it would be especially helpful to obtain bank funding if there was extensive damage to the property they are selling “as is”.

Getting into Short Sales

With the increase in foreclosures lately you may have heard the term “short sale” and wondered what it was. A short sale is when the lender will accept less than the full amount due on a mortgage when a property is sold. Usually, the lender will accept the short sale to avoid the time and expense of a foreclosure.

When a borrower is in default on a mortgage they not only owe the back payments but also may owe late fees, property inspection fees, attorney fees, etc. This can add up quickly to eat up all the equity the borrower had in the property. If the borrower is unable to bring the account current the lender will then foreclose on the property.

With a foreclosure, the lender can lose up to 40% of the mortgage amount because of the extra costs involved with foreclosing on a property: attorney fees, court costs, lost interest, eviction costs, property maintenance costs, and selling costs. Foreclosing on a property can also take up to two years in some states. Therefore, it is sometimes in the best interest of the lender to accept the short sale.

It also can be in the best interest of the borrower. They will not have to endure the time and stress of a foreclosure and their credit may not be as adversely affected as it would with a foreclosure. It is quicker and easier and does not subject the borrower to the embarrassment of a foreclosure.

Probate Sales

Probate sales (of both real and personal property) occur when an Estate is being administered because there is a person who is (1) incapable of managing either his or her own personal needs for food, clothing and medical care; or his or her own financial affairs (A "Conservatorship"); (2) a child under the age of 18 (A "Guardianship:); or a deceased person (A "Trustee Sale" or "Probate Sale"). The majority of these sales are referred to as “Probate” and are generally supervised by the probate court within the jurisdiction of the county where the real estate is located.

The Two Types of Probate Sales

1. Sales requiring Court Confirmation – Certain types of sales require appraisal and approval by the probate court. The goal of the court proceeding is to protect the interests of all beneficiaries. These sales take longer than standard sales due to the additional court process. The representative of the estate, with court permission, may grant an exclusive right to sell the property for a period not to exceed 90 days. Acceptance of an offer by the estate representative is subject to probate court confirmation.

An offer to purchase must be for a price which is not less than 90 percent of the property's appraised value. When an offer is accepted, subject to court confirmation, the representative will petition the court to confirm the sale. After the court has set the matter for hearing, any interested person may bid at the time of the hearing.

To open the bidding, there must be an increase over the original bid of at least five percent of the original bid plus $500. Once the bidding has been opened, the court in its discretion may permit the bidding to continue on smaller bid increments until it declares a bid to be the highest and best obtainable. The sale then will be confirmed by the court to the bidder. Ordinarily, after court confirmation of a sale, normal escrow procedures are used to consummate the transaction on the terms and conditions approved by the court.

2. Sales without Court Confirmation – If the personal representative has been granted full administrative powers under the Independent Administration of Estates Act (IAEA), court confirmation may not be required. These sales are closer to the timing of a regular real estate transaction. However, the executor-administrator is exempt from disclosure, unlike an ordinary sale. All heirs must be notified in writing of the sale, and have 15 days to object to the sale. If this occurs, the sale would most likely need to go to court for confirmation.

Probates sales, both independent administration and court confirmed, are another avenue in which to purchase and sell property.