In the third installment of my series on local real estate, I will discuss the key factors buyers need to consider when evaluating the purchase of a foreclosed property
For this article, I have relied on the expertise of local real estate and foreclosure expert Steve Epstein (805.689.9339). He is the director of REO services for Coldwell Banker and has been a Realtor in Santa Barbara for more than 24 years, and has closed more than 900 transactions since 1988, with more than 500 of them being foreclosed properties.
Foreclosures are sometimes referred to as REOs, or real estate owned, an industry description for properties owned by institutions after the foreclosure process has been concluded. The foreclosure process typically starts when the homeowner, or trustor, stops paying the mortgage, and the bank, or beneficiary, asks a servicing company (the trustee) to begin the foreclosure process. This process usually begins with the filing of a Notice of Default and ends with a Notice of Trustee’s sale being posted on the property and being printed for three weeks in a local adjudicated newspaper. All told, it takes 111 days from start to finish, before the bank can hold the trustee’s sale.
There are several reasons to be cautious when considering the purchase of a foreclosed property on the courthouse steps. First, you do not get to inspect the property, so there could be serious damage or other needed repairs requiring a substantial additional investment in the property. Many people will abuse a property, or will strip it of anything valuable, once the foreclosure process has begun, which can result in significant costs to the purchaser. What the banks will do to get a property ready for the market varies from near complete remodeling to doing virtually nothing.
The buyer will not get a termite report either. Some banks will not even do the basics, like the remediation of termite repairs, which are often a requirement for obtaining a new loan for the buyer. Also, you do not get a title report (unless you buy one up front) so you may be buying a second or third trust deed position behind a “senior” loan. Those sales also are cash transactions, and are never financed. The risk with these second and third trust deeds is usually far too great for the average homebuyer to assume.
Banks typically determine the price they will ask for a foreclosed property based on a qualified Realtor’s opinion, coupled with a current appraisal. Contrary to popular belief, there is no correlation between what the bank was owed before it foreclosed and what it will be able to get out of the property when it sells it. Many REO sales are better than average deals because banks are realistic, pragmatic sellers that are devoid of any emotional connection with the home. Banks are motivated sellers that want to move foreclosed properties off of their books quickly.
Many banks ask for an opinion of value that will allow the home to be under contract in 30 days or less; a tactic every seller should employ unless the seller is convinced the market is about to skyrocket in the next few months. Multiple offers and bids over the asking price are still very common on REO listings. Foreclosure buyers typically get an answer back as to whether they are the successful bidder very quickly, unlike the short-sale process, which can take many months and up to a year or longer in some cases.
An REO buyer should plan on the bank doing nothing in the way of repairs and upgrades. If the buyer asks the bank to cover any costs, they should be truly serious, big-ticket items that were not obvious prior to closing, or lender-required repairs that represent health and safety issues that often will be highlighted by the appraiser. The less you ask for, the more you are likely to get.
Banks have virtually no disclosure obligations. Banks will not send anyone to view the property and, other than reviewing some pictures, they usually never see the property at all. After a good round of inspections that every buyer should complete in the process of home-buying due diligence, the average buyer should know more about the property he or she is buying than just about anyone else. Hiring a host of trained, professional inspectors and contractors is always a buyer’s best hedge against future surprises and often beats even a thorough disclosure package, although both are nice to have. Foreclosure sales are typically “as is,” meaning the buyer gets the property in the condition it is in at the time of the transaction, and there is no warranty or obligation on the part of the seller (the bank) to correct any deficiencies whatsoever.
Buying a foreclosed property under the right circumstances can offer many benefits, not the least of which is a very attractive price. The process can be complex and risky, however, especially with regard to the potential cost of substantial repairs. As with any complicated financial transaction, it is advisable to work with a specialist when considering an REO transaction.
— Craig Allen, CFA, CFP, CIMA, is president of Montecito Private Asset Management LLC and founder of Dump Your Debt. He has been managing assets for foundations, corporations and high-net worth individuals for more than 20 years and is a Chartered Financial Analyst (CFA charter holder), a Certified Financial Planner (CFP) and holds the Certified Investment Management Analyst (CIMA) certification. He blogs at Finance With Craig Allen and can be contacted at craig@craigdallen.com or 805.898.1400. Click here for previous Craig Allen columns. Follow Craig on Twitter: @MPAMCraig.
