Category Archives: Buying a house

How a faraway tropical storm or hurricane can affect your closing

How a faraway tropical storm or hurricane can affect your closing

Both buyers and sellers need to keep abreast of tropical storm activity, and plan ahead to avoid insurance issues.

The Atlantic hurricane season begins June 1 and ends November 30, meaning it is in effect for 6 months out of every year! Thus, there’s a 50% chance that you could be closing on a sale or purchase during hurricane season. There is an important aspect to be aware of regarding named storms, because even if a storm doesn’t threaten our area, it can still impact real estate closings in a major way.

If you are planning on buying or selling a property, always stay current on the status of tropical activity. The reason is that insurance companies use a “hurricane box”, shown on the map above, as a guideline for writing homeowners and flood policies. The area of the box may vary slightly from company to company, but this one, which begins at 20 degrees N latitude and 80 degrees W longitude, is a good example. Once a named storm enters the box, insurance companies will no longer issue new policies, nor increase coverage on existing policies. This status is sometimes referred to as “non-bind”. When an insurance company officially commits to a policy, they “issue a binder” or are “bound” to that policy. Thus, when they are in non-bind status, no policies are bound, and no insurance can be obtained. They stay in non-bind status until the storm is no more, which can take days.

As a real estate closing draws near, one of the crucial steps required by the buyer’s lender is the binding of the homeowners insurance policy. Also, if flood insurance is mandated, it must be bound too. Usually insurance is bound in the late stages leading up toward closing, but therein lies the danger. Should the insurance not be bound, and a named storm enters the box, the closing would likely be delayed, possibly for a considerable time. That in turn could cause the contract date to pass by, the buyer’s rate lock to expire, and/or many other problems. All of these issues are serious, and can make the entire sale fall through. Therefore, closing delays must be avoided at all costs. (Keep in mind that the government-mandated changes to closing procedures effective October 3, 2015 are another potential cause of delay.)

To avoid problems due to named storms, both buyers and sellers MUST pay close attention to tropical activity. (Click here to reach an excellent website for monitoring the tropics.) If you’re a buyer and it seems even remotely possible that a named storm might enter the box around the time of closing, get the insurance bound IMMEDIATELY! If you are a seller, don’t rely on the buyer knowing about this and acting on it. Be proactive and have your agent contact theirs to make sure it is done. Otherwise, your sale could be in jeopardy.

By staying aware of potential storms, and taking care of the insurance binder(s) ahead of time, closings can proceed as planned, even if a named storm enters the box after the insurance is bound.

If you have any questions about how to handle this, give us a call or email!

Changes coming in October 2015

Changes coming in October 2015

In just a few weeks, 2 significant changes are being implemented which will affect residential real estate transactions.

These changes are:

1. On October 1, 2015, the upfront guarantee fee for Rural Development (RD) loans is increasing. Currently, RD loans require that the buyer pay a 2.0% upfront guarantee fee. After October 1, the fee will increase to 2.75%. To illustrate the difference this will make, let’s use a $150,000 loan as an example. Currently, the fee would be $3,000. At the new rate, it will be higher by $1,125.00 for a total of $4,125.00. This increase means buyers will have to bring more money to closing, or finance it into their loan, or negotiate it from the seller.

As long as RD has issued their commitment (in other words, has approved the file and sent it back to the lender to finish the pre-closing process) by September 30, 2015, the existing rate will still apply. As we’ll discuss in another article, RD is and has been taking about 32 days to issue their commitment after receiving a file from a lender. If this turnaround time continues, loans will have to be sent to RD by August 29, 2015 if they are to obtain the RD commitment prior to the fee increase.

2. The government has mandated that effective October 3, 2015, new forms and procedures must be used on ALL closings. According to title companies and others, it will take longer to get to closing, and other delays as well as higher closing costs may result. This was supposed to become effective on August 1, but concerns from the real estate industry, as well as errors which were found in the new forms and procedures, prompted the government to push it back to October. In our opinion, this will not provide any benefit to buyers and sellers whatsoever. Instead, like almost everything the government does when it meddles in private markets, the only result will be more paperwork, more delay, and more costs.

