The In's and Out's of REO's
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So you’re interested in buying a foreclosure property but have a vague or even no knowledge of what they are or how this particular home became a foreclosure? Read on!
The fact that the homeowner didn’t pay his mortgage and the bank took back the home is the simple answer. Here is some background information you might find useful.
Three Stages of Foreclosures
Pre-Forclosures
In this initial stage, a notice of default (NOD) has been publicly filed called an that the owners are in default on their mortgage. At this stage, the owners still have the ability to reverse the process. There is a time limit of anywhere from a few weeks to one year to reverse the process. By catching up on their payments, the owner can avoid the home going into the public auction stage. There is also the option of selling the home and paying off the lender. In the Sacramento real estate market, the values have gone down so much that the bank, in addition to the owner not making the payments, would have to agree to accept less than the loan amount on the home.
Public Auctions
In the second stage of the forclosure process, a public notice is filed of an upcoming auction or Trustee sale. The lender generally sets the opening bid at the mortgage balance including any penalties and fees incurred by the former homeowner. This amount doesn’t include senior loans or liens, mechanics liens for example, and the winner bidder assumes responsibility for said loans and liens. Postponements to the auction are frequent without a subsequent notice being filed.
Forclosed or Bank Owned Properties (REO’s)
Properties that have been foreclosed on, or in other words “repossessed”, by the bank are owned by the bank. All loans and liens, senior and junior, evaporate and the home is sold to the best offer. The bank sometimes will post these homes on their own websites or, in most cases, hire an experienced agent to sell the home.
The easiest stage to purchase a foreclosure is the REO foreclosure. The pre-foreclosure and buying at a public auction take a sophisticated investor with prior experince in acquiring these properities.
The REO foreclosure or bank owned properties listed on the MLS by agents retained by the banks is the easiest way to purchasing one or many homes. These agents are the best resource to your successfully securing a foreclosure at the best possible price and terms.
Banks Aren’t in the Real Estate Business
Banks are not in the real estate business and when the first wave of NOD (dotice of default) began to go out, they didn’t have the systems in place to handle the volume of homes coming back to them. Additionally, in the Sacramento region, it wasn’t until the beginning of 2008 that they started to get the idea that the majority of the homes they owned were overpriced. There are stories out there of listing agents representing these banks who would price the property correctly, obtain several offers quickly only to have the bank reject them all under the thought that if they had offers too soon after the home was listed it must be under-priced for the market.
Banks then began pricing homes according to the market and inventory levels began to decrease in the Sacramento real estate market. In a time when the inventory of homes for sale generally increased, spring/early summer, the inventory levels actually decreased slightly and some zip codes increased in sales from 200 to 300 percent from 2007 to 2008. Today, the foreclosure market represents approximately 70% of all sales in the Sacramento real estate market.
Buying a Forclosure Property
Now that the banks are forced to offload non performing loans and assets, prices have dropped dramatically. They are in the position of creating cash flow and lowering the prices on these homes is the best way to do it. The deals are out there and they are plentiful at the moment. The remainder of 2008 and 2009 will be the best time to get a great deal on these properties.
The Glich
During the housing boom, interest rates were very low and very stable. Now that the economy is on the brink of recession quarter after quarter, interest rates are not stable and will rise going forward. The credit crunch has meant that fogging a mirror is no longer part of the qualifying process. Now you’ve got to be squeaky clean to get the best rate and terms. Private mortgage insurance premiums have increased and if you don’t have 20% down chances are you might be priced out of the market. Add a rise in the very unstable interest rates and sooner than later, low home prices won’t matter as the cost of borrowing will be higher. Right now, interest rates are still relatively low and prices are too…the best time to buy in between now and the end of 2008.
Quoting a great article from CNNMoney.com “For every half point interest rate increase, the monthly payment on a typical mortgage of $200,000 jumps nearly $70. That adds up to more than $800 a year, and $8,000 in the first 10 years of a 30-year mortgage alone.” Also mentioned in this article, “most of the financial experts expect that rates will climb up to 7% by the end of the year.” We’ve already seen rates bounce up to this level then recede but I wouldn’t count on that continuing with inflationary concerns in play.
Adding to this is the fact that approximately 270 lending institutions that were in business 2 years ago are now gone. This inflates the risk in the secondary mortgage market, where notes are marketed and sold, and money finds another place to multiply.
Let’s Make It Simple (the pitch!)
This market isn’t easy to navigate for the majority of buyers. Selecting the right agent is crucial to success in this market. The problem is that these agents aren’t easy to find even with all of their contact information in the palm of your hand. There are several teams of agents specializing in foreclosures in the Sacramento region and they are all so busy that just getting a return phone call can seem like pulling teeth.
I represent just such a team. However, you have my personal gaurantee that if you call me, I WILL get back to you within 24 at the very latest. My team works with 32 banks, has hundreds of listings and a support staff to get it done. We have intimate knowledge of our inventory and can get you the best deal possible on an REO forclosure listing. Give me a call or send a message with any questions you have. I have lenders to help you get pre approved and ready to purchase.