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Thursday, October 18, 2007

Buying distressed homes...

As I mentioned in an earlier post (see my post of September 13), I’m spending about 50-60% of my time showing bank repo houses to potential buyers. Foreclosures go through at least three stages in Michigan, so I thought it was time to look at them from a buyer’s perspective.

• Pre-Foreclosures

In the pre-foreclosure stage, investors will likely be able to do the most good for the distressed homeowner and for themselves. Pre-foreclosure is where further damage to the home owner's credit rating can be forestalled and the home may be transferred at a mutually-agreed-upon price before it is necessary to get the lender involved. The best potential leads to locate a property at this stage may come from real estate agents, or through business associates and friends. There are local legal newspapers in most communities that list homeowners who are in this early stage of default, but not yet in foreclosure. Word of mouth is also a very viable way to find out about distressed homeowners, especially in a smaller neighborhood or sub.

It’s during this period where the homeowner has fallen behind and may negotiate with the bank to put the foreclosure process on hold temporarily and allow for a “Short-Sale” of the property, where the bank agrees to take less than it is owed, just to get the house sold. Unfortunately, many delinquent homeowners don’t take advantage of that option with their lenders. Many times you will see For Sale By Owner signs pop up during this time, because the sellers think they can sell the house and save the money that they might have to pay a realtor to market it – a big mistake that usually ends in failure. For listed properties, you will see the words “Short Sale” in the listing information. Remember that the bank must approve any offer that you make for the place during this time and the sale could still fall apart if the bank and the delinquent owner cannot agree on what to do about the difference between what you are offering and the amount owed on the house.

• Foreclosure Stage

In the next phase, when a property is at the foreclosure stage, the best way to identify a potential property is through the public records at the County Clerk's office. Find out where the notices of default are filed and determine how to sort through the general index to discover pending foreclosure sales. In Oakland Country, Michigan thee is a paper called the Oakland County Legal News where all official court proceedings are posted – including all foreclosure notices. You can subscribe to that newspaper if you’d like.

The foreclosure process itself will vary from one state to the next, depending on whether it is a title or lien state, which determines whether a judicial or non-judicial form of foreclosure is involved. Judicial foreclosures pertain to mortgages, rather than deeds of trusts, and take significantly longer to complete. Michigan is a judicial state, so expect a longer (6-8 month) process

In Michigan, a Sheriff’s Sale takes place usually after the banks has gone through about 2-3 months of delinquent notices and attempts to get the delinquent homeowner to get caught up. The lender always ends up buying the property back at the Sheriff’s sale and that sale starts a six month redemption period clock running; during which time the delinquent homeowner can “redeem” the house by paying off the amount due and any penalties that have accrued. The foreclosed homeowner is allowed to live in the home for those six months without having to pay anything to the bank. It's during that six months that homes sometimes get damaged by vengeful owners taking out their frustrations.

If you purchase a home in this stage you’ll likely not get a free and clear title to the place, since he original owner still has a redemption claim to the place. You may just receive a Quitclaim Deed from the bank during this period. You will be able to clear that up later, if the redemption period ends without the old owner exercising that claim by paying off the old debt. However, there is a chance (slim as it might be) that the foreclosed homeowner will come up with the money to redeem the house after you have “bought” it and they will have a valid claim to taker it back. You’d be out the house, but you’d get your money back.

• Post-Foreclosure

The last stage is the post-foreclosure stage, where the lender has already taken control of the property. In a worst case scenario the bank had to have the Sheriff evict the old homeowners – a nasty process at best. The home is then in the possession of the lender's REO (Real Estate Owned) department. Banks really don’t want to hold onto these properties for long, since they are a cash drain (even minimal maintenance costs something); so you’ll likely see a dramatic price reduction as the bank dumps the house. Some banks will hold out for 3-6 months at the old pre-foreclosure price before dumping the price to get rid of the house. By this time the house may have been abused by vandals or deteriorated somewhat, if it was abandoned. You will likely get a free and clear title at this stage This is a stage that usually doesn’t last long after the bank has decided to dump the property. I’ve seen banks dump the price and sell the property in 2-3 days; so, you have to be ready to act quickly when you spot one of these “get rid of it” prices. Expect also the full Sgt Schultz routine (see my post of September 22) from the banks at this stage, including no negotiations of any repairs or concessions. This is full panic-mode, get out time for the bank.

In any of these stages, but especially in the last two, it is important to get a good home inspection done, even if you have to pay extra to get the house de-winterized and re-winterized in order to do the inspection. Once the house is unoccupied the banks will likely have all of the utilities cut off and have the house winterized (all water drained from the pipes) to avoid any winter pipe freezing issues. During the winter months it's advisable to take a flashlight with you to any of these homes, so that you can see in the basements as you're going through them. You should also check with the local township or city to see if there are any outstanding bills (water, taxes, special assessments, etc.) that need to be paid on the property and make sure that the bank acknowledges that they are responsible for paying those debts off from their proceeds and not passing them through to you.

Buying a foreclosed house can save you a lot of money; however, it requires a higher level of caution and due diligence in the process than would be the case with a normal house sale. Your Realtor can help with that and can manage the process through for you. My company has created a special Web site just for foreclosed properties - go there to start your search. Once you have found some properties that look promising, give me call and we'll go see them together.

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