It’s been nearly a decade since the beginning of the last recession, the mortgage banking crisis, and the big market for bank-owned properties or REOs (real estate owned). During the last decade, bank owned properties created some of the best deals for real estate investors. While some of these investors are complaining about the difficulty in buying REOs in today’s market it is still possible to make good investments in bank owned properties if you know exactly what to do.
The Myrtle Beach real estate market appears to be firing on all cylinders at the moment. The Trembley Group Real Estate Blog has discussed the thin housing inventory, the short times from listing to offer, offers close to asking price, and sometimes even multiple offers for more than asking price. It is indeed a seller’s market. Everything is headed in the right direction.
Does that mean that the market for distressed properties has dried up? The answer …
… is “no”. While the number of foreclosures in South Carolina is down, it is still ranked eighth nationally in the number of foreclosures on the market. While the market for distressed properties is slim in many areas, foreclosure is a long process, sometimes taking more than two years. Many foreclosures are just now working their way through the system in South Carolina.
When dealing with bank-owned real estate, it’s important to know the language.
Pre-foreclosure is the period between the point in time the lender files a foreclosure notice of default in the public records and the date the property is to be sold at public auction.
The average time it takes to foreclose on a property varies widely by state.
In South Carolina, the lender must go to court in what is called a judicial foreclosure proceeding and the process generally takes from 150 days to 180 months.
This is the legal proceeding in which a lender obtains a court ordered termination of an individual’s right of redemption.
Usually a lender obtains a security interest from a borrower who mortgages or pledges an asset like a house to secure the loan. If the borrower defaults and the lender tries to repossess the property, courts of equity can grant the borrower the equitable right of redemption if the borrower repays the debt. While this equitable right exists, the lender cannot be sure that it can successfully repossess the property, thus the lender seeks to foreclose the equitable right of redemption. The property is then typically put up for auction on the courthouse steps.
Potential Short Sale
Sometimes the mortgage servicer might allow the borrower to list and sell the mortgaged property with the understanding that the net proceeds from the sale may be less than the total amount due on the mortgage. The short sale must be an arm’s length transaction with the net sale proceeds (after deductions for reasonable and customary selling costs) being applied to a discounted (“short”) mortgage payoff acceptable to a servicer. The servicer agrees to accept the short payoff as full satisfaction of the total amount due on the first mortgage.
Lender Approved Short Sale
Once the loan servicer determines a mortgage is eligible for a short sale, the servicer determines the minimum acceptable net proceeds (minimum net) that the investor will accept from the transaction. The lender will notify the seller of the “approved” short sale where a pre-determined sales price has been identified and sold at that price point.
A short sale occurs when there is more debt on a home than the property itself is worth.
If the property owner is considered to have substantial hardship that the debt cannot be repaid in full, the lender will agree to take less than the debt amount and forgive the borrower without foreclosure proceedings.
Regardless of all the potential pitfalls, there are still opportunities to be had if the process is fully understood. Lori Beatty recently joined The Trembley Group Real Estate as a new sales executive. Like all the sales executives at The Trembley Group, Lori is committed to helping her clients find their future by listing and selling their houses or finding “the perfect house” for home buyers. Lori is also an expert in evaluating distressed properties. For 16 years, Lori was a partner in a company that evaluated, maintained, and remodeled distressed properties for lending institutions.
Real estate owned or REO is a term used to describe a class of property owned by a lender – usually a bank, government agency, or government loan insurer – after an unsuccessful foreclosure auction where the property fails to sell to an independent third party.
This type of property is taken back by lenders during foreclosure. Banks frequently negotiate low-interest rates and low down payments on properties they own. REOs can be found through the online service RealtyTrac, directly through lenders, or through knowledgeable and experienced Realtors like The Trembley Group. Large national lending institutions have departments called loss mitigation departments, that sell these properties.
Lori says many purchasers of distressed properties underestimate the importance of using a Realtor. “Basically, a real estate agent represents the purchaser and locates the property,” Lori says. “They write the offer using a regular purchase agreement as they would use in any other transaction. Once the lender accepts, they will forward their addendum/counter offer. It is really important to read the addendum very carefully because they are very one sided. Bank addendums are NOT buyer friendly. And although they are non-negotiable, it’s still a good idea to understand the terms.”
