Newbie advice on a specific pre-foreclosure

Foreclosures, Short Sales, Tax Foreclosures
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APOLOGIES FOR THE LENGTH, BUT WANTED TO INCLUDE ALL RELEVANT DETAILS.

Hi, I posted earlier about deficiency judgments - a separate issue and thanks for the feedback there Judd!

I’m now looking for some advice about how to move forward. I am considering making an offer on a pre-foreclosure property for it to be my family home (ie. not just an investment). It’s going to have to be a short sale, though, I don’t think it’s worth what is owed. They bought it for $500,000 2 years ago, and have 2 mortgages on it - $400 and $100. Property market has weakened since then - prices starting to fall a bit, but not collapse. The house seems to be structurally sound (10 yrs old), but needs complete repaint, all carpets replaced, and a few other minor works. Hopefully, I am right - getting it inspected tomorrow to confirm.

The primary lender is foreclosing. They sent the owners a letter saying the property would be auctioned last Wednesday (I only found out a couple of days beforehand), but then sent another saying they had til 9/13 to make the payments. I couldn’t find any evidence of the auction, so it seems the bank unilaterally decided to give them a bit more time (it makes no difference to them though). The owners are represented by a realtor who is a bit of a shady character - wanted me to pay him for information about the auction (info he never had). The house has been on the market 3 months (1st 598, then 548) and he’s done practically nothing to market it. But they say we have to deal with him.

My questions are:

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Given that we are novices, and given the shady realtor, is it worth hiring an agent experienced in this kind of thing to hold our hands? We could really do without the expense (presumably we’ll still have to hire an attorney anyway), but if it’s essential, it’s essential. If it’s not…

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We were originally thinking of a slightly higher offer, but now we’re thinking that if we offer $410,000 to the primary lender they will buy in (the deposit on the auction that never was was $41,000 @10%, so presumably there are arrears/fees in addition to principal). Then we would hope that a nominal offer (couple of $k) to the 2nd lender will swing the deal. At the same time, though, a BPO could yield a significantly higher value (depending on how (in)sensitive the B is to the cosmetic condition and the direction of the market right now). I’ve read that the BPO is crucial in whether the lenders decide to go to auction, but in this case, with the secondary lender losing out rather than the primary, is it still the case?

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Should we do a title search before making the offer, or can we make it contingent on satisfactory title?

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Say we reach an agreement with the banks on a short sale - then what happens with the owners? What if they don’t want to leave the house? Would we have to evict them (a situation I would REALLY want to avoid)? What if they decide to trash the place? I don’t think these scenarios are likely, they’re good people, but difficult circumstances make people unpredictable.

Feedback SERIOUSLY appreciated!

dri

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First, decide whether this purchase is a home or investment, not both. Rule # 1 in investing, have an exit strategy. If it is to be your home your exit is different than an investment property, thus, buying with emotion (neighbors, nearby parks, the directly the drive-way points, Feng Shui malarkey, etc. - you know, all the fluffy stuff) and/or lower profit margin, is allowed. If it is an investment, let the numbers do the walking.

Second, find out the true timing of this transaction. No sense in spinning your wheels if you don’t have enough time to save the deal.

Regarding the realtor: I would report the realtor if you have some proof of them trying to charge you for the information. If it is “he said, she said”, forget it and move on. While it may not be illegal, the realtor is giving perception of impropriety, and the broker may not appreciate that. If the realtor is the broker, go to the board of realtors in your area. Bad realtors just bring down all the good ones, and we all know the good ones are few and far between :stuck_out_tongue:

Go around the realtor and track down the owner. If the realtor has a bullet-proof listing agreement with the HO, no worries - just pay the realtor their commission after you get the short sale negotiated down to $400k or whatever it ends up to be.

If you end up using a buyer’s agent, make sure they are experienced with shorts.

