Buying Foreclosures - Fact or Fiction

      Why use HiltonHeadForclosures.net? Foreclosures are very difficult to handle. Foreclosure property can be complicated, frustrating and time consuming, yet very rewarding. Welcome to bureaucratic red tape 101. You have to remember: the home is no longer owned by an individual but by a corporation and sometimes a very large corporation. So, the owner has no first hand knowledge about the home, has no ties to the home other than purely financial, has to answer to more than one person (many times more than just a few people) and lays no claim to the quality or soundness of the property. These factors make it very difficult to negotiate foreclosure sales and they can take up to as long as 6 months or more to close. So, if you have time on your side and if you have the time to work the deal, then a foreclosure could be right for you to take advantage of an opportunity in today's market. Again, it takes time and it takes a lot of it to make a foreclosure come together and that is why you need professional help from someone such as ourselves to help guide you through this complicated process.                  

    What's the difference between a Foreclosure and a Short Sale, you may ask. A foreclosure is when the mortgage company has exhausted all avenues with the home owner to repay the mortgage that the owner has taken out in order to purchase the property. The mortgage company in turns reclaims the property from the owner who is default and subsequently the mortgage company becomes the owner of that property. Once this takes plce in the court proceeding any and all liens against the property are then either thrown our by the court or satisfied by the bank. You will then receive a Special Warrenty Deed from the bank when you close on the property.

    A Short Sale is when the owner can no longer afford to make the mortgage payments on the property and contacts the mortgage company about the situation. The two parties then enter into negotiations where the mortgage company will accept a lesser amount of what is owed on the property. They do this only when there is sufficient evidence that the market will not bear what is owed on the property. This process eliminates the  lender from having to go through an inevitable foreclosure where additional expenses are involved. In this case there are several factors you must consider. 1) if there are any liens on the property you may be required to settled those liens at the closing table. ie. back taxes, regime fees, mechanics liens etc. 2) not all short sales are succesful because the homeowner has not done the proper paperwork and homework with the bank in order to position themselves to be accepted under these conditions. 3) short sales may often require the homeowner to sign a promissory note for some portion (if not all) of the "short balance" of the loan with the bank. This is important to know because not all offers are necessarily appealing to a seller who is in this situation. They may be better of allowing the property to go into forelcosure versus accepting a very low offer on their property.

The Lenders Profits

     The goal of the foreclosing lender is to gain possession of the property. The financial goal is the recovery of the principle loan balance, accrued interest, late fees and penalties, taxes paid on behalf of the property owner, court costs and attorneys' fees. In most states, the laws are written so that the lender can only attempt to recover these widely accepted standard losses.

     The lender will add in every legitimate expense when foreclosing. This is what is sued for: the total the lender claims is owed by the property owner. In most states, this is the maximum amount the lender can collect. The laws are written this way to protect home owners from unfair practices.

     The commonly held notion that a bank (or any other lender) must sell a repossessed property for the same amount it cost to gain possession and therefore cannot make a profit is false. If the foreclosing lender is the successful bidder at the auction, it will take possession of the property for the very first time. When this happens, all the rules change. The lender, now the legal property owner, can do anything it wants with the property, Rent it, keep it, whatever. It can also sell the property for any amount it so desires.

 Condition of Title

     Often when purchasing foreclosures buyers are concerned about the quality issued by the lender. A common belief is that there may be liens or judgments clouding the title. This is a myth. The lender will bid at auction only if it wants the property. The lender, typically the senior lien holder, wipes out all junior lien holders or judgments in the process.

     If the foreclosing lender does not bid at that sheriff's sale or auction, it probably doesn't want the property. This may be due to excessive superior liens, such as IRS or tax liens. (Tip: If the lender doesn't bid for the property at auction, you probably shouldn't either.)

     The lender, in an effort to recoup its losses, will bid on the property, wipe out other lien holders, then pay the balance of outstanding property taxes to secure the property's clear title. No lender will go through the time, effort and expense of foreclosing, only to lose the property for a few thousand dollars in back taxes.

                                  Having absorbed these costs, the lender generally adds them to the asking price and will sell the property with clear title. If you have heard that the lender must sell the property for what they paid for it at auction, forget it.

    Another myth is that all banks are bending over backwards to give away foreclosed properties. It's true that the lenders want to sell their foreclosures as they are in the banking business not the brick and morter business. Lenders, banks in particular, are corporations. These corporations are driven to make money, not to lose it. A bank has to answer to its shareholders just like other corporations do.

   The business of repossessing properties is not new. Over the years, many lenders have developed effective methods of selling their REO's quickly, with minimal loss.

 Property Disposition

     Lender practices and procedures vary greatly. Some widely market their inventory of REO's, while others practically hide them.  We know of some banks that advertise foreclosures in daily newspapers, while others demand that you maintain an account with them (or better yet, become a stockholder) just to get their list of properties. Lenders are in the money business, not the real estate business. This is why most properties are marketed through recognized real estate brokers or agencies. Some agencies specialize in foreclosures and may represent several lenders' properties.

    Lenders with larger inventories often have a staff dedicated to analyzing and managing the properties, while at the same time coordinating and managing the brokers retained to market the properties. The lender determines the strategy and the broker markets the properties accordingly.

 Investing Overview

    Purchasing directly from the bank is the most popular way to buy foreclosures. Find properties that meet your investing criteria, those that are in your area, price range, size and style. Determine whether you are buying to resell or to secure a residence for yourself. Determine if the property is a bargain by deducting the lender's asking price from the average market price of very similar properties in the immediate area. We can help you with this.

     Your goal as an investor is to realize a tidy profit. You can buy property at a 15%-20% discount and earn a 35%-40% return. As a home buyer, you want to buy below market value with a low down payment, low interest rate and reduced closing costs.    

    Home buyers should negotiate around the four discount factors: price, down payment, interest rate and closing costs. The bank, being a lender, can negotiate all these items with your real estate professional.

   A Pre-approval letter form your financial institution showing that you have the ability to purchase the property is an absolute MUST in oder to submit an offer on a foreclosure property. You will also be required to place up to 5% of the price of the property into an escrow account at the time of ratification. So make sure you have liquid funds in order to meet this criteria. Otherwise, the banks will not consider your offer.

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