Archive for October 12th, 2007

Orange County Foreclosures

Posted on October 12, 2007. Filed under: First Time Buyer help, Orange County Real Estate |

Hey guys! We read a great article in the OC Register and thought it had such good information we just had to pass along. Here you go & happy reading!!

Buying foreclosures has promise, pitfalls Purchasing such properties requires thorough vetting.  By RICHARD I. RYDSTROM: SPECIAL TO THE ORANGE COUNTY REGISTER     Rising foreclosure rates in Orange County and across California present great buying opportunities for investors, first-time homebuyers and others interested in purchasing real estate at a discount.    Buyers can make a purchase at three stages of the foreclosure process.    First, they can buy properties directly from the homeowner in the “before” stage (called pre-foreclosures). The second opportunity comes at the foreclosure sale or auction. Finally, one can purchase a foreclosed property after the foreclosure sale as an REO, or real estate-owned property. In this case, the seller is the bank or lender that took the property back after foreclosing on the homeowner.    Let’s look at the challenges and opportunities of each stage.    PRE-FORECLOSURE STAGE     The pre-foreclosure stage is the period between the filing of a notice of default by the lender and the foreclosure sale. Great opportunities exist for purchasing properties at 10 percent to 40 percent below market value, but buyers must heed two critical caveats. First, the pre-foreclosure stage is strictly governed by California law, which makes it a crime to buy property from a homeowner in foreclosure unless:    The proper home equity and notice of default purchase agreements are used.    The buyer does not sign any deed or side agreements until the expiration of the cancellation period.    The buyer has a signed notice of cancellation giving the seller until midnight of the fifth business day to cancel the deal.    The second caveat is that there may be liens or judgments against the property. It’s crucial to research the property’s title so contract terms can be written to exclude or negotiate satisfaction of liens and judgments (at deep discounts, usually 50 percent to 90 percent off face value).    Buyer beware! Run a preliminary title report with a title company or search public records at the Orange County Assessors Office.    The pre-foreclosure stage also presents an opportunity to purchase the property at 20 percent to 40 percent off market value as a “short sale,” meaning at a price below the amount due on the mortgage(s).    However, getting the lender to agree to a short sale can require months of negotiations and the submission of a short sale package documenting:    Homeowner hardship. Property/ neighborhood hardship with rebuttal broker price opinion (BPO) appraisals. The BPO is the fair market price established by the lender, which usually differs greatly from the price at which the borrower expects to sell the home. The buyer can rebut the BPO with a local Realtor’s rebuttal BPO, an AVN (automated valuation network) or AVM (automated valuation model) report, or a physical appraisal.    Hardship in the economy. Note that the homeowner may be subject to income tax on the amount of forgiveness of debt or on the amount of the nonpurchase money mortgage (refinanced mortgage) deficiencies. Therefore, buyer and short-seller should negotiate the waiver of the deficiency judgment and/or income tax liability. To avoid lawsuits, disclose these contingencies in writing to the seller.  WALL STREET REOS  Keep an eye on these Wall Street investment banks that will be selling REOs at deep discounts: Bear Stearns Citigroup JP Morgan Chase Merrill Lynch Morgan Stanley Lehman Brothers  AUCTION STAGE  Buying at the foreclosure sale or auction involves bidding against other potential buyers, which usually raises the price. Buyers must pay for the property in full with cash or a cashier’s check. The minimum price is determined by the credit bid, i.e., the minimum amount due to the lender on the loan with associated costs. Again, the watchword is buyer beware as there may be liens or judgments against the property that the successful bidder will inherit. Although it is possible to get these properties for up to 40 percent below market value, competition among bidders may reduce the discount.  REO STAGE  At the REO stage (real estate owned by a financial institution), buyers can purchase the property directly from the lender or its representative (an REO auction service).    The benefit of buying property at this stage is that any liens or judgments will already have been eliminated by the foreclosure sale. Further, as REO inventories grow rapidly, sales and auctions will result in deep discounts ranging from 10 percent to 40 percent below market, with favorable or flexible buying terms.    However, the best-kept secret for REOs is that Wall Street investment banks have been forced to take title to properties they are unprepared to administer, creating direct REO purchase opportunities at deep discounts from 10 percent to 50 percent or more. This opportunity is an anomaly of the recent mortgage meltdown.    DO YOUR HOMEWORK     Don’t get carried away as Orange County’s foreclosure rates continue to rise and the buying frenzy builds. Just because a property is in foreclosure doesn’t mean it’s a good deal. Always thoroughly research the property and the neighborhood to avoid getting stuck with liens, judgments, bad neighbors and other surprises. For added protection, consult with Realtors, attorneys and other professionals.