Category Archives: Financing

Don't "give" your listing away!

Don’t “give” your listing away!

Selling a house is serious business, and your needs come first.

If you or a family member were sick, would you:

A) Go to your friend’s son who just got his medical license?
B) Visit the nice old doctor you sort of know, whose practice is slow so he “needs the business”?
C) Get treated by the best, most qualified doctor available?

Of course the answer is C! You want the cure to occur quickly, reliably, and with a low risk of anything bad happening.

While selling a house is not the same as dealing with an illness, it is still usually the single biggest financial decision in a person’s life. As a seller, you are also a customer. You are paying a commission to an agent in order to purchase service, experience, marketing, and representation, with the goal being a fast and successful sale. You do not want any unexpected surprises or expenses, or to wait forever.

You’d think that with the stakes so high, sellers would always choose an agent carefully, and demand the very best. However, we’ve seen far too many instances where owners treat selling a house completely differently from when they seek any other professional service. Instead of acting in their own best interests, sellers sometimes feel an obligation to “give their listing” to an acquaintance, or someone brand-new, or someone whose business is slow, etc. It’s very strange, as such owners somehow overlook the fact that they are about to make an enormous step, one which affects every aspect of their lives. Yet for some odd reason, they forget this, and put their fate in the hands of someone based on a casual relationship, or pity, or guilt. We’ve met people who listed with someone simply because they were the first agent they spoke to, and “felt bad” for not using them. Selling a house is far too important to “give it” to someone based on emotions.

A prime example of why not to do so: Long ago, an old client of ours called to say he was in dire circumstances and REALLY needed to sell his house. He was quiet and apologetic, and said that he’d already told a part-time agent he knew that he’d list with him. He explained that he felt sorry for the agent, and wanted to “give him a shot”. The owner didn’t have much confidence in the agent, as he actually said he expected to be talking to us after his listing was up and the house wasn’t sold! Yet, he still listed with that agent.

The agent put only a brief description and less than 10 pictures on the listing. About half of the pictures were sideways, and the square footage of the house was wrong by a huge amount!

The house was beautiful, and in a desirable neighborhood, but months and months went by and it didn’t sell. We never heard from the owner again, so they obviously renewed their listing in spite of everything. Eventually the house sold, but only after more than an entire year had passed and the owner had reduced the price several times. The owner lost months of valuable time, and thousands of dollars, due to the extra notes they had to pay and the price drops they had to make because of poor representation.

Selling your house is not a charity prize, to be given away to just anyone based on emotions. It is a huge event in your life, with far reaching and long lasting effects. There is considerable potential for things to go wrong, so it is crucial to have someone with the skills, knowledge, and experience to handle your sale, avoid the problems, and bring about a successful closing.

After the 2016 Flood: What to Expect in Real Estate and Beyond

After the 2016 Flood: What to Expect in Real Estate and Beyond

Answers to important unresolved issues may change this, but as of now, here are our broad views on what lies ahead.

We broke down residential properties into 3 general categories, and offer our thoughts on issues related to each:

1. Homes which were untouched by the flood
As detailed in our previous article, we believe that prices for these homes should rise modestly (10-15%) over the next year. This is due to the simple law of supply and demand. Among these houses, those in so-called “no flood” zones (zones X, C, or B; properly called “moderate to low risk areas”) should be the most sought after. (Click here for a more complete explanation of flood zones.)

Undamaged houses in “flood zones” (zones A, AE, or V; properly called Special Flood Hazard Areas / SFHAs) will still be in demand, but because of their flood zone classification, they’re not quite as attractive.

2. Homes which received minimal flooding, and have never flooded before
These houses should still be very marketable after PROPER repair, especially those not in an SFHA. Sellers will have to disclose the fact that it flooded, of course. Homes such as these will take some time to repair, and once complete, probably won’t fetch quite as much as undamaged homes. However, they will have considerable value, since there are a limited number of homes which were completely untouched. It’s possible that bargains may be found among these once-flooded houses, if the owners decide to sell them as-is and move instead of repairing them.

3. Homes which received a significant amount of flood damage
Houses in this category have many potential issues to examine. Local governments are requiring inspections before issuing building permits. Also, higher water levels mean more damage, thus the “substantial repair” rules are more likely to apply. “Substantial repair” is a repair costing at least 50% of the property’s market value. FEMA mandates that properties requiring substantial repair must also be brought into compliance with current NFIP (National Flood Insurance Program) guidelines. In other words, if a house is below BFE (Base Flood Elevation) and “substantially damaged” then it must be elevated at least to the BFE in order to be compliant. Ascension and East Baton Rouge Parishes have even stricter requirements with regard to “substantial repair”. Ascension normally requires elevation to 1’ above the highest water level during a flood, and East Baton Rouge considers 40% to be the threshold for “substantial repair”. However, as of now, Ascension has relaxed their elevation requirement to 1’ above BFE, which is still tougher than FEMA’s standards.

