Foreclosure Inventories—Preforeclosure inventory is an estimate of the number of properties that have had a Notice of Default filed against the property, but have not yet been Scheduled for Sale. The Scheduled for Sale inventory indicates those properties that have had a Notice of Trustee Sale filed, but have not yet been sold or had the sale cancelled. The Bank Owned (REO) inventory indicates the number of properties that have been sold Back to the Bank at the trustee sale, and which the bank has not yet resold to another party.

NUMBER 1:  You will be exposed to certain risks as a Buyer that you probably would not need to be concerned about with a regular purchase.

• You will not get a seller’s disclosure. The Bank has never lived in the home, and is not held legally responsible for knowing about problems with the home.
• If the Bank accepts your offer, you may have to wait several days or even weeks for the Bank to sign the contract. And while you’re waiting, your lender may not even start working on your loan until it receives a signed contract.
• The Bank may require you to perform your inspections quickly, giving you only a short amount of time to evaluate the property. Also, the Bank may only give you 30 to 45 days to close the transaction, but if you are late they may charge you a penalty fee of $50 up to $200 a day or more until you close.

When homeowners lose their jobs, many can no longer make mortgage payments and end up losing their homes.  Even homeowners who remain employed however, have seen the market value of their homes decline drastically, often to the point where their homes are worth less than what they owe on them.  However, the percentage of “upside down” home owners is gradually decreasing nationally, to about 21.5% of all U.S. homeowners.  Numbers for Jackson and Josephine Counties were not available for comparison.

Notices of Default have held pretty steady in Jackson County, with about two hundred notices going out every month this year.  However, even though the number of homes entering the Foreclosure process is not increasing, it looks like Banks are getting more aggressive in most of the U.S.  in actually foreclosing on homeowners who have received notices of default. 

When homes are foreclosed on they are generally offered for sale at auction at the local county courthouses or lienholders’ offices, but most foreclosed homes do not sell at these auctions for a variety of reasons.  After these failed auctions, Banks hold these properties on their books until they decide to engage local realtors to list and sell these REO (real estate owned) properties for them. In Jackson County, REO properties are selling for a median price of $135,000, compared to a $200,000 median price for normal “non-distressed” home sales. For the first six months of 2010, an average of 54 REO homes were sold each month (about 35% of all existing home sales).  However, in the last three months that number has declined slightly to about 48 REO homes sold each month and only 27% of all existing home sales.

So, although foreclosure sales have declined locally, we still have a significant unemployment problem, and notices of default have not declined noticeably, so it looks like the foreclosure problem will be with us for a while.  The good news is that some jobs have come back, housing price declines appear to be slowing, and fewer homeowners are upside-down in their mortgages, all increasing the likelihood of recovery in the local economy and real estate market.

You may have more risk than you would in a regular real estate transaction, but there are no delinquent taxes, no liens and no tenants to evict!  Because REOs are somewhat similar to regular sales they can be pretty safe, however there are at least 12 important differences in buying an REO, compared to a regular sale!  Here are differences #7 through #12.

7. Bank Strategies in Accepting an Offer

• If an REO property is new to the market, the Bank may not make a decision on any offers for at least 5 days, in order to give the property fair exposure and allow time for other offers to come in.
• If there are multiple offers, many Banks will counter with a request for the Buyers’ “best and final” offers.
• From all of the “best and final” offers that are submitted to the Bank, it will choose the one that has the best combination of price and terms.
• The Bank may respond to the “best and final” offer with its own counter-offer, for price or terms changes or both.
• If the first offer cannot be successfully negotiated, then the Bank may counter the next best offer.

8. How to Get Your REO Offer Accepted:

Banks look for offers that are close to asking price and have a high probability of closing. In short, that means the Buyer should have secure financing and not ask for too many conditions to be met by the Bank for acceptance of the offer.  Following are some guidelines for making a strong offer, regardless of whether there are other offers on the property.

• Work with an Agent who is experienced with Foreclosure Sales
• Figure out how much the Property is worth in today’s market. Just because it’s a foreclosure doesn’t mean it’s a good deal. Also, if you’re competing against other Buyers, you don’t want to get caught up in the competition and offer more than the home is worth.  Ask your agent to perform a comparative market analysis (CMA) of the property.  Then estimate the cost of repairs or renovations you will need to do and add that to the asking price.
• If there are no other offers on the REO home, you can probably offer less than list price and get your offer accepted. However, if there are more than two offers, you will most likely need to offer above the asking price.
• Get a preapproval letter from your lender in advance of making an offer, not a prequal letter. Banks prefer preapproval from banks over mortgage brokers. You might also consider getting preapproved by the lender who owns the property. You will not be required to use that lender, but the Bank will give more weight to a preapproval from one of its own departments.
• Don’t Ask for Repairs Up Front. Sometimes banks will pay for repairs, but typically will not agree to do so at the offer stage. If there are problems found during a home inspection, you can try to renegotiate after your offer has been accepted.
• Shorten the Inspection Period. If other buyers ask for 17 days, for example, to conduct inspections, and you ask for 10, you will be viewed as a more serious buyer. If you are having a well tested however, be sure to allow enough time to get test results back within the inspection contingency period.
• Let the bank choose the Title Company.
• Consider the Appraisal Consequences. If you offer over the list price, don’t forget that your lender’s appraisal will need to agree with that price. If your appraisal does come in low, don’t despair. At that point your Realtor may be able to negotiate a lower price, since the Bank will probably have the same problem with any other buyer who needs financing.
• Whatever you ask the seller to pay for should have the exact dollar amount specified. The net value of your offer is what the Bank needs to see before accepting it.

