by Alison Moss

The Foreclosure Process

Proceed with caution when considering buying a foreclosed home

When a homeowner stops paying their mortgage, the lending bank repossesses the home in a process called Foreclosure. Foreclosed properties are also called REO’s (Real Estate Owned). The foreclosure process is complicated and it takes several months, usually 6 months at a minimum. 

1. If a homeowner does not pay their mortgage for 3-4 months they officially become ‘in default’. The bank records the default status with the local courts.

2. Since most mortgages have what’s called an acceleration clause once the loan goes into default, missing more than 4 payments will generally constitute a loan to be considered in default. Once that acceleration clause goes into effect and the balance of the loan is due immediately.

3.  At this point the bank initiates legal proceedings to foreclose on the property and repossess it.

4. As part of the process the homeowner and the bank attend court hearings where each side can present their case.

5. The local Sheriff serves an eviction notice and removes all of the homeowner’s belongings.

6. The home then goes to a Sheriff’s sale which occurs on different days depending on the county. The property address is published in the newspaper with the sheriff’s sale date on it. The property is auctioned off with the opening bid set at 2/3 of the home’s market value.

7. In most cases, the bank will go to the Sheriff’s sale to make sure that the home is auctioned off at a certain value. If the bids are not high enough, the bank will buy the home back and list it with a real estate agent.

8. Whoever purchases the home at the Sheriff’s sale receives a Sherriff’s deed which removes all of the liens from the property.
 
The Perils of Buying a Foreclosure

I do not recommend that my buyers buy a property at a Sheriff’s Sale for many reasons. One of the primary reasons is because the buyer doesn’t usually have the opportunity to inspect the property before the sale. Homes that sell at Sheriff’s sales are sold as is and there is no opportunity for the buyer to ask for remediation or repairs prior to closing. 

Most properties sold at a Sheriff’s Sale are bought by savvy investors who have experience renovating properties, or the bank buys the property back. If the bank buys back the property it will take several weeks for the deed to be recorded by the county indicating the change of ownership before the bank can relist the property for sale. During these weeks to months, the home sits vacant and does not have any utilities on. This abandonment of the property during the coldest months of the winter or hottest months of the summer takes its toll on the home. 

By the time the bank relists the property with the agent, the home’s condition has worsened and can have roof leaks, mold, holes in the wall & ceiling, in need of new carpet, paint, appliances, water heater, and may have been vandalized. It is important to talk to a real estate agent who can generate a comparable sales report to determine if the home is as good of a deal as you think. Some bank owned homes are not priced that much lower than other consumer owned homes in the neighborhood. So you want to be sure that you don’t get in over your head with the improvements needed to ensure the home is safe for you to live in.

Buying  A Foreclosure From a Bank

The contract process with bank owned homes is similar to the short sale, only the bank’s asset manager and other bank decision makers on this property are the only parties that must sign off. Since the former homeowner is now out of the picture they have no involvement in this transaction. The Cincinnati Area Board of Realtors contract can be used and the buyer does have the protection of financing, inspection, and appraisal contingencies.

Bank owned homes are sold as is. The only delays that usually occur with bank owned properties are if the property is listed before the sheriff’s deed is recorded in the bank’s name, there may be delays in the bank’s ability to close the transaction since they cannot transfer a deed that is in the former homeowner’s name.  If the time between the inspection period and the closing is lengthy be sure to make weekly or bi-weekly trips to the property to be sure that the home hasn’t been vandalized and be sure that you do a final walk through. I sold a bank owned home last year where we had to continually call the property management company to board windows that were being broken by vandals and had a hot water heater and all of the plumbing pipes stolen two days before closing. Since the bank has to deliver the home in the same condition it was in during the initial showing, we delayed the closing while the bank replaced the pipes and the water heater. Also keep in mind that no matter what an inspection turns up you can absolutely make no alterations to a property until after the closing has occurred.

There are many lending restrictions on foreclosure (REO) properties that exist depending on the condition of the home and its true market value once the home is move-in ready. REO’s can be a great investment or a money pit depending on the property. If you are interested in buying a foreclosure or determining if a foreclosure is a good deal for you please feel free to call me or email me with any questions you have.