Buying a Short Sale or Pre-Foreclosure Property

Although several news reports state that the number of mortgage-defaults has continually gone up and that interest rates have not come down as expected keeping buyers wary about buying a home, they fail to mention that actually this is a great time to buy.

With property values already low, great number of properties available for sale, programs like: FHA and CalHFA (which we can qualify you for) helping buyers finance up to 97 percent and in some instances up to 102 percent with the option of having the seller cover for their down payment and closing cost, this is truly a buyer’s market.

Today more and more buyers are asking about buying foreclosed homes, but apparently there is a big misconception amongst buyers. The misconception is that everything not being sold as a regular sale in today’s market is a foreclosure sale. This is not the case as in some cases the sale could be a short sale or a pre-foreclosure, a foreclosure auction sale or an REO sale. Contrary to what you may think, there are differences between these types of sales so we are going to explore the differences between buying a short sale, buying at a foreclosure auction and buying an REO property.

As you fast forward in the lives of the many homeowners that rushed to buy 100 percent financed homes back in 2004-2006, they did not realize that their homes would be worth so much less in 2008. Now they are stuck with homes worth less than the actual combined balance of their loans. Unable to refinance or to keep up with the rise of their monthly mortgage payments, they decide to sell their homes at a loss; this is called a short sale.

A pre-foreclosure sale is not necessarily a short sale, although it often is, because there are some properties that actually do have equity but for “a” or “b” reason the homeowner is delinquent with the mortgage payments and is forced to sale before the lender forecloses on them.

Disclaimer: The following is a basic non-legal descriptive explanation of a typical non-judicial foreclosure process in California, consult with an attorney for the specifics on your situation

In a short sale or pre-foreclosure, often the seller has stopped making the payments on their mortgage, when this happens the lender will begin calling the homeowner offering to assist them either through a loan modification, forbearance agreement, etc. If the homeowner does not qualify for any of these programs or ignores the calls (this is a big mistake) and continues not making the mortgage payments, the lender may wait 3 to 4 months after the first late payment before it begins the foreclosure proceeding by recording a “notice of default” and making it public notice. At this time the seller has a limited amount of time to find a buyer and sell the home. Generally 90 days after the “notice of default” has been recorded and the seller still has not found a buyer, the lender will send a “notice of sale” informing the homeowner when and where the sale will be performed. Normally a seller can stop this foreclosure process up to 5 days prior to the trustee sale date by bringing the mortgage current or by selling the property.

When looking to buy a short sale, you need to understand that many short sales won’t make it to the closing table for many reasons. I can personally tell you a few. Some lenders are new to this type of transactions and although they are getting better, some staff at the loss mitigation departments is not well informed about the market conditions in certain areas. Sometimes, all they focus is on the mathematics of the transaction and not the reality. Other times it will be because of an overpriced appraisal or “broker price opinion” performed by an appraiser chosen by the lender from a totally different market. Other times it is neither the lack of information or a bad appraisal but simply the shortage of man power unable to handle the large number of short sales that need to be processed.

However, if you want to buy a short sale or a pre-foreclosed home, the first thing you will need is patience because this type of transaction takes longer than a regular purchase transaction. You will also need to be pre-approved and not just pre-qualified. A pre-qualification does not necessarily prove that you can actually afford the purchase. On the other hand, a pre-approval is a more detailed screening of your financial situation and it will show the lender that you are a strong buyer making it possible to have a transaction with minimal delays.

With a short sale or pre-foreclosed home, you may definitely find a great home at a very low price but you need a Realtor that understands the process so that there is no panic, misunderstandings for lack of experience with these types of transactions. Your Realtor needs to know what key questions to ask the listing agent in order to analyze if the home is worth pursuing instead of wasting time and money for the buyer and seller.

If you are an investor, I don’t know any Realtor that will help you buy a home as an investment property if a “notice of default” has already been recorded on such property simply because there are laws that protect homeowners in distressed from being taken advantage of.

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If you are interested in seeing which property either through a regular sale, Short Sale or REO gives you the best value for your money and are also interested in seeing how you can combine this purchase with an FHA loan or CalHFA loan, call me or contact me so we can sit down to discuss all your options.

Buying a Short Sale property
Buying a Home at Foreclosure Auctions
Buying an REO (Real Estate Owned) property

Comments

3 Responses to “Buying a Short Sale or Pre-Foreclosure Property”

Opportunity for Buyers in a Slow Real Estate Market San Jose California / Bay Area on April 3rd, 2008 4:20 pm

[...] be seen as really gloomy. A market with an ever increasing number of unhappy sellers, unsold homes, short sales failing to sell because of a lender’s inexperience or lack of market knowledge, foreclosed homes [...]
Homeowners guide to Short Sales and Preventing Foreclosure, consequences on April 3rd, 2008 4:27 pm

[...] of whether you are looking to buy a regular home, buying a short sale, buying an REO property or considering selling your home as a regular sale or selling it as short [...]
Foreclosure scams San Jose California on April 3rd, 2008 4:32 pm

[...] real estate market not only has brought an abundance of inventory, many of which are being sold as short sales, sold at foreclosure auctions or sold as REO properties, but this market has also brought to our [...]