We’ve all heard it, “Make money buying foreclosures”, “Buy a foreclosure and save thousands”, but what does it really mean for you?
When people say “foreclosures” they typically mean, distressed sales. A distressed sale is one where the loan on the home is delinquent. In other words, the borrower, or homeowner, is behind on their loan payments.
Distressed sales fall into three main categories: Short Sales, Foreclosures, and Bank Owned (REOs)
Short Sales often occur when a borrower can no longer make the loan payments and the lender decides that taking a small discount on the loan is more beneficial than foreclosing on the borrower. Short sales can be beneficial to both the borrower and lender because the foreclosure process can be an expensive lengthy process.
One benefit of a short sale to the home owner is that they remain in the home throughout the process, which can take up to a year. In addition, the home owner does not get a foreclosure on their credit history which can be damaging to the borrower if they seek another loan in the future.
For the lender, the home is occupied which often means it is still being maintained, which a vacant home is not. It is worth it to the lender to take a smaller discount on the loan compared to the costs associated with foreclosure and continued non-payment on the loan.
Foreclosure is the process a lender goes through to take possession of a property when the borrow has stopped making payments for a certain period of time. If the lender is unwilling to do a short sale, foreclosure is the next step in the process.
In California, the Trust Deed is the most common loan on single family real estate. If a lender forecloses on a Trust Deed, a Trustee attempts to sell the property at auction to recover the balance of the loan. Foreclosure through a trustee sale (auction), or non-judicial foreclosures, are quick and easy for the lender. In other states (where mortgages are used instead of trust deeds) a lender must foreclose through operation of law. This is a lengthy, expensive, legal process for lenders.
When a property fails to sell at a foreclosure auction the bank who foreclosed takes possession and it becomes REO (Real Estate Owned) or Bank Owned. The bank now controls the home and can rent it, sell it, or hold on to it. The bank usually will list the property through a broker, such as CAPROPERTYFINDER.COM. Click here to view our REO listings for sale in California.
There can be negative aspects to purchasing a distressed sale. Lenders are managing millions of distressed homes and multiple offers on each home so at times, distressed sales can take anywhere from 3-12 months depending on the specific nature of the sale.
Distressed sales are sold in an “as-is” state. Some distressed sales may be missing flooring and/or appliances (and in extreme cases wiring or plumbing). Make sure you completely understand all the costs associated with getting your home in the condition you want it in. These “missing” components can add thousands of dollars to your purchase price.
Distressed sales have positive aspects such as a degree of urgency for the lender. There is much incentive for a lender to sell and not much for them to try and hold on to the property so distressed sales can sometimes sell as much as 20-30% below fair market value.
When buying a distressed sale it’s important that you work with an experienced California real estate broker who specializes in distressed sales. He or she can guide you through the complicated process of purchasing a distressed sale and put you into the home of your dreams at a substantial discount.
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