The expression “buying a foreclosure” is a bit misleading because you can’t buy a foreclosure. Do you mean a bank owned home? A home that is going through a foreclosure process? A short sale? A home that is part of a bankruptcy? Regardless of which process you are referring to, you are most likely talking about a distressed home.
There are many ways a home, or rather a homeowner, comes under distress. Here are a few common situations:
- The homeowner has to sell the home and can’t recoup all costs of the sale.
- Repairs on the home have become prohibitive and the home owner can’t pay for the repairs. This happens many times with structural repairs that can easily reach $20,000 to $30,000.
- A homeowner can’t repay a debt that was secured with the home.
- An estate is beyond repair and is being auctioned off.
- Home owners can’t pay the newly increased taxes.
There were over 500 distressed properties in Colorado Springs during the height of the last recession around 2010. As of May 2019, there are 9 distressed properties. Significant home value increases and an abundance of eager buyers have caused Colorado Springs homes to sell at record prices. This has made short sales unnecessary in most cases. This trend has also reduced the number of home flippers in the field. Only the very diligent, well-funded and creative flippers are able to snap up properties. Buy and hold investors and short-term rental owners have replaced the typical flipper for now.
What are the different types of distressed properties?
A home in distress is when the home owner is not able to complete their financial obligations in some way, and therefore the home has to be sold in order to satisfy creditors.
Many folks became familiar with the term “short sale” after the last financial crisis. A short sale is the sale of a home where the lender is willing to accept less than the amount still owed on the property.
This can happen when a home is purchased at a premium (as many home buyers do in our current market) and then the owners are forced to sell the home due to unforeseen circumstances. The owners are unable to recoup the sales fees and loan debt. That’s why buying a home without a down payment can be dangerous and needs careful consideration.
For example, let’s imagine in the near future you changed jobs and it required a move to a new location. What if the real estate market at this time wouldn’t favor a sales price that covers all of the sales fees and your loan? Would you be able to hold on to the property until the market recovered? If not, it’s worth thinking about saving more before you make the commitment to purchase a home. Or research rental rates to see if you can pay your home loan if you have to rent it out. Keep in mind that you only have a loss (or gain) once you sell your home, so being in a position where you can hold on to your real estate for a longer period is important.
Related Reading: Home Buying Mistakes
Lenders will immediately reach out to homeowners once a mortgage payment is missed. Some lenders might offer a restructuring of the loan, while others will start foreclosure proceedings immediately. In Colorado, a Deed of Trust is recorded in which the buyer has pre-signed a Power of Sale clause that enables the lender to proceed with the foreclosure process without going through the judicial process.
There are homes that will be listed by real estate agents and do not start out as a short sale. They turn into a short sale if the incoming offer(s) do not net enough proceeds to cover all costs of the sale and the loan. Short sales are clearly indicated in the MLS. The public auction appointment will usually be postponed when an offer has been received and accepted by the seller and subsequently by the bank/mortgagor.
Public Auction at the County Public Trustees office
Some states have a different, drawn out process for a foreclosure, but Colorado’s process can be fairly swift. Once the Notice of Election and Demand (NED) is filed, the process is started and the property will show up on the El Paso Public Trustee website. You can sign up with the trustee office to receive weekly notifications of properties scheduled to be auctioned off that week. Potential buyers do not get an opportunity to enter the home and see the inside of the properties. You’ll have to do some swift research on the property because it’s yours as soon as you purchase it (for the most part – I’ll explain later).
On the day of auction, you must register as a bidder at the trustee’s office and then proceed to the auctioning room. Cash or certified funds for the full amount of the bid must be tendered to the Public Trustee at the time of sale. Once you have paid and the redemption period has passed, a Certificate of Purchase will be issued by the Public Trustee and recorded at the office of the El Paso County Clerk & Recorder
Even though banks have a deed of trust recorded and are owed the amount that they loaned (with plenty of fees), they actually have to offer on the property that they financed. The bank is the winner with their minimum bid if there are no higher bids.
Bank Owned Properties
When a bank receives a home back in lieu of foreclosure, it means the property owners decided to return their home to the bank instead of paying off the mortgage. Needless to say, the homeowner’s credit will be damaged.
The banks have established websites and contractors who will assist in the sales of such properties. Not all properties are sold, and it remains a mystery as to what determines the bank’s decision to sell or keep a bank owned property.
Related Reading: Home Buyer Frequently Asked Questions
Where can I find distressed homes?
- Local Trustee Website
You can go directly to the El Paso County Trustees website and look for all the homes for which a Notice of Election and Demand has been filed. You’ll see when homes are scheduled for auction.
- Local MLS
As described earlier, not all distressed homes are initially listed as such. That can happen as the sales process continues and it is revealed that the debt cannot be repaid from the proceeds of the home sale. Contact us and we’ll be happy to set you up with listing notifications of these properties
- Online Auctions
Some lenders will auction off homes or land. Auctions are generally a quicker and potentially cheaper way for lenders to sell a home. They might only have the home listed on a website, or they may choose to also list the auctioned home on the MLS (Multiple Listing Service) to attract more buyers.
Be cautious if you’re planning to buy a home via online auction. Read all of the fine print and familiarize yourself with the process. You can hire a real estate to represent you, but you are basically still on your own. Make sure you understand if an agent is being paid by the site and which fees you are responsible for. Sometimes the buyer has to pay a buyer’s fee after the auction. You will definitely want to add the buyer’s fee into your buying cost and calculate it into the price offer.
Listings for Fannie Mae guaranteed properties. These are also simultaneously listed in the MLS.
Listings of foreclosed homes previously secured by an FHA loan. Simultaneously listed in the MLS.
VA owned properties, including VA Vendee. Simultaneously listed in the MLS.
Related Reading: Seller Financing via the VA Call us for a list of participating lenders 719-321-0800
Note, at times the website and the MLS are not synched, meaning you might be able to find a home on the official websites but not on the MLS or vice versa.
- Ideally, the earlier a buyer/investor can find a distressed or possibly distressed home the better it is for both parties.
- Distressed homes have become fairly rare (thank goodness). If you find a listing on the MLS you will have to compete with other buyers.
- The HUD home store and Homepath have put time limits on their listings for investor offers. Owner occupants are preferred over a fix and flipper.
- Be aware that when offering on a short sale you cannot be in a time crunch. It could take anywhere from 3 to 9+ months for a short sale to be accepted by the lender. This mostly depends on how much of the short sale process has been completed.
- Expect a “hurry up and wait” attitude.
- The money you save by buying a distressed home may exceed the money you’ll need to repair it. Careful calculations are in order.
- The bank will have their own contracts and addenda.
- You will have a new timeline and requirements to fulfill.
- You are able to inspect the home and terminate the contract, but you are basically buying the home “As Is.”
- Have an experienced real estate pro by your side to guide you through this process.