The home-buying process is stressful and aggravating when sellers hold all the cards. Negotiations seem fruitless, especially in a sellers' market. Hitting the wall time and again just increases the appetite for a motivated seller. That hunger might just lead a frustrated buyer to consider properties in the foreclosure process. After all, banks do not want to own houses that require upkeep and security, whatever the home values. They are the ultimate motivated sellers. While such prospects are promising on the face of it, foreclosures are not all smooth sailing for interested purchasers. Knowing how they differ from more conventional transactions helps buyers to achieve their aims.
How Does a Foreclosure Work?
In essence, foreclosure is a legal proceeding whereby the mortgage lender can take legal ownership of a collateral property for which the borrower has ceased to make payments. After taking possession of a foreclosed house, the bank or lender then tries to sell it in order to at least partially recoup its losses from the bad loan. Rules and timelines are different in each state. Some states mandate judicial foreclosure: the lender must seek permission to foreclose from a state court. Others do not involve the courts unless the borrower sues to stop the process. Needless to say, going through a judge lengthens the timeline.
Once the legal action is complete, the lender most often will put the property up for auction. There is no negotiation or haggling over home values. The house goes to the highest bidder -- provided that the bid is adequate to cover the lender's financial losses. Though the simplicity of the transaction is attractive, there are negatives. Successful bidders purchase the house as is. No repair requests or concessions. In addition, prospective bidders cannot ordinarily visit the property. other than driving by. In some cases, virtual tours are available online. In any event, the buyer hopes to get the house at a bargain since he or she has no idea of any unwelcome surprises that may await.
What Happens If No Bids Are Accepted?
If a lender does not receive an adequate bid, the house goes into its real estate owner (REO) portfolio. Unlike the real estate portfolio of some wealthy investors, REOs are a burden for banks and lenders to bear: the property is generating no income yet requires maintenance and security. Buyers might get good deals with REOs if they act wisely. These properties can be discovered online at lender websites. Using a buyer's agent helps prospective purchasers to obtain a comprehensive list of available REOs through a multiple listing service. No offers should be made on the home until after home inspection and appraisal reports are received.
There is every chance that repairs will be needed so buyers need these reports before negotiating with the lender. Helpful too is for a buyer to get pre-approved for financing from the financial institution that owns the subject property. In this way, the lender's losses are further mitigated by the new loan. The good news is that transactions are closed regularly with REOs.
Are There Any Alternatives?
If buying a home from a bank is not desirable, purchasers can always look at those properties that are in default yet not yet at the point of foreclosure. Here is where highly motivated sellers are found -- they want to avoid the legal costs and credit damage that come with foreclosure so are apt to be flexible with their terms. Home seekers should check county records for notices of default. A dream house might just be waiting there.
