Buying a Marin home in foreclosure may make good sense for real estate investors and homebuyers. That’s because these homes are usually lower priced. But the old adage “buyer beware” definitely applies here and working with an experienced Realtor is a must. A foreclosed home may look like a great deal, but – as we discuss below – looks can be deceiving. We’ll walk you through each of the three stages at which a buyer can purchase a foreclosed home in California, and we’ll discuss the potential opportunities and pitfalls.
First, a Little Background on the Foreclosure Process
What is a foreclosure? A foreclosure occurs when a lender (e.g., a bank) takes possession of a home when the borrower does not keep up mortgage payments.
Why are foreclosed homes less expensive?
Foreclosed homes are usually less expensive because the lender is concerned about recouping its investment and removing the debt from its books. By offering the property at below market value, the lender has a better chance of offloading the property quickly. These homes may also be less expensive because they are in poor condition. Borrowers who do not have the funds to pay the mortgage most likely did not have the means to maintain the property, much less update it. Costly repairs may be necessary and the lender may discount the price to take that into account.
Opportunities to Purchase at the Three Stages of Foreclosure
Here is an overview of each of the three stages of a foreclosure in California.
Pre-Foreclosure
Once a lender notifies the homeowners that they are behind on paying their mortgage, the homeowners have some months to correct the default. If informal negotiations fail, the lender files a Notice of Default (NOD) with the county. The homeowner has another 90 days or more to correct the NOD. At this stage, most pre-foreclosures are corrected, and a normal relationship is re-established between owner and lender.
In the pre-foreclosure period, the homeowner can also sell the home and pay the loan in full. Lenders may agree to a Short Sale, in which the home is sold for less than the remaining mortgage amount.
Since pre-foreclosures are often not listed for sale on the internet, you might want to discuss with your Realtor contacting the owners directly about selling the property at a favorable price before it enters the auction process (see below). The services of a reputable real estate agent are important here. As a buyer, you’ll want to arrange for a full inspection of a property and have your Realtor interpret the results to understand the extent and cost of repairs that may be needed, and how this affects the price you will offer.
Foreclosure Auction
If the homeowner has been unable correct the NOD or to sell the home at the pre-foreclosure stage, the lender will record a Notice of Sale and put the property up for auction to the highest bidder. The auctioneer will set a minimum bid, which includes the unpaid loan amount, costs, and interest.
At this stage, it is important for buyers to be represented by a reputable and knowledgeable real estate professional (who will accompany you the auction) because auctions are high-stakes affairs. Here are some important considerations:
- Homes are usually sold in “as-is” condition and have not been inspected, leaving buyers without information about the extent and potential costs of necessary repairs.
- Auctions usually require all-cash purchases, paid up front.
- Limited Information: Buyers may need more access to the property’s history, condition, and potential liens, making thorough due diligence challenging.
- Complex paperwork without the possibility of negotiation. This applies at all stages of the foreclosure process).
Real Estate Owned
If the home does not sell at auction, the lender purchases the property and then puts it on the open market. The term for the home now is REO (Real Estate Owned).
While REOs may offer straightforward transactions, buyers should investigate a property’s condition and title issues just as they would with any potential purchase. Remember that REOs are sold “as is.”
You can buy an REO in essentially the same way you can any other property in California, with a loan, mortgage or all cash. However, traditional lenders may be hesitant to finance REO properties and insurers may decline to provide insurance due to a property’s condition.
Summary of Pros and Cons
Pros
- You’ll pay a lower price.
- Lenders tend to be motivated sellers, especially if the property has been on the market for a while.
- A below market purchase may be a good investment.
Cons
- Foreclosed homes are sold in “as-in” condition and typically need work before they are move-in ready, which means additional costs.
- Homes bought at auction have their own set of concerns: Inspections cannot be conducted prior to sale; an upfront deposit may be required; and, if your bid is accepted, payment must be made with a certified check or cash.
- You may be asked to cover more of the costs associated with the purchase, e.g., closing costs, which are typically paid by the seller.
How to Find Foreclosed Properties
Your Realtor is your best resource for finding properties in any of the stages of the foreclosure process and can also direct you to preferred, reliable websites. These websites include:
- www.foreclosure.com
- www.equator.com
- HomePath (primarily lists foreclosed properties owned by Fannie Mae)
- HomeSteps (specializes in listings of foreclosed properties owned by Freddie Mac)
- Zillow
- Realtor.com
- Bank Of America (with a dedicated section for bank-owned properties and foreclosures)
It’s a Tricky Business – Have an Experienced Realtor as Your Guide
Deciding whether to purchase a foreclosed home is not straightforward; the process is best undertaken with an experienced local Realtor at your side who can help avoid costly mistakes and provide an education about the foreclosure process, including delays you could face and borrower’s rights under California law that could affect a purchase. With the right research and advice, you may be able to buy a distressed property at an attractive, below market price and enhance its value through cost-effective renovations, creating an asset in the highly desirable Marin real estate market.