Foreclosures: Some General Information

Below is basically an email I sent to a client recently.  I thought it might be a relevant blog post.  I hope you find it helpful!  If you have more questions, let me know.

MISSOURI is a non-judicial foreclosure state.  Banks do NOT have to sue to foreclose.  I would think this makes us a better lending climate than judicial foreclosure states.  This DOES, though, mean there is a redemption period for those who have been foreclosed upon, but only if notice of intent to redeem is given within 10 days of the ‘trustee sale,’ which is the foreclosure sale.  Do they ever redeem?  Never say never, but it’s rare.  And by the time things are listed on the market for sale, that period would have passed.  Here’s the MO statute:

NO MATTER WHAT YOU BUY – foreclosure or retail or other — you must get title insurance.  If there are any issues, they will come to the forefront during the time of title examination.  For very dear friends of mine, I had an unusual situation on their Fannie Mae foreclosure purchase.  Before the home was foreclosed on, the previous owners had refinanced their loan.  The closing of that refinance was handled by a title company that was shady, and that title company did not file the release of the lien of that refinanced loan.  That old, refinanced loan was made by some bank that went belly up and was taken over by the FDIC.  Furthermore, that old, unreleased lien was for a greater amount of money than my friends were paying for the house!  As an agent, I could not in good conscience allow them to buy a house where someone could come back and try to collect on that old lien.  Likewise, they were not interested in that, either!  The likelihood of this happening?  Probably pretty slim.  But those are still odds I would not take, and neither would these folks.  The title company would not provide coverage under the title insurance policy that would include this unlikely scenario (title company wanted to leave it as an ‘exception’ to their coverage for the buyer, but they would have covered the lender completely if this happened), and it about drove us all completely mad.  I had help from the title company attorney, and I did a lot of digging myself.  Finally, we got the FDIC to release the old lien.  And everyone was happy.  Title insurance is very important, and it needs to be in good form, too!

MOST FORECLOSURES are sold entirely on an as-is basis.  SOMETIMES we can get the banks to do a little something.  Sometimes Fannie or Freddie might make minor, minor alterations, usually to accommodate inspections or an appraisal.  I have had banks do other minor things, but that has not been for a long, long time.

SOMETHING TO KEEP IN MIND is that if you are getting a loan, an appraisal will be required.  Appraisers make a note as to whether or not the water is on in the home.  If there is no water, some underwriters will reject the deal.  It is often impossible to have the water on for your inspections and appraisals if the current owner (bank/Fannie, etc.) determines the lines won’t hold sufficient pressure, and, therefore, activating the water would cause damage to the home.  This becomes a Catch 22.  Individuals would like to reap the benefits of a lower priced, foreclosed home, but they can’t because of the condition and lender requirements that the water be on at the time of appraisal.  It’s just a head banger, and another fun thing to deal with in real estate!

Foreclosure offers are made on what is known as a “Special Sale Contract,” which has removed the seller’s responsibility for getting a municipal inspection done (if one is required).  It also removes the buyer’s automatic right to do private inspections.  Well, guess what?  We agents got sick of trying to write back into the Special Sale Contract a clause allowing our buyers to inspect, and there is now a rider we include with the contract which puts all of the buyer’s inspection rights back in there.  Inspections are for the buyer’s information only, and the banks/government entities will rarely make repairs, and it is very unlikely there would be a price adjustment based on inspections.  Many banks and the government sponsored entities will require a buyer to use their own form of contract, with some sort of reference being made to the original Special Sale Contract offer.

Government owned/backed loans generally provide an exclusive period for owner/occupant bidders.  If homes don’t sell during that time, then the investors can have at them.  I am sure some investors cheat about owner occupancy, but there are huge fines and threats of loss of license, so a reputable agent will not play around with that at all.

Foreclosure listings generally will not accept a contract that is contingent upon selling the buyer’s home.

For some listings, banks will put in carpet and paint, etc., before listing them.  This is smart, but this oftentimes leaves them unwilling to negotiate much on the price at the beginning of the marketing period.

Mainly, if you are looking for a foreclosed property, you need to know that the sale will be AS IS; you can still do inspections and exit the contract if you don’t like the results (no price renegotiations); the water needs to be on if you are getting a loan; and title work should be ordered as soon as practicable in case there are any issues, including old stuff out there that will need to be cleared from title for a buyer’s protection.

There are weird things that crop up.  In this business you try to anticipate issues, but some you can’t even dream would be possible.

Many times, though, a foreclosure purchase is just as smooth as a retail one.  You just never know.  You should be prepared for a more difficult transaction, and then be grateful if it turns out not to be so.  And hopefully, at the end of the day, you’ll have exchanged a little elbow grease for equity, and will have a new happy home!

Did you read all that?  Smile




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