Houses such as these will need a lot of work. If the owner had flood insurance, then they SHOULD receive sufficient funds to repair it, unless elevating is required. Flood policies include up to $30K of ICC (Increased Cost of Compliance) coverage to help elevate, but that might only pay to raise a small house on piers, and not much else. Mandated elevation is the number one concern on everyone’s mind right now! If a house needs “substantial repair” and lies below BFE, then the cost of elevation must be added to the already large repair cost. Even with flood insurance, the total is likely to be out of reach for many homeowners. People are justifiably upset about this. Some are talking about simply walking away from their homes, as they have no way to pay for everything.

If communities are left with thousands of houses which are deemed both non-compliant and substantially damaged, and whose owners cannot afford to elevate them, it will be a disaster. The houses would stand empty, meaning we could be faced with entire neighborhoods of abandoned homes.

On a positive note, it is likely that there will be opportunities among houses with considerable damage. Some owners will want to simply get rid of their damaged homes quickly, and sell them at bargain prices. This would allow those willing to invest the money, time, and effort to acquire a house inexpensively. Doing so would benefit new homeowners, property flippers, or those wanting to use the house for rental income, thus bringing new life to these homes and neighborhoods. However, buyers need to be very diligent in evaluating “bargain” houses, as any potential issues such as elevation, etc. would be theirs to face. Non-compliant homes are especially problematic, because even a cash buyer could not purchase and renovate them, and simply choose not to have flood insurance. Parishes will not issue a building permit for the repairs on a non-compliant structure, so they’d still have to elevate if the house is below BFE.

The prospect of abandoned homes is something else to consider for those thinking about picking up flooded houses cheap. Suppose that the newly renovated property is surrounded by empty, gutted houses? It won’t have much appeal, and could turn out to be a bad investment. Nobody wants to live in the middle of abandoned homes or vacant lots.

We believe that there will be new activity among even the badly flooded homes. People have a way of bouncing back strongly from disasters like this, and often the neighborhoods end up being better than before. However, that activity could be severely limited by the FEMA/local elevation rules. After Katrina, there were Road Home grants which helped many people without flood insurance. As of now though, nothing similar seems to be available, and thousands of people are gravely concerned.

We’re not sure what the solution is, but the prospect of losing a substantial part of the population (thus the tax base) should motivate governments into action. Hopefully those in charge recognize the gravity of the situation, and will fight for a workable solution. Ultimately, it’s the federal government (as in FEMA and the National Flood Insurance Program) whose guidelines are the overriding factor, so they would have to either relax the rules, or cough up the money to help fix these houses.

If you want to know more about your specific situation, give us a call or send an email. We’ll help you in any way we can.

After the 2016 Flood: Now What?

After the 2016 Flood: Now What?

With the floodwaters gone, many are wondering what lies ahead for home sales and prices.

The devastating flood of 2016 laid waste to much of central Louisiana, on a scale not seen since Hurricane Katrina 11 years ago. More than 80% of the structures in Livingston Parish sustained flood damage, and 35% of those in East Baton Rouge. Other nearby parishes were severely affected as well.

As you may have seen in our 4-part series on flood insurance and related issues, our former home in St. Bernard Parish was completely flooded and lost to Katrina. While there are indeed differences between the flooding from Katrina and this year’s flood, there are many similarities as well. Just as in Katrina, entire neighborhoods have been devastated, and many thousands of homes have been made unlivable. As it was back then, everyone is asking with regard to houses: “Now what?”

There is no simple answer to that question, because issues such as FEMA payments, rebuilding requirements, and others remain unsettled. However, based upon our research of what happened in the years following Katrina, and our knowledge of the market, we can offer some informed analysis.

The main factor is that the supply of habitable houses is down, at least temporarily. There was already a shortage of available homes prior to the flood, and with tens of thousands damaged, that supply has now shrunk incredibly. The law of supply and demand will definitely apply, though with some limitations.

