So, you've heard that a foreclosed property can be a buyer's best way of gaining instant equity in real estate. However, the term foreclosure does cover a wide area with many sub-groups within it. It's important to understand the three different categories there are in foreclosures, the timelines associated with them, and which type of foreclosure is hot and at what time and why. This not-so-often-known information will take you from being a great agent to being priceless for your buyers.
Within the area of foreclosures there are three basic categories. Let's break down each category to see which is hot and which one is not. By doing so you can save lots of time and trouble and it will help both you and your buyer navigate through the foreclosure market.
BEFORE THE AUCTION
The first category of foreclosures is buying before the auction. This will be in an area where homes are on the brink of foreclosure but not yet foreclosed on. These will include listed properties from the MLS, short sales, NOD'S, and NOTS. Because of the excess inventory in the foreclosure market and the restrictions in lending, this is not the time for homeowners to sell their property at retail. As a matter of fact, this could be one of the worst times for them to sell their home at retail. Retail priced homes cannot compete against foreclosures and so it will be almost impossible to sell their home now and thus buyers will have no way to buy a home with equity in it at this stage of the foreclosure process.
There is, however, one segment within this first category that might help: the short sale. A short sale is when a house is about to foreclose and a buyer comes in to negotiate with the bank to let the home go for a value less than the amount owed on the home, an excellent way for the buyer to get a home at below market value. Please understand that, in general, short sales seem to be taking much too long to complete with an average closing time of 4-6 months. Sometimes buyers get impatient and drop out of the deal before they close on the property. On average only about 20% of short sales actually close. Understand that there are a lot of companies, realtors, and buyers that are quite successful in short sales but unfortunately many others are not.
AT THE AUCTION
The second category is buying a foreclosure directly at the auction. Some states have judicial proceedings to handle these transactions while others, California included, have trustee sales that take place right on the courthouse steps.
On the positive side, there is not a lot of competition if you have cash or most of it at the time of the auction and are the winning bidder. Unfortunately, this does eliminate a great deal of potential buyers because most people don’t have an excess of $100,000 on hand for an auction. Because REO properties are selling under amounts owed compared to properties that are in the (NOTS) stage, buying at a trustee's sale is not always the way to buy in most situations. Today most properties are going back to the banks and then they become bank owned.
The down side is that buying a good property this way makes it difficult for a buyer to break into the foreclosure market, not to mention that this really is a small part of the market nowadays. It is important to understand that no commission is paid at the trustee sales auctions and realtor after bank owned foreclosure auctions take place are also very small. This is a good area for a buyer, but not for a strictly commission-based agent.
AFTER THE AUCTION (THE REO)
The best, easiest, safest, and most lucrative way to buy a foreclosed property is in the third category: buying a bank owned property (REO) after the auction is over. Due to the sheer volume of foreclosures on the market and those that will be coming in over the next year and a half, banks are lowering their prices daily just to move these houses out of their inventory. Banks list these REO homes with realtors who specialize in this type of sale. If a home doesn't sell in a 60-90 day period after the price is discounted from the original listing price, it could go back to the bank and be relisted with an auction company or sold off in bulk to much larger investors that have the capital to buy packages upwards of $5 Million.
The bottom line is that one should be very experienced to sensibly buy a home at any type of auction. The market in Southern California is seeing prices that could drop to 50% of their highs of just 2 years ago and in turn buyers are getting properties at 50 cents on the dollar. What's great about all this is that because of the new lower priced homes they will once again be cash flow positive with 20% down fully amortized investments. Buying a bank owned property is a lot less risky than trying to buy at a trustee's sale auction. The process is much faster than a short sale, with negotiations generally complete within a couple of weeks as opposed to the average 6 months a short sale often commands. Bank owned properties are almost always vacant, making it easy to inspect and to estimate what it will take to bring the home into move-in condition.
No matter what type of sale you plan to partake in, it is always a good idea to get a good home inspection of the property at hand. Every buyer should have an exit strategy planned before they even make an offer and having the most information possible will help them make the best decision. All the help you can offer them will only make you, the agent, a very valuable asset to the buyer. Together as a team, you can pool your knowledge, sharpen your buying skills, and find some good diamonds in the rough.