Should Military Families Consider Purchasing Foreclosures?
By Joe Gladden, Captain, USN (retired), Realtor,
Veteran Realty Serving America’s Military, Inc.
We are frequently asked this question by purchaser clients looking to find the very best value in a home (rightfully so!). We will make an important distinction up front. This article is directed primarily to Military Families looking to purchase a home as their primary resident which is a completely different animal from purchasing investment properties. While they may consider keeping the home after a PCS and converting it to an investment property, the two require a totally different mindset and analysis.
This article will address Foreclosures, Short Sales, and Pre-Foreclosures. Each is defined below.
For our discussion, a Foreclosure is a property that is owned by the lending institution following the legal process after payment default.
Because of the “soft market” in many parts of the country, foreclosures are getting considerable press. We should acknowledge the human cost of a foreclosures as they cause good people a great deal of pain…including some our military families! And if you find yourself in this situation due to PCS orders, we encourage you to help us document this situation on our VR SAM® blog at http://vrsam.blogspot.com/. (Sidebar: We believe Military Families should not suffer great losses or be excluded from the American Dream of homeownership because of their service and are making our best effort to inform policy makers of this unacceptable situation!)
Let’s examine how a bank or lending institution typically deals with a property that comes back to them as a result of a full foreclosure. Government regulations usually require the institution keep in reserve an amount of money equal to the value of the loan against the property. This is money that cannot be freed up for further investment, thus costing the lending institution money. The institution basically does what most homeowners do when they wish to sell a home. They call a Realtor. Generally they have an arrangement with a broker who will list all of the institution’s foreclosures for a reduced rate. The Realtor then places the home in the local Multiple Listing Service and a sign goes up on the property. So, once a property has been through full foreclosure, generally it is marketed like any other property and there really is no “secret handshake” or list to find Foreclosed properties.
Here are five important distinctions that make a Foreclosed Property different than a typical home sale.
1. You are negotiating with an unemotional institution, not an individual. Ultimately the institution will have a bottom line established by the cognizant officer or board. Whether or not the home sells does NOT directly impact an individual or their personal finances! And that bottom line may or may not be below market value!
2. Institutions rely heavily on processes and procedures …which take time. Do not expect the negotiations and decisions to move quickly. As opposed to the conventional negotiations with individual sellers, negotiations will not continue past normal working hours or into weekends. Likewise, expect the institution to impose additional contract requirements such as specific disclosures and addendums that will further encumber the process.
3. Most institutions will list and sell the property “as is.” This term has specific legal meaning and MAY VARY BY STATE LAWS AND TRADITIONS! It may mean that the institution requires the purchaser to sign a disclosure or addendum that precludes negotiations based on a home inspection and / or the traditional pre-settlement walk through inspection! Thus if considering writing a contract on a foreclosure property, you may want to seek permission from the institution to complete the home inspection BEFORE making the contractual offer.
4. Foreclosures are truly a sad event and it is likely that the previous owner would not maintain the property in excellent condition during the process. Some angry owners may in fact inflict intentional damage to the property upon departure. You should also consider that some or all of the utilities may be disconnected. It is even possible that utility meters have been removed which can be quite expensive to reinstate. This can obviously present additional concerns and expenses as water seals in plumbing may dry out, the home may have been without heat and / or air conditioning for a period of time. All of these circumstances can increase your costs!
5. Although it is hard to believe, some states have a “Redemption” law that allows previous owners to “Redeem” their home…EVEN AFTER THE SALE by paying off their debt! EachRedemption State may have different laws. You should do very careful research on this aspect of buying Foreclosures, and consult an attorney, BEFORE you write the contract!!!
Closely related to the Foreclosure is the Short Sale. This occurs when a home owner knows they are in financial trouble and negotiates an agreement with the lender to sell the home for less than they owe, just to get out from under the payments. The terms of the sale (ie. Price) are subject to third party approval by that same unemotional lending institution. If not sold in a specified amount of time, the Short Sale will likely lead to Foreclosure. Generally, the lending institution views this as an alternative to the legal action, and thus expense, of the foreclosure process. They evaluate the loss incurred by a Short Sale compared to the loss / expense of a Foreclosure. The distressed seller may avoid a record of default and / or bankruptcy but will likely suffer an unfavorable credit status. If you are a seller considering this option you should also be aware that this could have significant tax implications as it MAY be viewed as a “forgiven debt” and considered as income…by all means, GET PROFESSIONAL TAX ADVICE!
As in Foreclosure a Short Sale will probably be listed with a Realtor and found in the MLS. In the typical Short Sale case, the purchaser / agent will negotiate with the owner, but the contract still must be approved by the “unemotional” lending institution. Thus, the purchaser must wait for an answer from the seller AND the approval from the institution. It should be obvious that this process can be slow and frustrating.
Pre-foreclosure is a situation in which a home owner is approaching default and / or has been served notice by the lending institution of impending legal action. The notice by the lending institution is generally served on the owner, and then recorded in the local courthouse and in many cases is made public through local newspapers or other local customs.
Everyone has seen the TV infomercials, email promises, etc. of how to get a great deal or get rich by buying distressed properties or Pre-foreclosures. Just pay a few bucks and get the Pre-foreclosure lists and all the secrets to how it’s done. Then sit back and watch the dough roll in!
I am not sure where all of these lists originate but some are undoubtedly compilations from the courthouse records and / or other credit record sources. Generally by the time these lists are published, it is already in full Foreclosure OR purchased by an investor who spends a LOT of time at the courthouse and does this professionally. Seasoned investors will tell you that they may view and evaluate dozens of properties before they find one that makes sense…and that takes time. They will also tell you that they must be aware of, and comply with any state / local laws that exist specifically to ensure that distressed sellers are not exploited.
Pre-foreclosures may or may not be listed in the MLS. The willingness of the seller to negotiate a favorable below market price may depend on many variables to include their realistic view of “market value.”
The VR SAM® conclusion is that most Military Families seeking a primary residence will have better success finding the home, in their time frame, that meets their personal needs (commute, financial, schools, etc.) through conventional means (advertisements, MLS, etc.). Searches focused exclusively on Foreclosures, Short Sales, and Pre-foreclosures will eliminate many eligible homes, may require a significant time investment, and will not necessarily guarantee purchase of a home “below market value.”
Many distressed properties will be advertised through conventional means such as the MLS, print and internet advertisement. If you find one that meets your residence needs AND appears to be a good deal, be prepared for a more encumbered negotiation / contract process if you choose to write a contract on those homes. By all means, seek professional advice from Realtors, Attorneys, and Tax Experts as appropriate.
We hope this helps answer many of the questions about Foreclosures, Short Sales, and Pre-foreclosures. As always, we invite your thoughts, comments, and questions. Thank you for serving!