After Katrina, I saw some people raise the price of their undamaged houses ridiculously high just days after the storm, hoping to “cash in” on the sudden demand. However, since most home sales are financed, the price MUST be supported by an appraisal. This fact kept rampant price gouging to a minimum. At the same time though, there WAS a legitimate shortage of homes. Plus, buyers who had cash could afford to pay a reasonable premium to quickly get a house untouched by the hurricane. So, home prices indeed rose.

Danielle and I remain members of the New Orleans MLS, so I did some in-depth research of home prices before and after Katrina. I chose to compare homes which sold at a price of $250K or less; were in Very Good or Excellent condition; and were not foreclosures. I excluded St. Bernard Parish from the initial search, since EVERY structure in the entire parish (including our house) was declared uninhabitable after the storm.

From January 1, 2005 through August 28, 2005 (the day before Katrina) sales of homes meeting my search criteria averaged $92.59 per Square Foot of Living Area (SFLA). In this period, 4,309 such homes were sold.

I then ran the exact same search, for the same period 1 year later, in 2006. The average sales price per SFLA was $105.85. The number (volume) of sold homes increased to 4,487.

So, the average sales price per SFLA for these homes increased by 14.3% after Katrina, with the sales volume going up about 4.1%.flood2016_now_what_graph1I  went back and applied the same search criteria to St. Bernard Parish. Prior to the storm, from 1/1/2005 through 8/28/2005, there were 246 sales, averaging $82.71 per SFLA.

Due to the utter devastation in the parish, it took a long time for rebuilding to begin, so only 7 (SEVEN) houses meeting my criteria were sold there in all of 2006! I therefore extended the post-Katrina comparison period through the end of 2007. During this time, 131 such homes sold, at an average price per SFLA of $92.28.

While the number of sales fell by 46.7%, the average price of those sales was 11.6% higher! It makes sense that the volume was down, since literally EVERY house had been damaged. It also stands to reason that prices went up, due to the low number of available homes. It is encouraging that even homes in an area which was completely destroyed, all of which had to be repaired, still sold on average for 11.6% more than before the storm.flood2016_now_what_graph2

In my opinion, our part of the state after the 2016 flood is a lot like New Orleans and its surroundings were after Katrina. Some areas were completely flooded, while others were untouched, and yet others fell somewhere in between. I think we will see a similar trend in prices, with non-flooded homes, and later, homes which flooded once and were well-repaired, increasing in price somewhere in the 10%-15% range. This estimate will NOT apply to homes which were heavily damaged and/or lie below Base Flood Elevation (BFE). Those will not fare so well, unfortunately.

The road back to full recovery from this disaster will be long and difficult. If you’d like to ask our opinion on your specific situation, we’ll be glad to do so. Just give us a call or send an email.

In my next article, I’ll talk about some of the issues, challenges, and opportunities you can expect with regard to real estate in the coming months.

Hell Freezes Over!

Hell Freezes Over!

That’s got to be why the fees on a widely-used type of mortgage will be FALLING as of October 1, 2016.

The USDA Rural Development (RD) Single Family Housing program just announced that the cost of their version of mortgage insurance will be significantly lowered for fiscal year 2017! This is the period starting October 1, 2016 and ending September 30, 2017.

Commonly known on other loans as PMI, MI, or MIP, these fees are called guarantee fees on RD loans. It’s the same thing, by a different name – mortgage insurance that YOU pay, which covers the lender against any loss they might face should they foreclose on the house and have to sell it for less than what they are owed. Having to pay for something that benefits only the lender is frustrating, but it’s a necessary evil. Without it, lenders wouldn’t write mortgages.

On an RD loan, there are 2 parts to their guarantee fees: The first is an upfront, lump sum fee which you pay at closing. Currently it is 2.75% of the loan amount. The 2nd part is a recurring fee based on an annual 0.5% of the outstanding loan balance, which is broken down and paid monthly as part of your note. While it falls slightly as your principal goes down, this monthly fee stays in effect for the life of your loan.

RD has been raising their guarantee fees over the last few years (see our previous article) which is why we were utterly amazed when we were notified about the upcoming reduction. It will definitely benefit buyers who finance with an RD loan, thus helping sellers as well. Since the loan fees will be less, houses will be more affordable.

As an example: Currently, to buy and finance a $150,000 house with an RD loan would require a 2.75% upfront guarantee fee, which is $4,125.00. The annual guarantee fee of 0.5% is $750.00 per year, which works out to an extra $62.50 on the monthly note.

As of October 1, 2016 the upfront rate drops to only 1.0%, and the annual fee to 0.35%. On our $150,000 example house, this would make the upfront fee $1,500.00 which is a difference of $2,625.00. The annual fee would drop to $525.00, or $43.75 per month, a savings of $18.75 off of the note.

