Buying a House in Pre-Foreclosure
Last week, we spoke of post-foreclosure houses. These houses are bank-owned, meaning they’ve gone past the ‘sale on the courthouse steps’ – they weren’t bought by anyone at this auction and so they’ve become bank-owned properties. These homes are (this is my opinion – no scientific statistical polls here) what most people mean when they mention ‘buying a foreclosure’.
This week we’ll briefly discuss pre–foreclosures. There is a bit more sleuthing to get a full picture of what properties are in pre-foreclosure and what stage they’re in. Pre-foreclosure can be roughly put into two helpful categories: Notice of Default and Short Sale.
After it has not received payments for a few months, a bank will file a Notice of Default (NOD). An NOD is an official notice to the buyer that they need to pay their arrears or lose the house (be foreclosed on).
NOD’s are public record… discovering what properties are in default requires a little work but is a good way to discover houses where the owner may need some help and may be willing to pay, often in the form of the home’s sale price, to do so. In other words, the price and terms are more likely to be negotiable than a house that’s listed in a traditional sense (i.e. someone is moving to Vermont who just needs to sell).
Here’s the rub: NOD’s may be listed or not. Thus the sleuthing. If listed, simple enough (unless you check the public record, you very well may not know the house is an NOD); if not listed, the challenge is to approach the owners (you can do this or you can have a friendly agent do it) and see if you can reach an agreement – they may not even be interested in selling. There are many moving parts: the owner may already be working on a solution with the bank, or perhaps the owner was unemployed but is now back on track and able to catch up.
The second category in pre-foreclosure is a short sale. A short sale is when a homeowner is ‘upside down’ in a house, i.e. she owes more than the house is worth (this can include mortgages, liens, HOA arrearages, etc.). It is a way for an owner to avoid foreclosure. First, negotiations ensue between owner and bank to decide if a short sale is approved. I’m skipping many steps here (there’s a bank involved, so one must go through the rigamarole; typically there is also an agent involved, negotiating the short sale details), but, in the end, a price is decided and the house is listed with an agent. When an offer comes in, it will be negotiated between potential buyer and the bank – because it is the bank, not the owner, who has final say-so.
There are a few things for a buyer to consider with short sales. Nothing is written in stone of course, but keep these things in mind.
Yes, the bank does want to get rid of the property… but it also wants to sell as near market value as possible. If the house is listed below market value, there is a good chance that competition (especially in a market like we have right now) will drive the price up to the market value. In other words, it’s not automatically a good deal.
Also remember that banks will typically not do repairs – you’re buying the house in ‘as-is’ condition. This said, you’ll need an inspection. And you must also realize that, depending on the extent of the needed repairs, you could run into problems with your own financing – banks typically don’t lend on houses that need anything major done. If there’s a hole in the roof or all of the windows are busted out, for example. (And no, you can’t just go over and fix things yourself).
Robert Thompson, [email protected] (503) 729-9477
Lic’d Oregon Principal Broker, Lic’d Washington Broker, eXp Realty