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Buying a foreclosure property is neither easy nor a guaranteed bargain. Here’s a beginner’s guide on how to approach this complicated part of the market.You’ve seen the ads: Investors in expensive suits boasting about the easy money they’ve made snapping up foreclosure bargains. But truth be told, buying a foreclosure property is neither easy nor a guaranteed bargain.

Sure, with the number of foreclosures surging, it’s possible to find a distressed home selling at a discount to those around it. But often there are pitfalls surrounding these abandoned homes that buyers should be aware of.

By the time you get them fixed up, in some cases you have paid more than retail (or market value)

To effectively shop for a foreclosure home, you need to understand the foreclosure process, the risks and the timing necessary to close the sale.

It also doesn’t hurt to have some help from a seasoned agent who has handled a lot of bank-owned sales as a buyer’s representative. But be wary of anyone who claims to know too much about what lenders will accept and when,.

“This market is so crazy I would be cautious of anyone who says they know where the market is going.

The foreclosure process

Let’s start with a basic definition of foreclosure, how it works and how long it takes.The foreclosure process is a means by which a bank can recover the amount owed on a defaulted loan, by repossessing the property that secured the loan.

The average foreclosure starts when a homeowner misses a mortgage payment and the lender files a notice of default. This is a public record and can be a first step for buyers in finding distressed properties, says Alexis McGee, co-founder of Foreclosures.com and author of “The Foreclosures.com Guide to Advanced Investing Techniques You Won’t Learn Anywhere Else ”

If the property owner doesn’t pay the owed amount in 60 to 90 days (or whatever timeline is dictated by the state you live in), a public auction notice is generally recorded that sets a sale date for the home.

If the property doesn’t sell at auction, the lender takes ownership of the property with the intent to sell it and recover its money. These bank-owned homes are often referred to as REO properties, a term that stands for “real-estate-owned.”

However, the foreclosure process differs widely from state to state. States with so-called judicial foreclosure laws require banks to go to court or file a lawsuit to repossess a home. This initial filing is called a “lis pendens,” meaning “suit is pending.”

Nonjudicial states do not require this. The deed of trust signed by buyers typically includes a power-of-sale clause, authorizing a trustee to sell the real estate to pay off the debt if it’s in default. The notice of default kicks off this process.

It’s important to be familiar with what the laws are in your state before embarking on your search, as they can affect the amount of risk you must shoulder and the timing for buying a foreclosed property.

A foreclosure in a judicial state such as New York can take more than12 months, while one in Texas can take as little as 60 days.

Now that you know the process, let’s move on to your options in buying distressed properties, and the risks and rewards of each.

3 ways to buy a foreclosure

1. Short sales

When the value of a home has gone below the balance of the mortgage or mortgages on it, owners will often try to get the bank to agree to a short sale.Under this arrangement, if you make a fair-market offer on a home that is less than the amount owed, a bank can agree to accept this offer and forgive the remaining debt on the property, staving off a foreclosure for the owner.

It can be a good deal if it works, experts say. But getting the bank to agree can be a lengthy and aggravating process both for the seller and the buyer.

“What you are going to find is many potential buyers go into a short sale, then the bank won’t say ‘yes’ or ‘no.’ This can go on for six months where they won’t give you an answer.

There’s a lot more paperwork for the owner to prove his insolvency, and if there is a second mortgage on the property, you have to persuade that lender to remove or reduce its lien, something that may or may not happen. Short sales do not wipe out these junior liens.

It’s best for: buyers who are in no hurry to move, or investors who are having a hard time finding deals in their community.

2. Foreclosure Auctions

Another way of purchasing foreclosures is to buy them at auction on the courthouse steps. Plenty of investors do this, often because it’s a way to buy an attractive property with multiple liens.But for most people, this option is fraught with risks, experts say. For one thing, you don’t get to see the interior of the house before you buy, you don’t get to conduct your own inspection, and often you have to evict the former owner.

There can be horrendous things wrong with the property. You better know what you’re doing or know that the price is so good, that even if it’s a disaster inside it will still be worth it.

You also have to be ready with a check that day for the full amount you plan to bid.

Moreover, you must do your own title search — there are no title insurance policies here — or else liens on the property could prevent you from getting clear title when you are trying to sell.  And many states offer a right of redemption for the previous owner — a time period in which he can get his property back if he pays the lender the outstanding loan amount, plus interest and the lender’s costs in foreclosure.

