How to Purchase Foreclosure Property

I get a lot of people contacting me through the Internet concerning California foreclosure property. A common question might be like this "I just saw a foreclosed house online that's worth $500,000. It's going to be auctioned in two weeks for $90,000. What's the catch?". Well, there are major catches: that's just the open bid, the lender isn't going to allow it to be sold for that much, and to be buying foreclosure properties at auction you usually need to be able to pay in cash. Many properties at auction will get bid up to 70% to 80% of their market value, and must be paid for in cash. A conventional loan cannot be used. Also, the amount owed to the first lien holder must be paid off during the auction or the property will become an REO (Real Estate Owned by the bank), so don't expect the above mentioned property to go out at anything close to $90,000. Most properties at auction today have more owed against them than anyone is going to bid for in cash. Often they have more owed agaist them than what they are worth. If they had any significant amount of equity, the property won't be on the foreclosure block to begin with. If you want to really get a good deal on foreclosure properties, and/or you need to get a loan to pay for part of the purchase, then you have to target foreclosures in a different way. The best two types of foreclosure properties to go after are listed Short Sales and listed REOs. Stick with properties already listed by agents. This will save you money, save your sanity, save your precious time, and help keep you out of court. Trying to deal directly with people who are losing their homes to foreclosure tends to be DIFFICULT to say the least, and sometimes dangerous both legally and physically.

Let's begin with an overview of the foreclosure process in California. The foreclosure process in California begins when the lender doesn't get their monthly payment on time. The lender will send out a letter advising the borrower that the payment is now overdue and must be received shortly; otherwise the foreclosure process will begin. If the lender still doesn't get the payment, a Notice of Default is sent. This begins a 90-day countdown to the bank being able to advertise the property as foreclosed and set a date for it to be auctioned for cash (or reposessed if no one bids as high as what the bank owes).

Typically, there is only one Notice of Default. This notice means that the borrower has 90 days to pay the balance due, which includes significant extra charges at this point because of late fees, interest charges, and the banks getting their legal departments involved. Every month that goes by, additional charges are added to the total bill for getting the property back out of foreclosure. As you can imagine, the charges add up so quickly that it's hard for most people in financial trouble to get themselves out once the process starts.

It is during this time that you may be able to come in with a Short Sale offer and get the property at a bargain price. A Short Sale is a pre-auction negotiation in which the lender agrees to take less for the property than the total amount of debt owed against it. I have seen lenders negotiate off 20% or even 30% of the debt, which can be a great bargain for the purchaser.

After the lender has gone through the 90-day Notice of Default process, they can advertise the auction of the property, then conduct the actual auction. By law, it must advertised over at least a three-week period and recorded at the courthouse with what is know as a "Notice of Trustee Sale". Foreclosed property that doesn't get high enough bids at the auction becomes bank property and is known as "Real Estate Owned", or simply REO. The lender will often then put the property on the open market and try to get a descent price by having a real estate agent market it.

Lenders generally prefer to get rid of REO properties quickly. Having too many foreclosed properties on hand can cause the government to raise its lending rate to that bank, or place the bank under various kinds of federal scrutiny. This is why REOs can also be wonderful bargains for buyers. REOs listed with real estate agents are often listed to sell at below-market prices, plus the bank may even be willing to go even lower.

So how do you buy a bargain property in this market? Well, the best thing to do is to talk to an experienced agent who works with a lot of these types of properties. In 2007, no other local REMAX agent had more transactions than I did, and many of these were distressed properties. This is one of the best times to buy in the last 30 years. Historically, California housing prices only go up over any extended period of time, and you may be surprised just how much of a loan you can get qualified for. Short Sales and REOs can even get you a property for 20% or even 30% below prevailing market prices. The important thing is that you get into California real estate at some point. If you buy today, five years from now you will probably look back and be amazed at what a bargain you got. I'm happy to answer any questions you may have. Give me a phone call at 805-284-8422, or email me at your convenience.

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