With so many houses in foreclosure, how do I buy one?
There are a few things to consider when shopping for a foreclosure:
o In most states, the home is purchased at auction. You are not provided access to the home prior to the auction. You will have the address in advance and you should at least drive. Sometimes when you walk by, you’ll see that the house is vacant or occupied.
o In most states, if the home is occupied, you will need to evict the current owners by following local laws. This means that even after you buy the house, the people who were foreclosed on could still live there. To prevent them from causing damage to the house, you may want to consider paying them to move. After all, it’s a lot easier to pay $1000 to have someone move in than to replace all the broken windows.
o If the house is unoccupied, try to find out if it has been vacant during the winter. If so, you may have frozen pipe damage.
o You can usually get a list of all foreclosures up for auction at the sheriff’s office.
o It would be advisable to partner with a REALTOR, or someone who understands the current market value of the home before making an offer on the home. This will tell you the value of the house if it were on the market today in average condition.
o You must make sure you know the ties against the property. (A lien is someone who has an interest in the property, such as a bank or a tax lien can also be placed if the person has not paid their taxes.) You can find out from the Recorder of Deeds or the county office in your area that handles property registration. All links on the property must be registered, but you can check with your local municipality to understand the rules in your area.
o Generally, the links are in this order:
1. Federal Tax
2.State tax
3. Local tax
4.1. Registered Mortgage (this is usually the primary mortgage)
5. Registered second mortgage (usually a home equity loan).
o Typically, when the higher-ranking entity forecloses, the lower-ranking items are liquidated unless they are tax liens. However, this is not always the case. You should check with your local municipality to be sure. Here are some examples.
1. The house has 10K in tax liens, 200K in first mortgage and 50K in second mortgage. The house is auctioned for $205,000. The tax lien is cancelled, the first mortgage receives $195,000 (losing $5,000), and the second mortgage and any subsequent liens would receive nothing. You own the house and the title is clear. (This is an example and is not guaranteed.)
2. The house has 50K in tax liens and was seized by the government for tax sale. The house as $250,000 in other mortgages on the property. You win the auction for $38,000. This removes the tax lien that foreclosed on the mortgage and typically all subordinated loans. Typically, in a case like this, the first mortgage company will bid on the house to protect their interests.
o Once you win the auction, you will usually have to immediately pay 10% in the form of a cashier’s check. Balance is due within 30 days.
o Now I suggest you hire an attorney and do a thorough title search on the property, purchase title insurance, and prepare the deed.
o If your title search looks positive (you didn’t miss any featured links), then pay the other 90%.
o If the title search indicated that you made a mistake, then you will need to decide whether it is in your best interest to complete the deal or lose your 10% deposit.
o Pay 90% and register the deed (your lawyer can help you with this).
o Now, if the house is empty, you need to get access (you won’t get any keys). The house is yours. (In some states, previous owners have a period of time in which they can reverse the foreclosure and pay the full amount owed to the foreclosure entity. This is usually 30 to 90 days, if applicable. You can still access the Property just has a higher degree of risk for that period.
o If the home is not vacant, you must work with the local sheriff to evict the current tenants. Please note my suggestion above.
As you can see, there is a lot of risk when buying a foreclosure. It is not as easy as it looks. There are some alternatives.
1. Work with a local real estate agent and buy the house through the normal channel. Banks sometimes reduce your lien (called a short sale) to avoid the cost of foreclosure and the risk that comes with it.
2. Sometimes you can contact banks and buy property from the bank. Many banks use local real estate agents to list their properties; so again, working with a REALTOR will help in this case.
Buying a foreclosure can be extremely rewarding. However, it can also be extremely expensive. Please make sure you know what to expect if you choose to go this route.
Using a licensed REALTOR is the surest way to ensure that you are buying a home for the correct value. Your proposal/contract of sale, whether prepared by an attorney or REALTOR, will ensure that your property is clear of all liens or closing does not occur.
For those of you looking for foreclosures, best of luck. For those of you looking to buy a home in a much less risky way, call a REALTOR and let the shopping begin.
(All information contained herein should be considered informational only. Local laws and ordinances will dictate the exact foreclosure process in your area. You should check your local laws/ordinances as they will take precedence over any information contained herein.)