You’d hate to buy a property at auction, pour money into it to fix it up and then have the owner reclaim the property and these improvements. It’s rare, but investors typically try to head this off in right-of-redemption states by purchasing the “redemption rights” from the previous owner for a few hundred or a few thousand bucks before or after the auction.

It’s worth noting that online auctions are emerging in the foreclosure space. If you investigate this option, be careful that the auction house you’re dealing with is selling the property and not a lien on the property, experts caution.

It’s best for: seasoned investors only. There is too much risk involved for people who don’t make their living in real estate. And frankly, investors say, often the minimum bid is no great bargain.

3. Bank REO

These are the properties that went to auction but were not bid on, and so they reverted to the lender holding the mortgage.In a hot market, these properties will sell for full market value, which in many cases is above the listed price. 

If you are willing to buy into a neighborhood with some blight — a lot of foreclosures — that’s where you will see some heavy discounts

However, it’s more common to find REO properties running 10% to 20% lower than market value. That may not sound like much of a discount, but on a $450,000 house, a $45,000 discount can mean the difference between qualifying for a loan or not.

The good news, experts say, is that REO homes are lot less risky to buy than properties bought through a short sale or auction. For one thing, all of the junior liens have been wiped out. And, unlike an auction property, you can tour and inspect the home just like any other home on the Multiple Listing Service.

But, investors say, they are not without their own set of complications, including damage from an unhappy former owner. Some agents recall irate borrowers pouring cement down the toilet to mess up the plumbing, or intentionally flooding the house to inflict water damage and mold.

If a property has been sitting empty for a while, there’s a chance it might have missing appliances, dead landscaping or damage from squatters. So it might be a good idea to bring a contractor along to find out what kinds of repairs are needed and what they will cost before you make a bid. For every dollar you spend on repairs you should knock $2 off the price of the home. You shouldn’t do the work for free, Investors caution that while you want to look for a fixer, you don’t want to choose a place that needs to be gutted, because you will have a hard time getting financing for it.

Conduct a little research with the home’s last listing agent, if you can. Some Bank REOs have wound up in foreclosure multiple times, because there’s something wrong with the property or its location.

Sometimes there’s a reason the thing went into foreclosure, Just because it’s a foreclosure doesn’t make it a good buy.

It’s best for: anyone who is interested in buying a property below market value and who is willing to do a little research.

The key pieces of advice for successful foreclosure buying, experts say, are to be educated, be thorough and be unemotional about the houses you bid on.

There’s a lot of competition for some of the better bank-owned properties, our office fields dozens of offers a day on some properties.

The good ones get multiple offers. I’ve had people who’ve made a dozen offers before getting one of them,.

Be prepared to look at a lot of foreclosures and get a feel for the market before hopping in there.

The legislation - likely to be enacted soon - devotes $300 billion to helping troubled homeowners avoid foreclosure. See if you qualify. By Les Christie, CNNMoney.com staff writer
Last Updated: July 25, 2008: 10:15 AM EDT

Breaking down the housing rescue

NEW YORK (CNNMoney.com) — The House on Wednesday passed a $300 billion housing rescue bill aimed at helping troubled homeowners avoid foreclosure and supporting mortgage giants Fannie Mae and Freddie Mac.

If the bill is now passed by the Senate and signed by President Bush, who today withdrew his threat to veto it, thousands of at-risk borrowers will be able to refinance their unaffordable old mortgages into new low-cost fixed-rate loans insured by the Federal Housing Administration (FHA).

The Congressional Budget Office estimates that 400,000 borrowers with $68 billion in loans may benefit from the program - but the bill allows for as many as 1 million or 2 million borrowers to participate in the program.

Here’s what homeowners need to know.

Who’s eligible? Qualified borrowers must live in their homes and have loans that were issued between January 2005 and June 2007. Additionally, they must be spending at least 31% of their gross monthly income on mortgage debt to be eligible for the program.

They can be up to date on their existing mortgage or in default, but either way borrowers must prove that they will not be able to keep paying their existing mortgage - and attest that they are not deliberately defaulting just to obtain lower payments.

Before homeowners can get FHA-backed mortgages, they must first retire any other debt on the home, such as a home equity loan or line of credit. Borrowers are not permitted to take out another home equity loan for at least five years, unless it’s to pay for necessary upkeep on the home.

To get a new home equity loan, borrowers will need approval from the FHA, and total debt cannot exceed 95% of the home’s appraised value at the time.