These changes are not minor, and will make the process of buying or selling a home take longer and cost more.

If you are thinking about buying or selling, there is still enough of a window left to avoid these upcoming issues. However, you must act fast in order to do so.

If you have any questions about either of these impending changes, post them below and we’ll get you the answers fast.

Good buyer agent

What to look for in a buyer agent

A good buyer agent can guide you through the intricate process of finding and purchasing a house.

In a previous article on this subject, we talked about the advantages of having your own buyer agent when buying a home. Here we will build upon that, and describe the things that a GOOD buyer agent should do for you throughout the entire process.

At the very beginning, a good buyer agent is going to first LISTEN carefully to what you need, want, and do not want in a house. We ask questions and find out as much detail as possible. Looking for a house is largely a process of eliminating those houses that do not meet your needs, budget, etc. It is NOT about finding the first house that seems to work, and getting a quick sale. We take your list of criteria, perform a detailed search based on those criteria, and then screen the results. Agents who devote themselves to their buyers know which subdivisions are declining in value or lie below Base Flood Elevation, etc. Specific houses with major problems are known to us too. We apply our expertise and knowledge, coupled with background research, to weed out the many homes which would simply be a waste of your time. Only then do we send you a list of possible candidates.

Recent improvements in MLS software allow us to send this to you via a website interface, which also gives you control over your search results. After we’ve filtered them, and as new listings come to you automatically, you can evaluate them further, marking them as Rejected, Possible, or Favorites. We are immediately notified, and follow up by getting you in-depth background details on those you deem worthy of a closer look.

In addition to value, condition, previous sales, and disclosed defects, we research flood zoning and much more, including clerk of court and tax records wherever possible!

Here are a couple of actual examples when our research saved our buyers money and major headaches:

1. Our buyer clients had very particular needs in a house. After searching for them a long time, we found one that seemed to fit those needs perfectly. However, during our thorough research, we discovered that the owner had $300,000.00 in personal judgments filed against him, AND that his ex-wife was technically still on the title! This title was clouded beyond all hope, and the house should not have even been listed for sale. The listing agent had no clue whatsoever that these issues existed until we showed them. We were able to halt the purchase process before our clients lost a dime. Normally problems like this would not be discovered until late in the purchase process, after inspections, appraisal, etc. The buyers would have spent a lot of time and money, only to see everything fall apart when the title work was done. By our being extremely diligent and proactive, we were able to prevent that disaster. And, a week later, a much nicer house came up for sale in the same neighborhood, and we had it under contract for our buyers literally within hours, and they successfully closed on it.

2. We took a longtime buyer client of ours to view a foreclosure which had just come up for sale. It was a large house on beautiful acreage, all in flood zone X (the best “no-flood” classification.) It turned out to be very nice, so we researched it in-depth. The house had been “bought” by the bank at sheriff sale about 2 months prior, for about $180K. (The amount of the sheriff sale is almost always meaningless, since the bank holding the mortgage is usually who takes possession of a foreclosed property at sheriff sales.) In this case though, the amount was important. The property was listed on the open market by the bank for about $260K. Our research revealed that the previous owner had a large IRS lien against him. Not everyone knows this, but IRS liens are NOT truly cleared by a sheriff sale. For 120 days after the sale, the IRS has the right to show up, present the new owner with a check for the amount of the sheriff sale, and take possession of the property! For this and other reasons, we didn’t pursue this house any further. We told the listing agent about it, and they said flat out that it wasn’t their responsibility! (This response disgusted us…) I followed it in the MLS, and saw that someone else soon bought it for around $250K, before the 120 days was up. This means that they risked losing $70K, and the house! Their agent either had no clue about the potential disaster, or simply didn’t care. There is no way we would ever put a client of ours in jeopardy like that.

Once the right house has been found, the duties of a good buyer agent are far from over. Our responsibility is to negotiate to get you the best possible deal, while protecting your interests above all else. There are procedures and timetables to follow, and some agents play fast and loose with those rules. Doing so can easily jeopardize your offer, therefore it is important to have a buyer agent who does things the right way.

