The "F" word has unfortunately become part of mainstream vocabulary despite Big Brother’s well intentioned efforts to protect us from its vulgarity. More than midway through the year, BankForeclosureSale reports that foreclosure filings are now in the millions and that July of 2009 had a 32% increase in filings over July of 2008.
For those that have personally gone through foreclosure or know of someone who has, the experience can be undeniably devastating. In fact, the desire to be a homeowner is so strong that many owners facing foreclosure have said that they’d rather die than lose their home.
As sad as this is, we live in a dog eat dog world and there are always those who are ready and willing to capitalize on the misfortune of others. And so, an entire market begins to take shape. It’s impossible to open up the newspaper or your web browser, or even drive down the street without a smack in the face from "Foreclosure Deals Found Here," "REO Opportunities," "Bank Repos" and "Short Sale" advertisements. These ads give off the impression that a vast goldmine of can’t-lose houses exist and that all one has to do is stake a claim at 123 Foreclosure Drive and hit pay dirt.
What the average prospective home buyer fails to realize is that in most cases, they are often looking in the wrong places or getting led down the wrong path. They waste weeks and months submitting offer after offer only to lose out to cash buyers. Most of the absolute rock bottom deals are often picked up by professional investors who have the right connections, the experience and deep enough pockets to pay cash.
Take the short sale market for example. Under the current tax code in California, sellers attempting to short sale (sell their home for less than they currently owe) their homes have nothing to lose by accepting a cash offer that is lower than the sales price and nothing to gain by accepting a higher offer from a first-time buyer with 3.5% down. With short sales, it typically takes the bank(s) months before they approve the offer and set a closing date and by that time a seller could be on the doorstep of foreclosure. So, sellers need the property to close quickly and a cash buyer has the upper hand; no appraisal issues, no TILA waiting periods, no repairs and no loan delays.
A similar story holds true for homes that are sold at trustee sales, the final step before a home reverts back to the bank. This is also known as a foreclosure auction. You’ve heard the stories of investors lined up outside the courthouse with cash or cashier’s checks in hand and it’s very real. It used to be that the minimum bid for a foreclosure was the outstanding balance of the loan. But with so many properties underwater, banks have been setting deficit bids (an opening bid that is less than what is owed on the property) sometimes as much as 50% below what is owed. In this arena, there is no way to arrange conventional financing, there are no guarantees of clear title and often times the buyer is left with the responsibility of evicting the property’s occupants. Not exactly the romantic vision most people have of owning their first home.
So what is left for buyers who are relying on traditional financing to realize their dream of homeownership? Quite frankly, quite a bit. With so many houses going to auction, a lot of them are reverting back to the banks. This happens when there are no bids at the trustee sale and banks have to take them back. The terms of endearment are REOs (Real Estate Owned), bank repos or bank owned. The three terms mean one and the same and typically represent a less-than-cash buyer’s best opportunity to strike gold provided they follow a few basic principles:
1) Find a qualified Realtor®. The Realtors® who are getting their clients’ offers accepted are well connected and keep their ears to the ground. Not only do they have access to the Multiple Listing Service but they stay on top of foreclosure filings and build relationships with REO agents (Realtors who represent the bank as the listing agent) or are sometimes even REO agents themselves. They know their local markets extremely well and often know about deals before they ever hit the multiple listing service
2) Get fully approved in advance. This does not mean simply completing an application over the phone and having a lender obtain a credit report. It means turning in the laundry list of documentation that is required and having the loan "blessed" by an actual underwriter. If a traditional buyer obtaining financing is going to stand a chance of beating out a cash buyer, they need to effectively become cash buyers themselves by having a full loan approval in hand at the time they submit an offer.
3) Work with a mortgage professional that has a CMPS designation. CMPS stands for Certified Mortgage Planning Specialist (www.cmpsintitute.org) and in order to obtain this designation, one must complete extensive training and pass a rigorous exam that measures proficiencies in the following areas:
* Financial Market and Interest Rate Analysis
* Cash Flow and Debt Analysis
* Real Estate Investment Planning
* Mortgage and Real Estate Taxation
* Ethics and Compliance
You can get a mortgage anywhere. It’s the expert advice that makes the difference between success and failure.
It’s a brave new world out there and there is plenty of housing gold for everyone. But just like the miners in the California gold rush of 1848 discovered, if you are looking in the wrong places or aren’t properly guided and equipped, you could very well end up with a huge mound of pyrite.