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What do you know about the foreclosure process?  Foreclosures are a key component of the real estate market today. Understanding the process will help you to understand what is happening in your market.

Check out an example of the process in California.  Luis is a California homeowner who rents out a bedroom of his home.  His renter found a job in another state and moved out.  Without the income from the rent, Luis couldn’t afford to make his mortgage payment.

Luis had trouble finding a new roommate because he had 3 big dogs and they made the house smell.  When Luis became 2 months past due the lender started calling and sending notices of late fees.  Luis didn’t know what to do.  He couldn’t afford to make his regular payment, let alone late fees on top of that.

After 3 months the lender filed a “Notice of Default.”   This is the beginning of the foreclosure process.  Different states may call it “Lis Pendens” instead of Notice of Default. Luis put the notice in a drawer figuring he would find a new renter at any time and use the security deposit to pay the mortgage.  Luis was in denial as are many people facing foreclosure.

90 days later, Luis still hadn’t found a renter.  The trustee filed a “Notice of Trustee Sale”.  In California 90 days is the minimum period between filing the Notice of default and the Notice of Trustee Sale.  The Trustee Sale was scheduled to be held 21 days later.  Again, this is the minimum period in California, other states may differ.

When the day of the sale came, the property was put up for auction.   At the auction anyone can purchase the property as long as they bid at least the amount of the mortgage in default including all fees and late charges accumulated.  Because the value of the property had dropped so much lately, nobody bid on the property.

Now the house became property of the lender since nobody bought it at auction.  This is called an REO (Real Estate Owned) property.  The lender didn’t really want the property, but foreclosure is the only recourse they have to try to get the money owed them.

Now the bank has a property that they can’t use and they don’t have the money they lent for it.  On top of that, the bank is required to keep money in reserve  for each property they own, plus they have to pay property taxes on it.

If it was just  Luis’ property the bank wouldn’t be in bad shape, but they have thousands of properties now.  They have to get rid of  some to stay in business.

So the bank listed the property for sale with a real estate broker.  The property was listed for well under what Luis originally owed.  The bank didn’t care.  They could write off the loss, and they had to get rid of some property for whatever price they could get.

How can you buy a property in the foreclosure process?
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Comments (0) Jan 15 2009

Do you believe that you can get a good deal in today’s real estate market? Many people are reluctant to buy a house today because of the news they have been hearing lately.

Listen to a story of three home buyers.  Buyer A, we’ll call Adam.  Adam bought his house shortly after the last bottom of the market cycle.  He was watching the market prices and waiting for prices to stop falling. Home prices had been dropping so Adam waited to buy until prices were on the rise again.  He didn’t want to buy a home that was losing value, after all.

Adam waited until he was sure that prices were on the rise again to buy his house.  By the time he was ready to buy, so were hundreds of others who had been waiting out the down market.  It was hard to find a house that met Adam’s needs and when he did there were other people bidding against him on the same property.

Adam ended up paying more than the current market value to get the house he wanted to keep other buyer’s from stealing it away from him. Adam was happy with his purchase because within a few years his property had appreciated in value

Bruce, buyer B, bought his house 5 years after Adam.  He kept hearing Adam talk about how his property had increased in value and Bruce wanted to get in the game.  He had a hard time finding a property he could afford.  When he did eventually buy, it was near the end of the upswing of prices.

After a year, prices started dropping and Bruce found his house was worth less than what he owed for it.  Adam was disappointed to see his home value dropping, but he still had a house worth twice what he owed on it.

Carl (yep, buyer C) bought his house 2 years before Adam.  When he was looking for a house to buy, the market was flooded with properties nobody wanted.  Prices were dropping and everybody was afraid to lose money.  But Carl knew how to find the good deals and there were plenty to be found.

Carl bought a house from a seller that had already moved to another state.  The seller had been trying to sell the property for 6 months without an offer.  The seller was tired of making mortgage payments on a property he didn’t want so he was willing to sell to Carl for what he owed on the property.

Since the seller had owned the property for 12 years and prices were still well above the price he bought it for, Carl got the property for half of what it appraised at.  By the time Adam bought his house, Carl’s house was worth almost double what Adam paid for his, but Carl only owed half of what Adam owed.

Today there are even better deals than what Carl bought.  The lenders are in trouble and need to unload properties or go under.  The FDIC has already closed several big players down and more are on the edge of failure.

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Comments (8) Jan 10 2009

Did you know that first time home buyers get a special tax credit?  Homes purchased between April 8, 2008 and July 1, 2009 qualify for a fully refundable tax credit of up to $7500.

When I bought my first home, there were many expenses incurred shortly after the my purchase closed.  As if coming up with a down payment isn’t enough, once the purchase closes there are many additional expenses.

First I had to pay to move.  While a move across town can be handled relatively inexpensively, some home buyer’s are faced with a cross country move that can really put a dent in the wallet. Read More

Comments (0) Jan 09 2009

Have recent reports on the housing market scared you away from buying a home? If so, you aren’t alone. Many people are looking at the current housing crisis as if it was Armageddon.

The Chinese have a word for crisis –  weiji. The two characters taken separately mean danger and opportunity respectively. Opportunity can be found in crisis.

Imagine for a minute another home buyer. He bought his home at the height of the frenzy when banks were lending to anybody with a pulse. He knew he didn’t get the best mortgage. The rate would adjust in 3 years, and then the payments would be hard to keep up.

He expected the value of his home to increase as prices had been doing for the past few years, so he planned to re-finance when the loan-to-value (LTV) of his home increased enough to qualify for a better mortgage.

When the credit crisis hit, the home buyer saw the value of his house plummet, but he still had the adjustable rate mortgage. Three years after he bought his house his payments started to increase. He could no longer afford to make his payments. Do you think this is an unusual situation?

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Comments (1) Jan 08 2009