After a contract is successfully signed, the clock really starts ticking, and many vitally important steps must take place before the sale is ready to be closed. They include: Termite inspection, home inspection, followup inspections if necessary, appraisal, and title work. Each of these is critical in its own unique way, and most can open up new back and forth negotiations with the seller. All must be handled correctly and in a timely manner.

The sequence of all these events is absolutely crucial. These days, appraisals cost about $450. The appraisal should come only after the termite and home inspections have been passed. Do not let a pushy agent or loan officer convince you to order appraisal and/or title work early on in the process! If you were to prematurely spend the money for an appraisal, only to then find out that the house has major defects causing you to back out, you will not get that $450 back. When representing buyers, we always take a very methodical, conservative approach. We never forget that you have money on the line. We start out with the least expensive item, then move on from there. That way, if the sale falls through for some reason, our clients have spent the smallest amount possible. Do understand that there is risk involved with buying a house, and that it is indeed possible to lose some money if the sale doesn’t close. However, that risk can be minimized if your agent gets things done in the right order.

(As a side note, we always recommend getting a thorough home inspection. Spending $300-$400 on a home inspection to find out if a house is full of problems is small change compared to buying those problems for $150,000.00 or much more, and dealing with them for many years.)

Finally, when everything is ready for closing, a good buyer agent will do a final walk-through of the house with you, get you a copy of the preliminary settlement statement showing the monetary details, and make sure you know exactly what to bring to the act of sale. They should also be there beside you at the closing to handle anything which might come up, to answer all your questions, and to review the documents you are signing.

A house is probably the largest purchase you will make in your lifetime, so choose your buyer agent carefully.

Before and After

A House Reborn

One of the nicest things about real estate is seeing someone take an old house and give it new life with quality renovations, and a lot of love.

We recently had the pleasure of helping a client find an old house in a high demand area. Their list of needs and wants was detailed, and it took quite a while for the right property to come along. When it did however, we acted quickly, and though there were obstacles along the way, we got it closed.

The property was approximately 100 years old, and had decades of deferred maintenance. Wood rot, foundation issues, termites, problems with AC, plumbing, and electrical systems – these were all on the list of known defects. In spite of this, the house was very special, and provided our buyer exactly what they’d been looking for. At the same time, they had no illusions about the amount of work needed, or the cost.termiteAlmost immediately after closing, the contractor whom they had carefully chosen got to work. As they tore into the home, they discovered that the termite damage was even worse than expected, though it was not a complete surprise. Fully half of the framing had to be replaced. They completely gutted the interior, changing the floorplan to one which was more useful, spacious, and modern. Outside, 100% of the old wood siding was discarded, and the house re-covered with HardiePlank cement fiber siding. Windows were added, as were completely new AC units, knotty pine flooring, and much more. It was a complete remodel in the truest sense of the word.We got to visit the home recently when it was just about complete. Only a few cosmetic items were left to do. We were stunned by how beautiful it is. After having been in the house at the very start, seeing it renovated was almost like being in a different home. Yet, the charm and character of the house remain. The new owners put a lot of thought, care, and tasteful creativity into the renovations. What was an old, badly neglected home has been transformed into a showpiece.

Renovating a home in this manner is a huge plus for the owners, the neighbors, and the surrounding community as a whole. The appeal and value of the house are astronomically higher now, and this all carries over into elevating neighborhood property values and  appearance. Everyone benefits from such a transformation. It gave us a great feeling knowing that we’d played a part in making this possible. We can’t wait for the next one!

Buyer Agents: What to look out for

Buyer Agents: What to look out for

When choosing a buyer agent to help you purchase a home, there are things to look OUT for, and things to look for. Today, we’ll talk about the former.

The job of a buyer agent encompasses many tasks, and when done correctly is not easy. Being a good buyer agent means keeping abreast of the market, constantly searching for possible homes, thoroughly researching those possibilities, evaluating them for you and with you, negotiating the contract, coordinating inspections, and much more. It is a very detailed job and a huge responsibility.

