Buying Distressed Property
Every week there is a headline in the newspaper about the rising number of foreclosures. Every day someone asks me the question, “Are there any great foreclosure deals out there?” During 2009, the average price for all sales as a percent of tax assessed value on Oahu was 95%. For REO, Lender Sales it was 74% and for pre-foreclosures, short sales it was 79%. So, it appears buyers do get a better value by purchasing distressed property. However, there are more factors that need to be considered before moving forward with this type of purchase, for example, the condition of the property and the marketability of title.
Distinctions to know:
Pre-foreclosures are short sales. While post-foreclosures are lender sales, REO(s) or “Real Estate Owned. In Hawaii there are also judicial and non-judicial foreclosures which are subject to auctions.
Short Sales occur when the purchase price presents a deficiency, “short” the amount needed to offset indebtedness. It also includes the cost associated with the sale. All lien holders are asked to release the liability allowing the sale to occur (This requires time to negotiate away all debts.). The sale only happens if the lenders approve the shortages and they feel the process is going to minimize their losses. The good thing, unlike the foreclosure process owner initiates the sale and they are willing participants. As a result the properties are generally in better condition because there is pride of ownership. These transactions typically take 4 to 6 months and they are very labor intensive.
On the other hand Lender Sales are after the foreclosure has occurred. The bank owns the property. The lender usually rehabs the property so that it is in fair condition for the buyer. These sales typically take 45 days. However, it is important to check with an escrow company to confirm ownership has been transferred properly to the lender and they have a marketable title to sell. Otherwise, the sale could get hung up in Land Court indefinitely.
Judicial and Non-Judicial Auctions take place at the court house steps. Judicial foreclosures require a hearing after the auction, allowing a second round of bidding. Non judicial foreclosures allow for the purchase of the property immediately. A cashier’s check for the down payment is submitted moments after the bidding process is completed and the balance of the monies has to be paid within a short period of time (ie 30 days). Judicial and Non Judicial foreclosures do not include the use of real estate agents so it is important for the bidder to do their homework. This includes inspecting the property ahead of time. Ensuring it is free of squatters or tenants and determining if junior liens exist which can transfer with the property. Since these foreclosures include evicting occupants the property condition is usually questionable. Everything from the oven to the kitchen sink may be ripped out and sold by the owners prior to the foreclosure occurring.