Banks are all about money – they want the most profit possible. The bank’s Realtor will do a Broker Price Opinion (BPO) and even an appraisal to find out what the property is worth before putting it on the market.
A good buyer’s Realtor will be familiar with the local market and do comps prior to submitting an offer.
“It’s also important to remember that the house is being bought ‘As Is’,” Lori continues. “If the former owner couldn’t afford to keep the mortgage current then they certainly didn’t spend anything on maintenance.” A Realtor experienced with REOs will know the danger signs to look for. Usually, there are no negotiations. An offer is submitted and the lender either accepts or declines. Foreclosures can take almost 9 months for a closing.
The Five-step Process
Lori Beatty says successfully purchasing a bank-owned REO is essentially a five step process:
Most foreclosure properties are usually referred as “distressed” properties. Bank-owned foreclosure homes are usually sold “as is,” which means that the 15 percent discount just saved on the purchase price can easily be eaten up by unforeseen expenses like repairs. Many owners of homes that go into foreclosure have been struggling financially, which usually means that the house has not received needed repairs or general maintenance for a while. Some homeowners who lose their property to a lender, damage the property in anger. An REO buyer needs to be prepared to do renovations and repairs. Hiring a licensed home inspector to give a written estimate of repairs is always a good idea. The estimate can be budgeted into the purchase price and used in negotiation with the bank to reduce the asking price.
Once a home has been located, the public records should be searched for liens and outstanding taxes. A preliminary title check can be done on RealtyTrac and a title company should do a full, insured title search before closing. Liens on the property can drive up the purchase price. Common liens typically found on a property are unpaid loans using the property as collateral, delinquent taxes, or unpaid contractors (mechanics liens). These liens remain intact until the money is paid, which means a purchaser must pay off the liens on the foreclosed property for a clear title. Banks should clear the title before selling but a buyer should never assume this is the case.
Investors should be prepared to negotiate a lower down payment, a lower interest rate, a reduction in closing costs and a lower asking price. Many lenders may be willing to waive some closing costs, maybe even offer a break on the interest rate or the down payment. Moreover, sometimes lenders offer to finance the property at a below-market rate or with a lower-than-usual closing cost and down payment. An experienced Realtor can guide an REO purchaser to obtain a better price and more favorable terms.
Although most banks want to unload their foreclosed properties, they won’t necessarily do so cheaply. Buyers aren’t guaranteed a fabulous price. But it is important to remember that the bank is an eager seller. Even though the bank’s REO manager or their listing agent might suggest that a list price is “firm,” it may be possible negotiate the price, especially if the foreclosed bank-owned home needs repairs. If submitting a low offer, it’s important to substantiate the reduced price and document the case. It is a good idea to furnish photographs and cost estimates for repairs to support an offer.
With good credit, many banks will loan the full price of the foreclosure or more. If the home is to be used as a rental, many banks will require only a 10 percent down payment. Foreclosure investors with a large amount of equity in another home may get a line of credit from their bank to purchase a foreclosure. When they convert the line of credit to a mortgage, the bank may not require a down payment.
If a real estate buyer decides to take the REO route, it is vital that they work with a Realtor experience in this type of sale. The foreclosure process has strict guidelines that require multiple components to any offer. If one of the components is missing, the offer will not even be considered.
An experienced agent can prepare an offer that will at least be considered. Many REOs are exceptional bargains with exceptional values. Bidding wars for REOs are frequent so an experienced and reliable agent representing the buyer’s best interests can be a vital part of the process. Anyone interested in exploring REOs in Myrtle Beach or anywhere along the Grand Strand can give Lori Beatty a call at 843.231.1071.
For more information contact: Lori Beatty, Sales Executive & Realtor, LBeatty.TheTrembleyGroup.com, 843.231.1071
Need help? Call The Trembley Group at 843.945.1880 ext. 100 and we’ll help you look for the perfect listing or buyers agent!
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