So, you want to buy a foreclosure? – Part 1

The reality of today’s real estate market is that there are many foreclosed properties on the market, and such homes sometimes represent a great opportunity for a prospective buyer. Who wouldn’t want to buy a house for 30% or 40% less than it sold for 2-4 years ago? On the surface, practically everyone should jump at such an opportunity. But, let’s take a deeper look to see if a foreclosed home is really the best buy for you. Please consider, the following information is not designed to frighten you away from buying a foreclosure, it is designed to make you a more informed consumer.

First, a few definitions:

Foreclosure -is the legal act of demanding the transfer of ownership of real property to the lender if the borrower is not paying the note as agreed. The process is governed differently in each state, but the result is that the lender gains ownership of the property; in today’s market environment the property is usually a private residence.

Short Sale -is an agreement between the borrower (home owner) and the “bank” (lender) whereby the lender agrees to accept a payoff of the outstanding loan that is less that what is owed the lender. This is usually done to facilitate a previously contracted private sale. The advantage for the lender is simply a question of dollars, will the lender realize a better advantage with a short sale than a foreclosure.

REO or OREO -this means Real Estate Owned or Other Real Estate Owned. The reference is to a financial institution owning non-performing real estate that was acquired through a foreclosure process. Financial institutions generally do not want REO property as such property is a negative on the institutions balance sheet, affecting the institutions ability to borrow and lend money.

All of the above definitions apply to a basket of real estate known as “distressed property”.

Deed in Lieu of – this process is simply a way to give a property to the lender if the owner (borrower) cannot make the payments or sell the property. The term, “in Lieu of” means “instead of “(foreclosure). This is not a popular option today because lenders have stacks of property in their REO departments and do not want any more.

Real Estate Market – A market is a place where things are bought and sold. In real estate, we think of a market as a city, neighborhood, subdivision, or specific geographic area, but the term can also be applied to a state, country or the world as a whole. In practice and function markets are very local, sometimes as small as a city block or a multi-unit building.

Appraisal – the process or technique of determining the value of a thing, in this article, real estate. With regard to residential property, the technique is based on analyzing 3-5 very recent sales of the same type of property in close proximity to the subject property, the subject property being the one you want to buy. Appraisals are examined for accuracy and validity by the loan underwriter, and sometimes are rejected because of perceived flaws in technique.

“Bank”- is a simple way of referring to the many different types of financial institutions that may own and need to dispose of foreclosed property. In some cases, the owner (seller) really is a bank, but it may be any number of other financial institutions.

Asset Manager- A company that acts as a servicing manager for a “Bank”. The asset manager may be involved in any or all parts of a transaction, from securing the property and maintaining that property to negotiating and closing the sale.

Now that we have an idea of just what we are talking about, let us consider you and your desire to “get a good deal”.

Tomorrow: Preparing to Buy

Written by Larry D. McGee, Denver Realtor - Visit Website Sphere: Related Content