Try to find good comps for this. In another post, you asked about my distressed comps remark. Yes, I mean try to find data on other like houses that went to foreclosure or at least a distress sale situation. There is a big difference between a distressed comparable sale vs. a retail comparable sale. Finding true comps will help you influence the BPO to your advantage. Find true comps will possibly help you show the second lien-holder that they will get squat at auction. Cosmetic issues affect value, no matter what anyone says. I would get a contractor’s estimate for every item needed to bring the property up to the right condition. Remember that, it is very likely that the person assigned to do the BPO is probably a junior realtor, getting paid $75. The more homework you can do for that realtor, the more chance you have to influence the BPO.

I wouldn’t waste the time on a title search just yet, not until you have somewhat of an idea whether your offer price is even in the ball-park. Also, your contract should already prescribe the transfer of clear title.

Evict or not evict: you are buying the house from the home-owner, not the lender. The lender is only giving the approval to “short” the pay-off. Your purchase contract should spell out when occupancy transfers. If they don’t leave by the certain date, they are trespassing on your property so call the police. No eviction necessary. If they trash your house after the closing, file a police report and/or go talk to an attorney. Not much more you can do, other than make sure than occupancy is conveyed at the same time as the closing.

I hope this helps. I am getting a headache from typing so much. Gotta go beat up some loss mit reps. ;D Post back if you need more help.

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tborkt, seriously useful info, can’t thank you enough!

I do have one more question ;): you say i’m buying from the HO. In theory, yes, but in fact the banks decide, and I also understand that if they accept a deal then the remainder owed by the HO is wiped out. (HOs certainly feel it’s out of their hands, and dont care much.) Q is, are they, and am I right in believing that they will come out of a SS debt-free (apart from utilities and tax on the write-down)?

Also, any hints on how I can find other distressed comps?

On the other stuff, the agent = broker = boss in small office specializing in foreclosures. Wish I could report him (already suspended indefinitely as an attorney), but unfortunately no proof of him requesting $$ - it was a tel conversation.

It’s definitely a home purchase rather than an investment, but at the same time we’re in a situation where we can’t afford negative equity in the future (prices are beginning to fall) as we might be transferred overseas and need to sell, so have to get a good deal!

Thanks again for your help!

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No problem. Glad to help.

You are buying from the HO, in law, not theory. Your purchase contract is with the homeowner, not the lender. No doubt that the lender plays a huge role, but technically and legally, you are buying from the HO. The lender is merely allowing the HO to receive a lower payoff than what they actually owe, thus enabling you to receive clear title to the house when the sale goes through. The HO could techncially sell you the house for $1 and you could go transfer the deed into your name tomorrow if you wanted. However, the title is "clouded’ by the fact that there is a mortgage collateralizing the IOU (promisorry note signed by the HO to pay back $X amount). While this may be mere semantics in your situation, it could be an important distinction in the future on other deals.

Regarding whether the “deficiency” amount is wiped out… that is up to the lender, and what they will accept. There are many variables that play into the decision of what the lender will or will not accept. However, remember that the lender may say no to a short sale unless the HO takes back a note (a new IOU) for the amount of the deficiency or some portion thereof. This new note would of course be unsecured. So, whether the HO skates debt-free depends on many variables. Examples of when this could happen are: brand new mortgage that defaults within the first few months, or lender does not believe the HO has a true hardship. Both scenarios definitely do happen.

Suggestions on finding distressed comps:

  • be-friend a realtor or appraiser and see if they will let you use their MLS access
  • court house
  • in my area, there is a legal newspaper that publishes every court proceeding in the county - foreclosures, divorces, probates, small claims, common pleas, everything. Subscribing to the legal newspaper also gives me web access to their on-line search function. Using this, I can search previous foreclosures. If you don’t have a legal newspaper in your area, see if there is a private party doing this leg-work and selling on-line subscription-based access to this info. I know a guy that does this in his surrounding 3 counties, and makes $10k/month. Decent money for driving to 3 court houses everyday, and publishing the info at night on his web site for his subscribers.