Buyers are going to find some extraordinary garage-sale priced homes in this market as banks foreclose on some homes in the area, but long before the Trustee's Sale there will opportunities to buy homes through a process called the "short sale."
What is a short sale? A short sale is the sale of a home that is in foreclosure at a price less than the existing balance of the mortgage, which can only occur with the full cooperation of the bank holding the mortgage. The process is very involved, and frankly, it is a rare event, or at least it has been. We will unduly see more short sales in the coming year.
The legal and procedural obstacles for the unwary are so significant that I would not recommend that a buyer try to purchase a home through a short sale without the professional help of an experienced person. By the way, most attorneys and most real estate agents are not experienced in this area. Due diligence in finding someone who can help you is critical to your success. Let me make the point this way: if you find someone who really knows how to help you purchase a home out of foreclosure, you will be ahead of the crowd of buyers, and you may be the only legitimate buyer as far as the bank is concerned.
Briefly, here is the process:
- Find and identify homes that are in default (even before the formal non-judicial foreclosure starts);
- Of course, also search for homes that are in foreclosure with plenty of lead time before the Trustee's Sale (you need many weeks and probably a couple of months to coordinate, so if the Trustee's Sale is around the corner, it is too late to do a short sale);
- Narrow this short list down to the one you would want to buy as your own;
- Do an accurate CMA (comparative market analysis) using "sold" homes of the same or very similar features (you'll need access to a good database, like the local MLS);
- Find out the exact mortgage balance and the status of the default or foreclosure;
- Find out if there is a second or third mortgage (trap for the unwary);
- Find out if there are other liens (tax liens, mechanic's lien, labor lien, state liens, etc.)
- Learn how to talk to the loss reduction department of the mortgage holder (not always a bank);
- Beware that purchasing a home in a short sale, which is before a formal foreclosure takes place, does not wipe out any subordinate loans or liens;
- You need to know which costs and fees, in addition to the mortgage balance, can be compromised and by how much (this is learned from experience);
- Put together a comprehensive package to the mortgage holder, which is the key to making all this happen. This includes the Purchase & Sale Agreement, and it includes a thorough analysis of the home, prices, the local market, and justification of the offering price (this must be very professional or your offer will be terminated without serious consideration, and you must convince the bank they should sell at your price to you);
- Follow through with all parties and details is critical to reaching the closing table on a short sale.
Short sales are difficult and complex. While some get-rich-quick cons are out there preaching that buying foreclosures is the answer to becoming wealthy, buyers of foreclosure properties through the short sale process are few and far between. Buying foreclosure properties is not for beginners. It is full of traps for the unwary.
Buying a foreclosure will be one of three experiences: 1.) a dead end after months of frustration, 2.) a fast way to lose money because of major mistakes in the process, or 3.) a great way to pick up a lot of equity immediately at closing because your purchase price is below the true current fair market value of the home.