Unfortunately, not all agents work this way, so the buyer experience varies widely. Firstly, there are agents would rather not work with buyers at all, and prefer only to list houses. While this seems strange to us, as we love working with buyers, we think that agents who feel this way are at least honest about it, and far better than agents who don’t like buyer work, but do it anyway. If an agent tells you they prefer not to work with buyers, ask them to refer you to a buyer agent they trust. They will almost certainly be glad to do so.

Many buyer agents find houses for their clients, but only by doing a very superficial search. They typically take the most basic requirements and send the buyer a huge list of properties, without doing any additional screening. Often, this is done via an automatic “set and forget” software function. The MLS system keeps sending search results, with no further action or attention on the part of the agent. The buyer, not having any guidance, usually picks a long list of possibilities from the mass of houses constantly arriving in their email, then calls the agent to come show them. Such a “shotgun” approach is a huge waste of time and resources, yet is very common. We’ve seen agents have people look at 15 houses in a single afternoon! One buyer came to us after being shown at least a half dozen homes by another agent. The problem was that NONE of those homes were eligible for the type of loan the buyer was using! The former agent didn’t bother to check this first, so the buyer lost a huge amount of time in their search for a house. Unfortunately, we see this superficial level of service quite often.

Over the years, we have spoken to buyers who said, “Yes, I have an agent. They told me to just drive all over looking for houses myself and to check the Internet, until I find one that interests me. Then I call them and they come show me the house and write an offer if I like it!” These buyers were doing all the work themselves, with their so-called “buyer agents” simply showing up afterwards to open the door and write an offer. This is appalling, and is the most extreme example of how a buyer agent is NOT supposed to act!

When you are ready to start looking for a house, seek and find a GOOD buyer agent, one who will work hard for you and act in your best interests. If you have an agent, but find yourself doing the work yourself, and/or getting no results or analysis from them, then it’s time to move on. If they are uncommunicative, and don’t seem interested or willing to put forth a lot of effort for you, then it’s time to move on. Good agents are out there, so there’s no need to leave the purchase of your future home to anyone else.

In an upcoming post we’ll describe what to look for in a good buyer agent, and the things they should do for you throughout the entire process.

Having your own buyer’s agent is vitally important, and it’s free!

Having your own buyer’s agent is vitally important, and it’s free!

Clearing up myths about the role agents play in the purchase of a home.

Many people, especially those who have not bought a house before, often misunderstand the way real estate works with regard to agents. That misunderstanding can cause you problems when looking for a home.

Myth 1: I have to call the agent on the sign.

NO! Understand that ANY agent can show and sell ANY listed property! It does not matter at all if the property is listed with a different company. All too frequently, we hear buyers commenting about a house being listed with someone else, and thinking that they “have” to call the person on the sign. Such is NOT the case, and as we will explain below, it is a HUGE advantage to have your own agent representing you as a buyer, and to work with them instead of the listing agent.

Myth 2: I’ll have to pay a buyer agent to represent me.

FALSE! When a seller lists a home for sale with their agent, they agreed to pay a certain amount, usually a percentage of the sales price, as the total commission. That commission is what pays their agent AND yours if you have one. The commission is split between the two agents. Thus, having a buyer agent working for you costs you nothing! A buyer agent not only is free to you, but also doesn’t cost the seller anything extra. In return, you get an agent who represents only you, and not the seller.

If you deal directly with a listing agent, on your own, it makes that agent yours on that property by default. This is called dual agency, and can lead to disadvantages for you as a buyer. First, that agent already has a relationship with the seller, and may have a strong sense of loyalty to them. This could affect you negatively during negotiations. Secondly, now that you know how commissions work, realize that if you don’t have a buyer agent representing you, the listing agent will get the entire commission! This can mean they would receive twice the pay or even more. Greed is a powerful temptation, and we’ve seen several cases where agents in a dual role did NOT work in the buyer’s best interest. Rather, they did everything they could to get the buyer to purchase THEIR property, whether it was right for the buyer or not. Dual agents are not supposed to act like this, but it happens.