Regardless of the price of a home, these reductions are substantial, and will make a significant difference to many people. We salute the RD program for enacting these reductions.

IMPORTANT NOTES:

  1. If you have an existing RD loan, these changes DO NOT affect you! Existing loans are locked in at the rates and terms in effect when the loan was originated.
  2. The new, lower rates only apply to loans which receive their official commitment from RD on or after October 1, 2016. If you’re buying a house prior to that date, and the RD commitment is issued anytime from now through September 30, 2016, the current rates will apply.

Let us know if you have any questions, or need help buying or selling!

HomeReady, Buyers Not

HomeReady, Buyers Not

Was one more nail in the mortgage industry’s coffin hammered in on December 21, 2015?

We are not, and some could argue that we may never, be fully recovered from the huge mortgage fiasco of a few years ago. Although many people have different opinions on what caused the mortgage crisis, this former loan officer and current real estate agent attributes it to several reasons. The main issues I saw were: 1) Somewhere along the line, the government promoted the opinion that homeownership is a right as an occupant of the United States, rather than a privilege and conscious choice for a person who is financially ready for the investment and maintenance that owning a property entails. 2) The government went too far in its effort to “protect” the “underserved” groups of the population by actually monitoring and fining large and small banking institutions that simply didn’t have their prescribed mix of borrowers in their portfolios. As a result, loans that shouldn’t have been made to borrowers who weren’t financially ready were pushed through to make sure the quota was covered. The sad part is, while these rules seem to care for the economic underdog, they actually hurt the people they profess to help, because those people simply aren’t prepared for the $5,000 expense of replacing the AC unit, or the $10,000 roof repair. Also, just the mortgage payments themselves proved to be unaffordable for many. In spite of this disaster, the government is back at it!

A new Fannie Mae program called “HomeReady” took effect on 12/15/2015. It reduces the income requirements, down payment requirements, and mortgage insurance requirements below those of even a current day FHA loan. You remember the FHA loans, right? They took place of the previously labeled now taboo “subprime” loans. They have a lower credit score requirement, higher debts allowed, and looser credit report rules. They are also the loans that when their buyer loses the home it is taken over by HUD. Have you seen many HUD foreclosures? We all have. So, take those standards and dip them lower to get a larger group of unsuspecting, unprepared borrowers so we can make a bigger foreclosure market and a larger financial problem for the people that are already not making it by even today’s standards.

Here are the basics of the HomeReady loan:

- Minimum 3% down payment
- NONE of the down payment has to come from the actual borrower! They can use grant money, grants, gifts, and the never allowed before CASH ON HAND. The cash on hand is such a no-no in the industry that it has caused home purchases to be delayed and even get turned down because the borrower couldn’t document where the cash came from. The reason that it is an issue is claimed to be that they need to be sure that the funds aren’t from terrorist sources OR are not that of someone other than the borrower. Yet, here on the new loan, those issues don’t seem to be a concern.
- REDUCED Mortgage Insurance coverage for loans that have less than 10% down payment! This is where you want more insurance coverage, as these buyers have less to lose if the 3% isn’t even theirs!
- Homeowner Education Requirement: A mere 4-6 hours to learn everything you need to know to become a homeowner with an online test.

Click here to see a comparison chart showing how HomeReady stacks up to Conventional loans and the MyCommunityMortgage (which has quietly passed away).

Yes, it appears that it has a higher credit score requirement than you would expect, but there are efforts in motion to allow VantageScore to be used instead of the traditional FICO scores, which will allow rental payments and utilities as sources of credit history. This change some are saying would add 100 points to everyone’s score or create credit history where there was none before. It’s arguable whether or not these payment histories of non-traditional credit sources are indicative of a borrower’s ability to pay a large regular payment like a house note. When you don’t pay your cell or electricity, they turn off those services. When you don’t pay your house note, it can take months or years to lose it to foreclosure, so the penalty of not paying is even less of an immediate concern.

What’s even more interesting is that I am not hearing any chatter on the typical mortgage and housing channels on this supposedly sweeping edict of benevolence. There are a few small articles, but not nearly the amount of attention it should be getting. Lenders, please share what you know and let us know what you’ve heard!
Hopefully, individual lenders will not be eager to jump aboard the HomeReady bandwagon. However, if the government convinces them that they will (again) be bailed out when foreclosures happen, they may very well embrace this insanity. If this occurs, many knowledgeable people in the real estate and finance industries fear that another meltdown could occur that would be far worse than what we’ve already lived through.

