Another way to invest in foreclosures

I've previously discussed the pros and cons of buying properties at the public auctions when the lender actually is foreclosing on the property. As the national foreclosure crisis has continued to grow, another opportunity has become quite common, and, to a degree, without some of the risks that the "auction on the courthouse steps" has. This is what the auctioneers call the Foreclosure Auction. More properly, it should be called the Post-Foreclosure Auction because the properties auctioned off in these auctions already have been foreclosed upon and the banks owning them are resorting to an auction because the owning banks have subsequently been unable to get them sold.
The process is usually a one or two day auction run by a professional auction company. For sale are hundreds, sometimes thousands, of properties that have one thing in common--they are bank-owned foreclosed properties. Often more than one bank's foreclosed properties are included in an auction. In most cases a brochure giving some details of all of the properties to be auctioned are made available to anyone wanting them. Usually a series of open houses is held before the auction, and buyers can even have inspections done before the auctions. Unlike the "courthouse steps" auction, these post-foreclosure auctions even allow escrow periods to provide time for financing and title searches.
At the auction, each property is put up to bid, usually with a minimum starting bid. After that, it's traditional auction--highest bidder wins and owns the property. At a typical one of these auctions, the action is loud and fast--approximately 25 properties each hour are sold, and the auctions usually last most of the day and into the evening.
As for values, typical winning bids seem to average anywhere from one third to just over half of what the claimed recent values are for the properties sold. There are a number of auction firms specializing in such auctions, and they can be Googled for further information on time and location of the upcoming auctions.

Trouble Finding Help?

We have previously mentioned for those of you worried about foreclosure, that it is increasingly possible to have the bank holding your mortgage modify the terms of the mortgage, making it easier for you to make the payments and make them on time. You basically have to call the bank and tell them of your problem, and, with proof of why you're in the situation and how you can get out of it, get them to modify the terms of your loan.
The big problem for many in this situation, it turns out, is that the lenders haven't been making it easy to find the right people to talk to at the bank. Freddie Mac, in a recently released report, said that 57% of all delinquent borrowers didn't even know they had options to alleviate their troubles. Defining delinquent borrowers as those at least a month behind in their payments, the survey found that many knew nothing about what options might exist or what, if any, applied to them in any given case.
These statistics could drop now as an industry group established to help ease the crisis, Hope Now, recently completed a mass mailing of 500,000 letters to delinquent borrowers. These letters directed the homeowners to a toll free counseling telephone number, (888) 995-4673, where they could get direction and assistance in possibly resolving their individual situations.
With numbers of defaults and foreclosures continuing to increase, and costs and losses to banks rising with every new foreclosure, it behooves the banks to make such assistance more accessible than they did previously. Every foreclosure avoided benefits BOTH sides--the banks and the homeowner whose house is at risk.

Alternatives to foreclosure

When you can't make the payments any more, for whatever reason, you do not necessarily have to go through a foreclosure. We've previously discussed some ideas here. There are others in tighter situations. It may seem unavoidable, particularly when you owe more than the house is worth, but there are alternatives. The most common of these is the Short Sale. It is called this because the bank holding your mortgage agrees to let you sell the house for whatever it's now worth and they agree that they'll accept less than they are owed if that's all the property can bring on the open market. In essence, the bank comes up 'short'. This doesn't mean that all is suddenly wonderful and rosy again. There are a few things to be aware of in such a situation. First, a short sale will still result in a hit on your credit record--just not as sever a hit as a full foreclosure. Second, you will likely incur a tax liability. Tax law considers any debt forgiven (your unpaid mortgage amount, for example) as regular income and taxes must be paid on it at regular income tax rates. Consult your tax advisor on this aspect. But, a short sale may still be better than waiting for the foreclosure. You at least can get on with your life, and at less a disadvantage than a foreclosure. Call your Realtor to discuss the idea. Make certain that he or she is experienced in this type of transaction. Just being a Realtor may not be enough, due to the fact that the process is very specific as to what a lender will want from you to agree to allow you to do such a sale. Ask your Realtor if they have experience in the field, and, if not, if they or their broker can refer you to someone who does have that experience. Then work with them. Good luck.

Hello, again. I was discussing the potential pitfalls of buying a property at the public foreclosure auction yesterday when we ended our discussion. As I was mentioning at the time, one thing a potential investor has to be very careful about is that he or she is bidding on a property that is being foreclosed by the holder of a first mortgage, NOT a subordinate one. That is so that if he or she is the successful bidder, there are no surprises in store along the lines of a bank with a senior mortgage contacting the proud new owner demanding that the
loan be paid by that new owner.

If the property is in a trust deed/escrow state, an investor can pay a title insurance firm for a property profile that should reveal all of the liens recorded against the property. A careful review of the mortgages recorded should tell if the foreclosing institution is in first or some subordinate position, and the amounts of each loan.

For those of you in a state where the closing is handled by attorneys, your attorney should be able to search the title records and arrive at a similar result. Costs of each process will vary with state and locale, as well as between attorneys or title firms, but the few hundred dollars could be well worth spending if the cost saves you from a much worse fate--owing unexpected thousands! Good luck and keep you eyes here for more in the future.

There's one question I get at least a half dozen times a day. (Used to be about once daily, but as foreclosures mount, so does the number of folks asking the question.) "Can you get a really good deal buying a foreclosed properfty?" Well, the answer is, "Maybe." I usually reply that it all depends on many factors. Is the property already foreclosed and owned by the bank? If so, how long has the bank owned it, and how large is that lender's foreclosure portfolio? What condition is the property in? How much did the bank have to write off when they foreclosed? If it's NOT yet owned by the bank, but only facing foreclosure, is the mortgage a first mortgage or a subordinate one (second, third, etc.)?

The reason for all of these questions is simple. Depending on the answers, a buyer can sometimes get an excellent deal at far below market value. However, if the answers are not the right ones, that same investor can find himself owning a real "Money Pit" (apologies to Tom Hanks and Shelly Long).

If the house hasn't yet been foreclosed upon, you may be able to make a deal with the owner, and how good a deal that is will depend on your abilities at bargaining, as well as the abilities of the seller. If it is going to be sold at public auction--the classic "auction on the courthouse steps"--the chances of your getting a good deal depend on how many others are seeking the same thing on that same property. More bidders usually means a higher price.

Also, in an auction situation, you probably won't have any opportunity to do inspections, nor get a list of disclosures about the property from the owner. It may be in fabulous shape....or all but falling down. You could find yourself the winning bidder, but on which mortgage? If it's the first mortgage, you don't have to worry about subordinate loans, as they're usually wiped out by the foreclosure sale. Except for IRS and judgment liens, you own the property free and clear. If, however, it's the third mortgage, you also own the property--and the priviliege of owing and having to pay the former first and second mortgages. You need to do your homework. A title company or real estate attorney can help you with this task.

More tomorrow.