How to buy a Foreclosure in California
Understanding how to buy a Foreclosure, Short Sale or a REO (Real Estate Owned) property can have many great advantages for an investor or a home-buyer. However, quite often there are some misconceptions of what a foreclosure is, and the amount one can save when buying a foreclosed home. Once you navigate some of the pitfalls of buying a foreclosure, this guide is built to help potential foreclosures, REOs, short sales and pre-foreclosures (Short Sales) whether you are a seasoned investor, or you are a first time buyer.
3 Ways to Buy a Foreclosure Home:
In short, there are 3 ways to buy a foreclosure, or financially distressed property:
- Pre-foreclosure Property – Difficulty: Medium
This is a home that is about to go into foreclosure but prior to the lender or trustee taking possession of the property. This also encompasses Short Sales which are homes that are sold below the debt owed on the property by agreement with the lender and the loanee. Currently there are very few if any short sale listings available.
- Foreclosure Auction at Courthouse / Trustee Sale – Difficulty: Hard / Risky
This type of foreclosure is a cash-only deal that takes place on the County Courthouse. The trustee will sell the trust deed to the highest bidder providing the bid is higher than the amount owed on the home. There is significantly more risk with purchasing a foreclosure this way as you will not be able to see inside the home or inspect the property prior to the sale.
- REO / Bank Owned – Difficulty: Easiest Way
This type of ‘foreclosed’ home happens after the bank has taken possession of the property. These homes are quite often listed on the MLS and banks are usually motivated to accept any reasonable offer. With this type of foreclosure you will be able to inspect the property prior to the final purchase.
A Foreclosure is Not Always a Good Deal.
Buyer sometimes have a misconception that because a home is listed as a foreclosure it must be a good deal. The fact is most foreclosures are not a good deal, but there are properties that are a really great deal! Be sure to have a real estate professional do a Comparative Market Analysis (CRM) on any potential property before you purchase a home. This alone could save you thousands, or even, tens of thousands of dollars on foreclosed property.
When buying a foreclosure, short-sale or REO it is important to do your homework. Many foreclosures have vandalism, seriously deferred maintenance, squatters or other problems. Having a professional and experienced real estate agent representing you as a buyer is essential as they will be able to garner a better deal with the bank, know the pitfalls and actually save you money in the end.
REO Sales or Bank Owned Properties is What Most Buyers Want.
Most people looking for foreclosed properties are actually most suited to buying Real Estate Owned (REO) properties (also known as bank owned properties). These are the properties listed on most real estate websites and are what most buyers are seeking when they are searching for a “foreclosure.”
These REO properties are better suited to most people’s needs. You can buy REO essentially the same way as any other property in California. You can purchase with a loan, mortgage (Trust Deed) or cash and you will have a home inspection and an escrow giving you time to evaluate your offer and the property.
Cash is King, but a Loan May Work Just Fine.
Banks generally prefer all cash offers as these tend to close quicker and have less hassles such as loan contingencies, however banks do consider loans acceptable offers and will accept them. especially if there are no other offers or only low-ball cash offers.
After Your Offer is Accepted on an REO…
Once you have an accepted offer from the back or creditor, just as with a conventional home purchase, buyers have a period of time to inspect the property, secure a loan (if specified) and complete all the requirements of the offer.. This time period is written into every real estate transaction and known as the contingency or due diligence period. It is important to note that unlike a traditional sale, a bank will rarely do repairs or offer credits for property damage, non-functioning items or the likewise. However, during this time a buyer may choose to back out or walk away from a bank owned property, without penalty and for any reasonable reason.
Definition of a REO
REO stands for Real Estate Owned properties. This means that a foreclosed property has been reclaimed from a former mortgage (or trust deed) holder by a bank, lender or government agency. These properties are generally listed on the MLS (Multiple Listing Service) and are bought and sold in generally the same way, with a few exceptions. This differs from a Foreclosure as foreclosure is the direct purchase of a defaulted loan or trust deed directly from a trustee.
Definition of a Foreclosure
The action of a mortgagee taking possession of a mortgaged property when the mortgagor does not make mortgage payments.
Misconceptions About Foreclosures, Auctions and REOs.
What some people may not know when first looking at foreclosures for sale is that the average “foreclosure” listing you find on a real estate site is a Real Estate Owned Property (REO) or a bank/lender owned property. This means the bank owns the property which differs from a foreclosure where the Trustee is willing to sell the property at auction, to the public or private seller. Essentially a true foreclosure is buying the property from the trustee just prior to the bank or lender taking possession of the property. This can be an important distinction to note if talking to professionals about purchasing a financially distressed property.
Since the trustee cannot sell a foreclosure property at auction for less than what is owed on the loan, depending on market conditions the home may not worth even the initial bid price. Also, if you want to leverage your money buying a foreclosure at auction may not be for you. Be sure to have a real estate professional check the public records property tax records and research the property to find any potential problems prior to making any offers or bids on a property.