One loan officer we’ve spoken with said that a lender in her portfolio with this program has added additional rules called “overlays” on top of the basic guidelines, but they don’t have all of the details yet on exactly how it will work.

We are excited to help people buy their homes, and do it all the time. Yet, we feel it is irresponsible of the government to seduce buyers into an attractive, but potentially damaging financial situation which they may not be capable of sustaining. Furthermore, with these “low cost” loans being offered, the future of our industry and economy continue to be jeopardized without disclosing the true price tag to the public and unsuspecting buyers.

A win for homeowners!

The new 2015 transportation bill does NOT take money from those who pay mortgages.

After a huge outcry from realtors and many others, the proposal to appropriate steal part of the guarantee fees (mortgage insurance premiums) from homeowners who pay them was dropped from the transportation bill. The bill was then passed and signed into law. In our recent article, we detailed this proposal, and how damaging it would be to almost everyone who pays a mortgage. The idea was  strongly opposed across the board. Only some Washington DC politicians supported it, seeing it as yet another way to get hardworking homeowners to shoulder the financial burden of yet another government project they can’t afford.

To our pleasant surprise, common sense prevailed. We want to express our sincere thanks to all who contacted their representatives in Congress and opposed this ridiculous proposal. Great job!

ALERT: CONTACT CONGRESS ASAP TO STOP THEM FROM HARMING HOMEOWNERS!

ALERT: CONTACT CONGRESS ASAP TO STOP THEM FROM HARMING HOMEOWNERS!

Once again, the idiots in Washington, DC are trying to find a way to make it harder and more expensive to purchase a home.

Background: Every type of loan has some sort of mortgage insurance which the buyer is required to pay. It is called PMI (Private Mortgage Insurance), or MIP (Mortgage Insurance Premium), or a Guarantee Fee. This insurance can be an up-front lump sum payment, a monthly premium added onto your note, or a combination of both. Even conventional loans with a 20% down payment, which don’t charge any monthly PMI, compensate for that by having a higher interest rate! So, while some forms of PMI are more apparent than others, the American homeowner always ends up paying to cover the lender’s risk of loans going bad.

Behind every lender is some entity which is ultimately responsible for the loan. VA loans are backed by the Veterans Administration; Rural Development loans are backed by the US Department of Agriculture; and FHA loans are backed by the Department of Housing and Urban Development (HUD). Note that these are all government agencies…

Conventional loans are backed by FNMA (Federal National Mortgage Association, commonly called “Fannie Mae”) and FHLMC (Federal Home Loan Mortgage Corporation, known as “Freddie Mac”). These are public government-sponsored enterprises (GSEs), created decades ago to provide a “private” secondary market for mortgages. In simple terms, they purchase conventional mortgages from the lenders. In our opinion, since the government has pretty much taken over Fannie and Freddie along with every other form of home lending, the GSEs are now just another department of the government.

Unfortunately, if you want to finance the purchase of a house, you WILL end up paying some form of mortgage insurance. It is a necessary evil, and there is no way around it. With so many mortgages going bad in past years, lenders are more reluctant than ever to write loans, and mortgage insurance helps reduce their risk. Without it, financing a house would be even harder, so there is a benefit to homebuyers.

The problem: RIGHT NOW, a new transportation (highway) funding bill is being debated in Congress which would steal part of those premiums away from the GSEs and use it for roads! The federal government cannot resist ANY opportunity to take money from taxpayers whenever they see it, and this is just the latest attempt by them to do so. It turns out that they raised guarantee fee rates for the GSEs back in 2011 to “offset” a measly 2-month payroll tax cut. This rate increase was for 10 YEARS! In other words, the millions of hardworking Americans who financed or will finance a home with a conventional loan between 2011 and 2021 will be paying for that “tax cut” over the entire life of their mortgages!

The highway funding bill currently in Congress seeks to extend that rate increase another 4 years. And, there’s no telling if they’ll try to raise the rates even more! Either way would keep the financial burden squarely on the shoulders of homeowners. This will prolong the harm being done to everyone trying to purchase a home, and possibly make it worse, all the way through the year 2025!

We urge you to contact your Senators and Representatives and ask them to oppose any use of guarantee fees (“G-fees”) in this highway bill. Homebuyers should NOT have a special “tax” placed on them alone to fund public projects which have nothing at all to do with housing.

You can get contact info for your Senators and Representatives at this website simply by entering your zip code.

Please act NOW, as this bill could be voted on at any time! They are pressing hard to get it pushed through.

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.

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.