How to buy a foreclosed home

by Dan Krell © 2007
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With changes in the market, we have seen an increase in the amount of bank owned homes on the market. What’s happening? Foreclosure rates for the entire country are up over forty percent since last year (MSN real estate). However, in the Bethesda-Rockville area the foreclosure rate only increased above four percent and decreased in the Baltimore area. If you live in Northern Virginia, the foreclosure rate increased over fifty percent since last year.

Putting the numbers in perspective, although the numbers seem high for our area, the home owner behavior relatively the same. The difference is that those who are in trouble do not have the parachute of the expanding real estate market.

In the last few years, when a home owner fell behind in their mortgage payments it was almost assured they would be able to sell the home quickly and realize a net gain in their sale. If they were not able to sell and the home went to auction, hungry home buyers and eager speculators were ready to purchase sight unseen.

Boy has the time changed! First of all, many home owners who are in trouble with their mortgage are not in the position to sell as the home value is less than what they may have purchased the home for. Additionally, if they have some exotic mortgage, there is a good chance that the interest has eaten into any equity they may have had, in addition to late fees as well as attorney fees (the mortgage company will charge the defaulting home owner for the cost of foreclosing).

If you have fallen behind in your mortgage recently, you know that banks are becoming more difficult to deal with. I have heard stories from home owners who have been told by a bank representative that because there is equity in the home, the bank is looking to foreclose and resell at a profit. Have the banks become greedy?

No. The banks are the same way they have always been, looking for ways to make money. What has changed is real estate market and technology.

A year ago, a bank owned home on the MLS was almost non existent in the Montgomery County area. Today, there are over 25 active bank owned homes on the market just in Montgomery County. Among the listings are a couple of good buys.

Bank owned homes used to be priced for quick sales. Today, bank owned homes are priced at full retail prices, even though the condition is less than perfect. Additionally, the banks may not entertain a lower offer until the home has been on the market for a while.

Technology has been a driving force in the real estate industry for over a decade. As technology changes and gets better, the valuation models the banks use will also get better. Presently, I believe the banks and REO disposition companies have fallen behind in the curve such that the valuations they are using are skewed to because of higher home prices from last year.

As the market stabilizes, we will see an increase of bank owned homes for sale. Eventually, bank owned home prices will also find their mark as market conditions and home condition are taken into account. If you are in the market for a bank owned home, talk to your Realtor and keep an eye on the bank owned inventory.

This column is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of 2/19/2007. 2007 © Dan Krell.

There are options if you are in Foreclosure

by Dan Krell © 2005
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Popular culture has a way of taking an item or an event and making it over simplified for the lay folk so as the item or event becomes a trite expression of a generation or decade. You can spot this happening when certain new buzzwords fly about the air. The event or item becomes trendy and ingrained in the psyche, then eventually becomes passe. This has become the case of trying to buy a pre-foreclosure. A pre-foreclosure is when the homeowner still owns the property, most likely is still living in the home and is facing a sure loss of their hard earned money and home.

As a Realtor, it used to be pretty common for a buyer to say, “Oh, and I am interested in buying a foreclosure,” at the end of the first meeting. Lately, it has become trendy for buyers to assert that they are looking for a pre-foreclosure because it is believed that the home is still in good condition. The main reason for these assertions is that buyers believe they are getting a great bargain. Unfortunately, it is far from the truth. Most people, who buy a foreclosed home, pay a premium because the market is very strong. Even when the home is distressed, the buyer will pay top dollar for a home is a particular neighborhood, knowing that they will have spend another $50,000 to $100,000 to fix the home. Certainly a pre-foreclosure will sell for market value.

The unfortunate player in this scenario is the original homeowner who faced a hardship or two and fell behind on their mortgage payments. Many people facing late payments or foreclosure usually lack information of where to get help. The U. S. Department of Housing and Urban Development (HUD) recommends that the first thing the homeowner should do is to call their lender if they are falling behind on their mortgage payments, or they know they will have problems making the mortgage payment. By calling the lender and explaining the situation, the lender will usually provide options to help the homeowner through the hardship. HUD also highly recommends that the homeowner call a HUD-approved housing counseling agency to assist. Information on the housing counseling agencies is available on the HUD website www.hud.gov.

According to BankRate.com, lenders want to help the borrower as much as possible. The last thing the lender wants is to spend thousands on legal fees to foreclose on a property then have to sell it. Some of the options that lenders extend to delinquent homeowners include a forbearance and mortgage modification. These provisions are usually more prevalent with FHA and VA backed mortgages, however, they are also offered for conventional mortgages as well. A forbearance is a special repayment plan where the lender arranges payments such that it will allow the homeowner to make mortgage payments after the financial crisis. Usually this is a fix for a short-term financial crisis.

If the homeowner is seriously behind on your mortgage, the lender can modify the mortgage. A modification is when mortgage payments that have not been paid are added to the principal of the existing mortgage. This allows the homeowner to essentially catch up and get back on track.

Recently, it has become common to see many pre-foreclosure sales. This when the owner has fallen behind in their mortgage payments or is even in the foreclosure process and sells the home on their own or through a Realtor. In most cases, this may be the last resort for the homeowner because they cannot pay the mortgage even with the modifications. Although the homeowner cannot keep the home, this is usually a good arrangement because the homeowner can pay off the mortgage and get the equity out of the home to apply it towards the purchase of a smaller and more affordable home.
If you or someone you know has the misfortune of falling behind on the mortgage, talk to the lender, they want to help.

This column is not intended to provide nor should it be relied upon for legal and financial advice. This column was originally published in the Montgomery County Sentinel 3/28/2005.
Copyright Dan Krell 2005.