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Typically, this has been investors' territory, but more and more owner- occupant buyers are considering foreclosed properties. If you are one of these buyers, here's some information and advice about the process. Georgia is a non-judicial foreclosure state, which means that the lender is not required to sue in a court of law to foreclose. The lender gives a minimum of 30 days notice after default. At that point, the lender may begin foreclosure proceedings, advertising the foreclosure for four consecutive weeks in the local legal newspaper. During this time, the owner has the right to cure the foreclosure by paying the amount owed plus any additional interest and penalties. After four weeks, the property is auctioned on the courthouse steps or sidewalk. Basically, there are two ways to buy a foreclosure: 1. You may find it on your own through the local legal newspaper, do a drive-by, and bid on it at auction. The condition is as-is, and the buyer must have funds in place (a line of credit or cash) to bid at auction. The lender usually opens the bid with the amount it needs to break even. If there is no bid, the property goes to the lender’s assets manager to determine fair market value and make arrangements to list the property with a real estate company. 2. The second way to buy a foreclosure is to purchase a foreclosed property listed with a real estate firm. If you’ve found a property of interest, and it’s a foreclosure, FAIR MARKET VALUE and CONDITION should be your primary concerns. ALL foreclosures are sold AS IS with to right to inspect and terminate (“Due Diligence”), but the seller will not make any repairs. The addenda that the seller (lender) attaches to the contract may range from 4 pages to 15 pages, and it all says the same thing: The seller does not claim any knowledge of or liability for the condition of the property. PRICE Sellers are just trying to recover what they’ve invested in the property, but often take a substantial loss. Price is negotiable. Before making an offer, be sure to check recent sales of comparable properties. If the home is in poor condition (more about that below), and if you must spend $15,000 to bring it up to normal condition, will it be worth what you paid for it plus at least $15,000? The seller may agree to terms that are not allowed by the lender for your particular loan. In lieu of an allowance for repairs, most lenders will require a price reduction. For many 90%-100% conventional loans, the seller is only allowed to pay 3% toward the buyer’s costs of closing. Be sure to ask your lender about these options before making an offer. CONDITION The one thing all foreclosures have in common is that the owners ran out of money. It may have been a fairly recent reversal of fortune – a loss of income, a health crisis, a death in the family. Or, it may have been an owner who was in over his/her head from the beginning due to a sub-prime or adjustable rate loan. In any case, realize that the house may not have been properly maintained for a long time. If it’s in really poor condition, it may not appraise for the purchase price, your lender may not be willing to make the loan, or your insurance company may refuse to insure it (or threaten to cancel your policy after closing). Even after you’ve closed, your homeowners association and city or county governments can force you to make repairs immediately, including the removal of any hazardous trees. If the house is in poor condition, do you have the funds and the time to bring it up to normal market condition immediately after closing? TITLE Foreclosures have messy histories. Liens may have been filed and not yet recorded, and the lag time is longer in some counties than in others. There may be outstanding tax liens and unpaid utility bills. There may be liens for unpaid repairs. THE OFFER Lenders and Assets Managers vary quite a lot in how they handle foreclosure transactions. In some cases, the lender may refuse to pay any closing costs, provide a home warranty or termite letter. In other cases, the lender may be willing to pay closing costs, provide a warranty, and even give an allowance for repairs after closing (see below for my comments on this option), Make your offer based on the condition of the property and fair market value for that house in that neighborhood. Ask for what you want in the initial offer, because there will be no negotiating after the offer is accepted. You will have to have funds in place for closing and a pre-approval letter from your loan originator, and earnest money of approximately 1% to 3% of the offer price. Earnest money is held by the assets manager for the bank. At closing, it is applied toward your down payment. Many banks will require that you be pre-qualified with their lender. In the past, all disclosures were attached to the initial offer. Lately, it seems more common for the seller disclosures to be attached after the acceptance. Keep in mind that the seller does not have any knowledge of the history of repairs or incidents that might affect the condition of the property. You may be bidding against other buyers, and the seller will respond only to the strongest offer. Even after acceptance, it may take up to seven calendar days before the seller signs and returns a copy of the contract (“Binding Agreement”). FINANCING You’ll have an agreed upon amount of time to determine if you have the ability to obtain the loan described in the Agreement. Typically, this will be 14-15 days for a foreclosure property. Before making an offer on a foreclosure, make sure that you have provided all information that your loan officer requires for desktop underwriting approval. Do not proceed into any Purchase and Sale Agreement without a Good Faith Estimate of your costs of closing, interest rate and loan amount. What will you need in reserves at closing? If all information you provide in your loan application is correct, can your lender reasonably assure you of loan approval? Be sure to have a frank discussion with your lender about the foreclosure property you are considering, along with your assessment of the condition of the property. Your lender may want to check into comparable sales in the neighborhood in advance to avoid an appraisal disaster down the road. Your earnest money is at risk if you exceed the financing contingency deadline and are unable to obtain the loan. INSPECTIONS Typically, you will be given a short time (5-7 calendar days) to conduct all inspections, including an independent home inspection, termite inspection, air quality inspections such as radon testing, research of the neighborhood and area conditions that might affect future property value. In most foreclosures, the utilities have been disconnected by the seller, and it may be your responsibility to order and pay any fees required to have the utilities turned on. Some sellers charge the buyer a fee ($100-$125), and the seller’s representative causes the utilities to be turned on for the inspections. In other cases, you may be required to make application and pay a deposit directly to the utility companies. In every case, it is the buyer’s responsibility to pay a fee to the seller or to the utility companies and have the utilities turned on if desired for an inspection. The inspections should give you the information you need to (1) Decide whether or not to proceed with the transaction, and (2) Evaluate what requires repair or replacement immediately after closing. If you choose not to proceed with the transaction, we’ll do a Termination and Release Agreement within your “Due Diligence” deadline. THE CLOSING In a normal sale, the closing attorney represents your lender. With a foreclosure, the attorney represents the seller, and in many cases, it is an office that deals only in foreclosures. The closing will not take place until the seller signs off on the final HUD1 (Settlement Statement), and many will take up to two business days. Be sure that you and your lender budget at least 48 hours after the final HUD1 is approved by your lender for closing. Everything takes more time when dealing with banks and assets managers, especially those who are out of state, so don’t be surprised if your closing is delayed. MY ADVICE 1. Be patient and resilient. Develop a thick skin. You are not dealing with a nail biting husband and wife who are anxious to close and move on. You’re playing on the seller’s field and by the seller’s rules. Aside from your initial offer and the information you provide to your loan officer, you don’t have a lot of control over this process. Expect obstacles, glitches, and delays. Expect the process to seem unfair sometimes. 2. Think like an investor, and be prepared to walk away if the inspection reveals more than you are prepared to handle. 3. Buy Owner’s Title Insurance. DISCLAIMER: I am not an expert in foreclosed properties, but have over 20 years of experience in residential real estate of all kinds. I do not list or sell HUD foreclosures (a completely different system). Here's a little information on a similar type of sale called SHORT SALES. Pat Sabin
(770) 490-1633 RE/MAX Northeast Each Office Independently Owned and Operated 651 Exchange Place Lilburn, GA 30047 (770) 923-4000 |