How can I apply? Borrowers can contact their current mortgage servicer or go directly to an FHA-approved lender for help. These lenders can be found on the Web site of the Department of Housing and Urban Development.

How does the refinancing process work?
This is a voluntary program, so lenders holding the original mortgage have to agree to rework a given loan before things can get started. The bill requires lenders to make major concessions, writing down the value of the loan to 90% of the home’s current value. In areas where prices have plummented by as much as 20%, that will mean a substantial loss for the lender.

But lenders won’t sign off on a workout unless they think that they’ll lose less money on that than they would by allowing a home to go through the costly foreclosure process.

Each loan will have to be underwritten by an FHA lender on a case-by-case basis. That means the banks will do a new appraisal to determine the home’s current value, as well as examine and verify income statements, bank accounts, job histories and credit scores.

Based on that new appraised home value, the FHA lender must determine how much the original lender has to reduce the original mortgage, so that it will reflect 90% of the home’s market value.

If the original lender agrees to the writedown, the new lender buys the old loan and takes over the reworked mortgage.

As part of the deal, the old lender writes off any fees and penalties on the original mortgage, including prepayment penalties, and accepts the proceeds from the new loan on a paid-in-full basis. Additionally, it pays the FHA an up-front premium equal to 3% of the mortgage principal.

What does it cost? There should be little up-front costs for borrowers to bear. Loan origination fees will vary by lender, but these can usually be paid by the borrower over the life of the loan in the form of a slightly higher interest rate.

However, the refinanced loans do come with many strings. For one thing, borrowers are responsible for paying an insurance premium to the FHA guaranteeing the loan, which will be 1.5% of the principal annually.

Borrowers also agree to share any profits from future home-price appreciation with the FHA. To do that, they’ll pay a “3% exit fee” of the mortgage principal to the FHA when they resell or refinance.

Plus, they’ll agree to pay the FHA 100% of any profits they realize from higher home prices if they sell or refinance within a year. So if the original loan principal is $200,000 and the home sells for $250,000, the borrower will owe the FHA $50,000, minus costs.

After a year, borrowers will share 90% of the profits with the FHA. The percentage keeps dropping in 10% increments to 50% after the fifth year, where it stays.

What will I save? Savings depend on what borrowers are paying for their present loan and where they live, but for most people it will be substantial, even after factoring in the FHA fees.

In areas that have sustained huge price drops, such as Sacramento, Calif., where prices have fallen by about 30% over the past year, some loans might be reduced by more than 40%.

Additionally, the FHA loans carry reasonable interest rates, which are fixed for the life of the loan, as opposed to a subprime adjustable-rate mortgage that can jump higher every six months.

Some believe housing recovery is still years away

July 24, 2008 07:55 AM

Where’s the bottom? Are Phoenix, Denver, Sacramento, South Florida and Las Vegas still in a tailspin? Is it time to make a run at a second home you felt you could never afford?

Perhaps we have been too driven and proud of the fact that 70 percent of all families in this country own their homes. In order to get there, lenders, real estate agents and consumers dipped into a “too easy” bucket where the value of ownership sunk to the same level of the cost of getting in the door — zero.

Sadly, greed became confused with privilege. We are now feeling the results of too much credit being offered to poor or borderline borrowers, overeager investors betting on dreams of continued double-digit appreciation, and impassioned move-ups wanting more housing than they could realistically afford.

The housing specialist first to label and predict a “foreclosure tsunami” for several areas of the country now predicts another round of foreclosures by homeowners who can afford to make their payments yet choose to walk away from their homes. When and if they do in any significant volume, it could lead to a housing meltdown.

“Virtually everyone missed the fact that housing appreciation is far more powerful to keep people paying than the legal consequences of default,” said Tom DiMercurio, a veteran of 38 years in the foreclosure business and former president of Fidelity National Asset Management Solutions. “For many folks in different states and different stages in their life, defaulting on their home loan makes economic sense.”

DiMercurio was the brains behind BuyBankHomes, a site that provides foreclosure information to interested parties such as consumers, investors and real estate agents. He also started Denver-based The Mercury Alliance, which offers conventional REO sales, management services, plus Internet auctions, and Paradigm Default Services, an operational platform for lenders and real estate brokers.