This is not to say that all listing agents will act this way when put in a dual role. If an agent is honest, they will tell you up front if their house does not fit your needs, and offer to find you one which does. We do this ourselves all the time when unrepresented buyers call about one of our listings, and it’s not what they’re looking for. They appreciate the honesty, and we then work with them and search for the right house. We have also represented buyers as dual agents when our listing WAS right for them. When we do, we take the role of dual agency very seriously, and diligently protect the buyer’s interests and confidentiality to the same high level as those of the seller. Many clients have trusted us in the role of dual agents, and we have never let them down. If the listing agent is truly honest and worthy of your trust, then using them may not be a problem. Usually however you have no knowledge of who they are. And, if their motivation is about money, not about doing what’s right, then there will be problems.

In general, we believe that a buyer should always have an agent representing them. The duty, obligation, and loyalty of your buyer agent is to you and you alone, and does not cost you anything. It’s the best deal in real estate! A good buyer agent can save you an untold amount of time, money, and heartache, and even help you avoid making a disastrous home purchase mistake.

Next time, we will cover some of the things that a good buyer agent should do for you.

Short sales

Short sales

A brief explanation of what short sales are, and what to expect should you try to buy one.

In our recent series on buying a foreclosure, we mentioned homes in pre-foreclosure which are known as short sales. A short sale is when the owner is behind on the mortgage, and is trying to sell the house to avoid foreclosure. While it is possible to purchase a home as a short sale, it is very difficult, and is a long and tortuous process. For a successful short sale to happen, the lender(s) holding the mortgage(s) must approve the sale and agree to take a loss. Purchasing a short sale, if successful, usually takes at least 4-5 months, during which time there is no way even to know if it will be approved or not. The lender can change their mind at any time without warning. And, they can take months to give their response, which may very well be “DENIED!”

Foreclosure is an expensive process, which costs lenders a lot of money in legal fees, sheriff’s fees, etc. Then, after going through all of that, they usually end up owning the property themselves, meaning they have to maintain and insure it until they finally sell it. Since foreclosure costs lenders so much, and they supposedly don’t like being property owners, you would think they’d make short sales very easy. Unfortunately, it is exactly the opposite. We’re not sure if it’s because lenders are overworked, or if perhaps they actually benefit by carrying delinquent loans on their books, or what. No matter the reason, almost every short sale transaction is a nightmare. It seems like the lenders do everything to make the process as unpleasant and slow as possible. Through it all, there’s no guarantee that all the effort will be worth it.

One of our listings was a short sale, and it took over FIVE months from the time it went under contract until it closed. Until the very end, the buyer had no idea if it would actually go through, or if the bank would decide to foreclose. They got lucky, but it took a LONG time.

Most of the buyers we meet avoid short sales like the plague. Trying to purchase a short sale demands that the buyer must have months to spare, and must be OK losing those months if it falls through. However, if they ultimately close, short sales can be quite a bargain for buyers, while relieving sellers of their financial burden and avoiding foreclosure.

If you are a buyer with the determination and time to pursue a short sale, you must be careful not to get stuck in a contract for months, with no way out. As a seller of a short sale property, having someone with years of financial experience on your side, who can deal with the lender, is a must. We have successfully negotiated short sales for both buyers and sellers, and are ready to do so when called upon.


Owners title insurance

Owners title insurance: Don’t buy a home without it!

Often overlooked, owners title insurance is absolutely essential when buying a home.

What do these things have in common, and should they matter?

  • The builder from whom you just bought a house filed bankruptcy shortly after you closed on it. At least one of his subcontractors did not get paid for the work they did on the house.
  • Decades ago, a corporation sold land on which a condominium complex was later built. The person who signed for the corporation at the sale was an officer of the corporation, though they did not file anything with the parish stating this. Many of the condominiums were bought and sold over the years, and now you’re purchasing one.
  • Back in the 1940′s, a piece of land was handed down to the heirs of the owner, who passed away. That succession was not filed with the parish. You are now buying a portion of that land.
  • The owner of a house donated half of his ownership to his wife, from whom he later divorced. Years later, the house was put on the market, and you now have it under contract.

The answers are that ALL of these are title issues which actually happened to clients of ours, and they VERY much mattered! Some of them were discovered by excellent title work from our closing attorney, and were able to be corrected. Some were not correctable, and caused the sale to fall through! Most of these SHOULD have been discovered long ago, but were not, while others were the result of newer events which there was no way to predict.

