Foreclosure market can be tough to buy into

Published 3:24 pm Friday, March 5, 2010

Question: My wife and I made an offer on a home prior to foreclosure and it was declined. Apparently our offer was not enough to pay off all the lien holders. The home is to be auctioned on the court house steps in a few weeks and the amount we offered is the opening bid.

We have read that the home will become what’s called real-estate owned if no one bids on it. Does that mean all lien holders fall away and only the bank remains? Would the bank be more open to our original offer after the auction? Why didn’t the bank counter? What is the process from the bank’s point of view?

We want to buy in this market and get the best deal possible. We still want the home, but do not want to bid on the courthouse steps.

Answer: With foreclosures in this area at record high levels, more and more people are trying to get a steal of a deal by buying a home from a homeowner who is in foreclosure.

But it’s much harder to buy a home in foreclosure at a bargain price than the get-rich-quick guys would have you believe.

As your letter points out, most homes in foreclosure are over-encumbered. That means the homeowners owe more on the house than it is worth. This is a very common problem because the accumulated back loan payments, penalties and accrued interest charges are added to the mortgage loan balance; and there are often second mortgages and other liens on the home. And, of course, home values have dropped dramatically over the past three years. Many homeowners, especially those who purchased during the 2005-07 boom years, were upside down (owing more on their mortgage than their home was worth) even before they went into foreclosure.

That’s why it is very difficult to find a good deal on a home during the 90-day pre-foreclosure period that takes place between the notice of trustee sale and the foreclosure auction at the courthouse.

You might have to look at more than 100 more homes in pre- foreclosure before you found one that had enough equity left to make sense as a buying opportunity.

When a home is sold at auction, the liens are paid off in the order that they are recorded against the property. For example, let’s assume a $300,000 house in foreclosure has a $280,000 first mortgage balance (including late payments, fees and interest), a $20,000 second mortgage balance, and $25,000 in other liens. That’s a total of $325,000 owed on a house that is worth only $300,000.

At the foreclosure auction, the first mortgage lender makes an opening bid equal to what is owed. In the example above, that could be $280,000. If nobody else makes a bid on the house, the lender gets the house and the junior lien holders get nothing. Their liens are wiped off the property records. If somebody bids the price up to $300,000, then the first and second mortgage holders would be paid off, but the last lien holder would be out of luck.

Now, here’s the catch: If you want to go to the foreclosure auction to buy the house for just over the opening bid (assuming no other investors are there to bid against you) you need to bring the full purchase price in cash. There’s no time to run out and get a new mortgage. That’s why only professional investors typically go to foreclosure auctions.

Your best bet is to contact bank officials right before the foreclosure auction and tell them you will buy the house for a little over their minimum bid price if they end up getting the house.

Now keep in mind that bank officials are not going to sell the house far below its fair-market value. They have real-estate-owned departments whose job is to fix up and sell their foreclosed properties and get the maximum value. They typically list the homes for sale with a real estate agent.

You might be able to convince the bank to give you a bit of a discount by arguing that you will save them the time and expense of marketing the home.

But don’t be too disappointed if you miss out on this deal. This is still a buyer’s market with home values back down to 2005 price levels and the number of homes for sale will increase as the weather warms up. There should be plenty of good deals on the market this spring without having to resort to buying a home in foreclosure.

Mail your real estate questions to Steve Tytler, The Herald, P.O. Box, Everett, WA 98206, or e-mail him at economy@heraldnet.com.