A decade of cheap money and incredibly flexible loan programs offered by many lenders sparked overbuilding by lenders, a flip-and-run mindset for speculators, and unrealistic expectations for first-time home buyers blinded by the low payments of a short-term loan. While the equity gained by rising home prices can cover many ill-conceived loan mistakes, a flat or sinking market only compounds problems for lenders and owners.

Credit is now tighter and borrowers are being screened and actually scrutinized for the first time in years. Yet, given the developments of the past 15 months, the key to getting a critical flow back into the housing picture may mean revamping the entire once-conservative loan-qualifying process.

“I also believe, that given the size of the growing number of people that have been and are continuing to be foreclosed, there will be no growth in the number of home buyers/borrowers — unless a foreclosure will be looked upon as a ‘late,’” DiMercurio said. “In order to have any kind of loan growth in the future residential market, something less than even subprime credit must be made satisfactory to lenders. And it won’t be easily substituted with down payment since values are also in the tank.”

Values are not in the tank everywhere, but homes certainly are not rising quickly in value and they are taking longer to sell. Multiple listing service figures that show a drop in new listings must be filtered with the number of would-be sellers not wanting to compete in a slow or flat market.

Some sellers, especially those in some select second-home markets, continue to believe that they are in the driver’s seat. A recent offer on a $739,000 home with three bedrooms and two baths in 1,440 square feet near Lake Tahoe did not even draw a counter from the seller when a potential buyer offered $669,000.

The buyer did his homework and made what he felt to be a generous offer. In seven sales in the immediate area from May 2007 through March 2008, the highest paid was $453 per square foot and the lowest price was approximately $370 per square foot. The buyer truly wanted the home and offered more than the highest price per square foot.

All real estate is regional. Blips and dips in one neighborhood can resemble a flat line just a few blocks away. But a return to a national “feel good” housing atmosphere likely is years away, not months. The components are varied and complex and certainly will not be sorted out this year. How is that even possible anyway when some people believe defaulting on your home loan makes economic sense?

Bankruptcy
A legal recourse that allows a person or business to clear any debt obligations by reorganizing the payment amount and payment schedule of those debt obligations. A bankruptcy stalls the foreclosure process, not allowing a foreclosing lender to proceed with the foreclosure until the bankruptcy proceedings are completed or the court in charge of the bankruptcy allows the lender to continue with the foreclosure.

Deed of Trust
A legal document that dictates the terms of a loan used to buy a property and transfers the ownership of the property to a third party called a trustee until the loan has been paid in full. The trustee can sell the property to recover the remaining loan balance for the lender if the borrower violates the terms of the loan (i.e. does not make monthly payments).

Foreclosure Sale
A process that allows a lender to recover the amount owed on a defaulted loan by selling or taking ownership (repossession) of the property securing the loan. The foreclosure process begins when a borrower/owner defaults on loan payments (usually mortgage payments) and the lender files the necessary documents to begin the foreclosure proceedings.

Junior Liens
Liens that have a lower priority in terms of their legal claim on a property. The priority is usually determined by the date when the lien was filed. The first lien, or senior lien, against a property is usually the first mortgage or deed of trust recorded when the owner bought the property. Junior liens are typically cleared out a public foreclosure sale, but the purchaser at the sale may be responsible to pay off senior or higher priority liens.

Lien
A legal claim on a property by a lender or other entity that is owed money by the owner of the property. The entity that files the legal claim is called the lien holder. If the owner does not pay off the loan or debt that is owed, the lien holder can take steps to sell or repossess the property to recover the debt owed (foreclosure).

Lis Pendens (LIS)
A publicly recorded notice of a pending lawsuit against a property owner that may affect the ownership of a property. Some states require lenders to file a lis pendens to begin the foreclosure process if a borrower is in default on loan payments.

Mortgage
A document that dictates the terms of a loan used to buy a property and gives the lender some claim to the property (either ownership or a lien) until the loan has been paid in full. The lender can take steps to have the property sold to recover the remaining loan balance if the property purchaser violates the terms of the loan (i.e. does not make monthly payments.)

Notice of Default (NOD):
A publicly recorded notice that a property owner has missed scheduled loan payments for a loan secured by a property. Some states require lenders to record a notice of default to begin the foreclosure process.

Notice of Sale (NTS or NFS):
A document announcing the public sale of a property to recover a debt owed by the owner of the property. The notice is mailed to parties affected by the sale of a property, advertised in local publications and recorded in public records. Among other information, it provides the date, time and location of the sale

Postponement
An announcement – usually made at the time and place of the originally scheduled foreclosure sale – that establishes a new date and time for the sale.