These types of issues, and many more, all greatly affect the title to the property you are trying to purchase. They can put a complete stop to the sale, which costs you time and money; they can cost you time and money while having to correct them yourself; or worst of all, can threaten your very ownership of the property after you buy it. Click here to see a list of potential problems which can affect title to a property.

Lenders realize that title problems can be severe, which is why they REQUIRE a lenders title policy be in place when you finance a purchase. If a title problem threatens the property, that policy covers the lender ONLY, not you!

Suppose for example you bought a house for $250K, putting down 20% ($50K) and financing the remaining $200K. Let’s say that a catastrophic title defect is discovered after the sale, one which invalidates the sale and returns the property to the former owner. (This is rare, but it CAN happen!) The lenders title policy covers their $200K, but without an owners policy, you are by yourself with regard to getting your $50K back. Chances are you’d have to hire an attorney and fight it out in court. IF you got your money back, it could take a very long time, and the legal fees might well eat up much of it anyway.

We believe that owners title insurance, like flood insurance, is something EVERY purchaser should insist upon when they buy real estate. The cost of an owners title policy is a onetime expense paid at closing, and covers you as long as you own the property. Most providers have basic coverage and an extended plan which costs only a little more, but gives you MUCH more in terms of coverage. ALWAYS GO WITH THE EXTENDED PLAN!

With an owners title policy, you have guaranteed legal representation should you ever have to defend your title through litigation. Also, your financial interests are covered. (Disclaimer: Policies will vary among different companies and coverage levels.)

Some real estate agents, loan officers, and even friends and family will sometimes (foolishly) advise you not to get title insurance. They’ll say things like “Come on, it’s in a subdivision, so these titles have already been thoroughly researched!” This does not matter. The condominium we mentioned above had had dozens of sales, spanning years, yet NOT ONE of the title attorneys on all those prior closings caught the fact that the original land sale was not valid!

If anyone advises you to omit title insurance, ask them if THEY will personally guarantee that every past sale, succession, resubdivision, etc. was properly executed and recorded; that NOBODY throughout the decades made any mistakes, or committed fraud; and if you do end up with a title problem, that THEY will cover every bit of your losses out of their own pocket. We strongly doubt they will say yes!

In summary, an owners title policy is one of the best forms of protection you can have for a property you own. Like flood insurance, chances are you won’t need it, but if you do, its benefits incredibly outweigh its cost.

Feel free to call or email us if you’d like to know more about this often overlooked coverage.

Note: We do not get any sort of referral fee or other benefit for recommending any outside product, person, or service. Not only is that illegal, it just wouldn’t be right. We make recommendations only for things we believe in, and which will best serve our clients.

Potential problems with foreclosures

Buying a Foreclosed House – Part 2

Foreclosed homes can be a great deal, but they do have a multitude of potential problems.

As we discussed last time, buying a foreclosed house can be a great opportunity, but there are also potential issues with foreclosures, so caution is necessary.

First of all, the condition of foreclosed homes can vary tremendously. We’ve seen foreclosures which were spotlessly clean and move-in ready, others which were in horribly poor condition, and everything in between.

It is very important to understand that even a missing light fixture or switch plate, or a leaking faucet, is enough to cause a house to fail appraisal for most loans! FHA, Rural Development (RD) and VA loans all require appraisers to evaluate the condition of a house and make sure it meets minimum standards. They consider even small items like these to violate those standards, making financing very difficult or even impossible. There are renovation loans available, but they are few and hard to get. Conventional loans are much more tolerant of property condition, but not everybody qualifies for a conventional loan.

One of the problems with foreclosures is that when they do need repair, most lenders will not make any, nor will they allow anyone else to do so! Every once in a great while a lender will agree to do some repairs in order to get the house sold, but this is very rare. The owners of some foreclosures, such as HUD, are absolutely inflexible about not allowing any repairs. They would rather sit on the house and drop the price by thousands of dollars until it sells for cash, rather than spend a couple of hundred for a simple repair. It makes no sense, but that’s how it works, and is why so many foreclosures take a long time to sell.

