Lately I’ve been working a lot on transactions on homes that are either owned by the bank or soon to be owned by the bank because the seller is in financial trouble. Ironically, some of this has come up while representing a family whose rental was recently sold at auction because their landlord didn’t make her payments. The bubble blogs are notorious for predicting situations like this and therefore, let’s give them their due and say it: they predicted situations like this.
As a Realtor®, the work becomes challenging as my buyers want to move quickly, but one of the drawbacks of a short sale situation is that they take a long time.
I thought this would be an opportunity to define a few terms, because buyers often ask me if I have access to foreclosures, and wonder how go go about buying a foreclosure.
Do We Have Foreclosures? The Short Answer.
The short answer to the question of whether Realtors® have access to foreclosures is “yes, absolutely”, because many homes are listed either by buyers hoping to avoid foreclosure in the future or banks that have already foreclosed and now own a property which failed to fetch a satisfactory price at a trustee’s sale. Buyers are interested in such properties because they may often be listed and acquired at prices that are significantly below market.
Short Sales
When a seller is in trouble and doesn’t have enough equity and cash to sell the home, pay the costs of sale, and pay off the loan, the home may be listed as a “short sale”. Short sales are called short because the sellers are short on funds, but ironically, sales where the seller is short on funds often go “long” when you talk about the escrow period. You won’t find the usual 30-day escrow period here. Instead, escrows of forty-five to sixty days and more are the norm. Short sales take extra time because the lender reserves to themselves the right to approve or reject the lower payoff that the seller is asking them to make, so another irony of the short sale process is that you’re working with the ultimate motivated seller whose hands are more or less tied by the lender.
Another drawback to short sales is that the lender is looking for the best offer, and they typically reserve the right to continue taking offers throughout the process. This means the money you pay towards inspections such as whole house and appraisal is at somewhat greater risk than on a typical sale.
A short sale may or may not be one in which a Notice of Default has been filed on the property.
Notice of Default
Most loans in California are secured not by mortgages, but by deeds of trust. A deed of trust is when a third party (the trustee) holds the “bare legal title” and the right to foreclose on behalf of a beneficiary (then lender). When a lender wishes to foreclose under a deed of trust, he tells the trustee, who then files a Notice of Default against the borrower. Once this happens, the trustee can sell the home, but only after a time specified by law and following additional steps. When a Notice of Default is filed, the property is often said to be “in foreclosure”.
What many buyers and their agents don’t know about Notices of Default is that once one has been filed, California law protects owners (borrowers) from unfair practices by “Equity Purchasers”. (California’s Equity Purchaser Law, California Civil Code, section 1695-1695.17). One element of this law that even many real estate agents are not aware of is that they must carry a surety bond equal to double the fair market value of the property if they represent a buyer on such a transaction who is purchasing the home, except in certain well defined cases, for example, where the buyer is purchasing the home as their primary residence.
Since as far as I’m aware no insurer provides such surety bonds, the upshot of the law is to put agents and brokers at risk if we represent you as in investor on the property, though there is no such problem if you’re occupying the home yourself.
Buying at a Trustee Sale
Another way to aquire a foreclosed property is to actually purchase it at the trustee’s sale. John Lockwood Associates does not currently represent buyers who wish to do this, and interested buyers are cautioned that such sales require considerable planning and research, since many of the typical protections and inspection periods do not apply to such sales.
Real Estate Owned
Sometimes called “bank repos” or REOs, “Real Estate Owned” is the accounting term that lenders use to show properties that they own, typically by having purchased them at the trustee’s sale when no one else purchased the property. Sale of these properties is less encumbered by the lengthy process you encounter in a short sale, because the lender who wants to recoup their losses and the seller are one and the same. Moreover, they’re exempt from the California Equity Purchaser law because the notice of default against them is no longer outstanding.
Because of these facts, REOs are somewhat easier and more straightforward to purchase, and they’re readily accessible to both owner-occupiers and investors alike. One down side of REOs is that the lenders sometimes ask for a fairly detailed addendum that makes the sale “as is” and may limit the buyer’s ability to recover their purchase deposit if they do not go through with the sale. Since I’m not a real estate attorney, I can’t advise you as to how enforceable those addendums are, but as a practical matter, I’ve been advising clients working with REOs to limit their deposit money to a token amount to mitigate their risks.
Conclusion
Foreclosure properties, especially short sales and REOs, offer considerable opportunities for buyers to get a home at a very competitive price compared to other homes on the market. This is especially true if you’re buying the home to live in. As is often the case in real estate, however, when you get a great price, you may find that you get not-so-great terms. An experienced Realtor® can help you understand what some of the trade-offs are and help make sure your interests are protected.
Foreclosures are an excellent choice if you have time and want to find a bargain, but they’re not a good idea if you’re in a hurry to move or you’re squeamish about terms.