Reinstatement
The stoppage of foreclosure proceedings and return to the original terms of a loan that occurs when an borrower pays off the amount in default on the loan to bring the loan payments current. The borrower’s chance to reinstate ends before the public foreclosure sale in most states.

REO:
A bank owned property that has already been through the trustee sale process and is now ready to purchase direct from the bank. These properties are normally listed with a Realtor, and placed in the Multiple Listing System. Find Bank Owned Properties

Short Sale:
A listing on a property that is being offered for less money than the existing loan balance. The seller and the real estate agent hope to persuade the existing lender to reduce the loan balance to the amount a new buyer has offered for the property.  Many times the seller is already behind in the payments, and there is little time to complete the sale.Most of the time the existing seller has little motivation to comply with the existing lender requirements: Provide a current financial statement, profit and loss statement, two years tax returns, and pay for a new appraisal and provide a copy of the purchase agreement between the seller and the new buyer. From most IDX feeds and metrolistmls.com. To find short sales go to our MLS Listings Page, and click on Short Sales.With so many great bank owned REO properties on the market, there is little need to look at short sales.

Trustee Sale:
The legal sale that is normally held at the courthouse steps, or at a title company. The existing lender will usually bid the existing loan amount, plus existing foreclosure costs.

 DEAR Gene: I am one of the unfortunate who has to deal with eventual foreclosure. Can you tell me how long I can remain in my home until legally having to vacate? –Constance

DEAR CONNIE: Before the foreclose takes place, please talk to your lender — and not just a low-level loan officer but someone high in the company. With all the foreclosures taking place throughout the country, lenders (at least the legitimate ones) do not want yet another foreclosure on their books. If no one buys at the foreclosure sale, the lender will be stuck with the house and will have to pay real estate taxes and insurance.

Also, check with your county and state governments. Many governments now have programs to assist borrowers who are in trouble, so you may be able to save your house.

How long do you have to stay in the house if it is foreclosed? Technically, you have to move out when the house is sold. But again, talk with your lender. They may be willing to let you stay for a period of time, if you can pay some rent. Lenders do not want houses to be vacant.

If the home is scheduled for foreclosure, I would attend that sale. Find out who bought it — it may be the lender itself if no one bids. Then discuss your situation with the buyer; once again, you may be able to strike a deal with that buyer.

To my knowledge, although you have to move out, it has been my experience that many homeowners whose property has been foreclosed upon just stay in the house until eviction proceedings are brought, and then they move out.

Judicial	Non-Judicial	Process Period	Sale Publication	Redemption Period	Sale/NTS
Yes	Yes	117 Days	21 Days	365* Days	Trustee
Comments:Judicial Foreclosures are not common

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Pre-foreclosure PeriodCourt foreclosures only occur if a lender desires a deficiency judgment. This process gives a borrower up to one year to redeem the property after the foreclosure sale. It is recommended that the borrower find a way to resolve it, or get some foreclosure assistance. In almost all cases, foreclosures are handled out of court. The process begins when a lender files a notice of default with the county recorder identifying the default amount and the date the borrower must pay off the default. The notice is mailed to the borrower and other affected parties.

Up to five business days before the trustee sale, the borrower may pay off the default plus any applicable costs of foreclosure and stop foreclosure. Three months after the notice of default is filed, the lender can schedule a trustee’s sale of the property.

Notice Of Sale / Auction
 
At least 20 days before the trustee’s sale, the notice of sale must be posted on the property and in one local public location. The notice is also published once a week for three weeks in a local newspaper, starting at least 20 days before the sale date. The notice is mailed to the borrower at least 20 days before the sale and to anyone who requests the notice. The notice must contain the date, time, and location of the sale, the property address, and the trustee’s contact information. In addition, the notice of sale must be recorded with the county recorder at least 14 days before the sale. 

The trustee’s sale is a public auction and the property is sold to the winning bidder. The trustee may require bidders to pay the full bid amount in cash or cashier’s check. Anyone may bid at the sale, including the lender and any junior lien holders. A trustee’s sale may be postponed by announcement at the sale. If a sale is postponed more than three times, a new notice of sale must be issued. 

After the sale is complete, the trustee transfers ownership to the winning bidder. The borrower does not have the right to redeem the property after the sale.

* Judicial Foreclosures Only