Besides repairs, there can be other problematic issues with foreclosures. When a house goes through foreclosure, previous liens are canceled, and go away, with one exception: An IRS tax lien. The law gives IRS the ability to take possession of a house up to 120 days AFTER it is sold at sheriff sale, regardless of who owns it! We have encountered this situation before, and cautioned our clients about the IRS lien. They wisely did not buy the house.

Also, it has been our experience that lenders don’t do thorough title work when taking ownership of a property after the sheriff sale. We have seen foreclosures where title problems came up, one of which was severe enough to put a stop to a sale!

These are just a couple of examples of the issues which foreclosures can bring with them. We have dealt with these and many others, and also have gone out of our way to learn about more complexities of buying foreclosed properties. In addition, Danielle’s many years as a loan officer give us a deep understanding of the lender side. All this together means we bring far more to your corner than any other agent.

People have come to us after wasting weeks with other agents looking at foreclosures which were NOT even eligible for the type of loan they had! Such ill-informed house searching not only wastes your valuable time, but can also cost you money. You could spend hundreds of dollars on inspections, appraisal, etc. only to learn too late that you cannot finance the home! We examine things in great detail and well in advance, to prevent these sorts of nasty and expensive surprises.

A foreclosed house can indeed be a great deal. However, it is important to have us looking out for you, so the many pitfalls of foreclosures can be avoided.

Foreclosed house with notices on windows

Buying a Foreclosed House – Part 1

Foreclosed houses are those on which the former owner defaulted on their loan, and now belong to the lender which held the mortgage. To take ownership, a lender has to go through a long formal process known as foreclosure.

You may have noticed houses sitting vacant, with paper notices on their front doors or windows, such as the house pictured here. These are usually homes which are on their way toward foreclosure, though they are not available for sale yet. People use the term “foreclosure” often to mean such houses. However, prior to completing the foreclosure process, these are almost always tied up in a huge mess of legal and financial problems. A house in pre-foreclosure would have to be sold as a “short sale”, which is something completely different, and a nightmare we cover in another discussion.

To acquire title to a house whose owner has fallen behind on their payments, the lender must go through the foreclosure process. The sheriff serves a notice of seizure, which is when the paper notices are affixed to the house. An appraisal may be done by the lender. After a length of time which can vary widely, the property is scheduled for auction at sheriff sale. Prior to the sheriff sale, the sheriff must publicly advertise the property a prescribed number of times. If the owner does not come forth and pay off everything they owe, the property is then sold at the sheriff sale on the scheduled date.

While anyone can bid at a sheriff sale, the terms typically require at least a 10% payment on the spot with the balance due in 30 days. Also, no inspections other than maybe an exterior viewing are allowed prior to the sale. In addition, contrary to popular belief, homes are not simply sold there for pennies on the dollar. Keep in mind that the lender wants their money back! Lenders send a representative to each sheriff sale, with instructions to bid up to a certain amount, roughly the amount they are owed. If someone outbids them, then that person buys the house, and the lender gets paid; otherwise the lender is the high bidder and gets the house. Only then does it belong to them, and they put it up for sale as a foreclosure, usually listing it with a real estate firm.

If a lender was not owed very much on a house, then it could indeed be quite a bargain when it finally lists as a foreclosure. Maybe the former owner only financed a small amount, or paid the mortgage for many years, leaving a small balance. However, this is often not the case, so the pricing of foreclosures can differ greatly.

Always remember that there is no “magic” or “secret” way to find out about foreclosures. We see websites and other advertisements claiming that you can buy foreclosures for ridiculously low amounts. These are scams, and usually consist of stuff like: “Buy our investor kit for only $69.95 and you too can learn how to find foreclosures for dirt cheap!” This is utter nonsense.

Until a house has been completely through the foreclosure process, it is not for sale. Once foreclosed, it will show up on the market just like any other house. We keep a close watch for these, but more importantly, also have a deep understanding of the potential problems which can arise with foreclosed homes. Our knowledge, experience, and attention to detail helps our clients avoid such issues.

In part 2, we’ll look at some of those potential problems.