Banks will not accept offers that are contingent on the sale of another property. In general, the fewer contingencies or demands you write into your offer, the better the Bank will like it. 

9. The Bank’s Addendum

After the Bank gives a verbal acceptance of your offer, it  will generate its own “Addendum” that over-rides your purchase agreement. Read through it carefully.  It will contain lots of language pertaining to the property being sold AS-IS in its current condition, and that the bank is to be “held harmless”, or not be liable for any unknown or pre-existing condition.

Agents that are members of the Oregon Association of Realtors use a standard 8-page contract that was painstakingly created by lawyers and a contracts committee. They tried to design it to be as fair as possible, only requiring you to “fill in the blanks.” Oregon Real Estate Brokers are given hours of training on these contracts. While it’s always a good idea to have the contract reviewed by a lawyer, there is some comfort in knowing that it everyone uses the same contract and that it was written by lawyers with a neutral bias.  When you buy a Bank owned property however, you start with a standard contract, but then the Bank sends its Addendum, which is generally non-negotiable. It might appear innocent, but it is not. It’s written 100% FOR the Bank and since every Bank has a separate bank addendum, there is currently no standard training for REALTORS to be familiar with everything the different Banks put in them that could put a Buyer at risk.

Here are a FEW of the things you should know about Bank Addendums:

1. The Bank’s Addendum takes precedence over any of the same things covered in the Standard Contract. So if your main contract says you get a walk through, but the addendum says “As-is,” the addendum wins.
2. Some bank addendums are written nationwide and ignore local laws. Local laws DO supersede these contracts, so sometimes there are points in them that are not enforceable.
3. The addendum could include hidden fees.
4. The addendum may shorten the time you have to get approved for a loan.
5. Many Addendums allow the Bank to cancel the contract up to the sale date. If they get a higher offer, or whatever, they can break the contract. I have never seen this happen, but you need to know that it COULD happen.
6. Pest and dry rot provisions. In a normal sale, the seller may pay if there is pest or dry rot damage. The Bank’s addendum usually puts that risk on the buyer.

If you’re wondering whether you can change or counter any of the terms of the Bank’s Addendum, the answer is “no”. If you want to buy the property, you have to agree to the terms as they are.  If you don’t like the terms, you don’t have to sign, just back-out and look for another property.   If you still want the property though, your best assurance is that the Bank really does want to sell you the property, and they’re not intentionally setting a trap for you with their addendum. Their lawyers are just being lawyers, and trying to protect the Bank’s interests above all else.

It’s important for you to have a Buyer’s agent who knows what he or she is doing.  You should know exactly what is in the Bank’s Addendum, and not be surprised by any requirements that are different than what you thought you asked for in the original contract.

10. Getting the Bank’s Signatures on an Accepted Offer

• If the Bank accepts your offer, it will either return an unsigned counter offer worksheet to you, or have the listing agent provide a verbal acceptance.
• If you accept the Bank’s counter offer, you will do so by signing the Bank’s Addendum.
• In a normal sale, the Seller would also sign all documents and addenda within one or two days after your acceptance. With an REO, your agent may get a verbal acceptance from the Bank’s listing agent, but no signatures by the bank.

• That means that the contract is not “executed” yet, and is not binding by law until you get signatures from the Bank.

The Bank wants to sell the home to you, so the risk is low that they will not sign, but your Lender may not be able to start your loan processing until it has an executed (signed) contract. That adds risk to you, since there may be other costs involved if the delay means you cannot close on time, such as interest rate locks for your mortgage loan or per diem penalties by the Bank.

11. Negotiating with the Bank to Fix Problems

• Banks try to sell REOs “as is” and may refuse to make repairs or give credits. You can always submit a written request for repairs, but the Bank may not agree to your request.

• If you can’t get financing because of a property condition however, the bank may be willing to take care of it.
• If the bank does not work with you and the property condition is worse than what you want to take on, it’s time to let go and move on to another property.

12. Per Diem Charges for Late Closing

• Many Banks will charge you a daily penalty fee if you don’t close escrow by the agreed upon date.  I have seen this be anywhere from $50/day to hundreds per day.
• The per diem charges are there because the bank wants to close the transaction as quickly as possible. If the bank is slow in responding to repair requests or other items out of your control threaten to push out the closing date, your Realtor should request an extension of the closing date from the Bank, and there is a good chance the Bank will agree, and not enforce the per diem charges.

You may have more risk than you would in a regular real estate transaction, but there are no delinquent taxes, no liens and no tenants to evict!  Because REOs are somewhat similar to regular sales they can be pretty safe, however there are at least 12 important differences in buying an REO, compared to a regular sale!
 

1. Buyer Risks (that you probably would not have with a regular purchase)

• You will not get a seller’s disclosure. The Bank has never lived in the home, and is not held responsible for knowing about problems with the home.
• If the Bank accepts your offer, you may have to wait several days or even weeks for the Bank to sign the contract.  Your lender may not start working on your loan until it receives a signed contract.
• The Bank may require you to perform your inspections quickly, giving you only a short amount of time to evaluate the property.

• The Bank may only give you 30 to 45 days to close the transaction, but if you are late they may charge you a penalty fee of $50 up to $200 a day or more until you close.

2. REO Seller Motivation

• Banks are not in the business of owning homes, and are usually motivated to sell them off as quickly as possible.
• The sale of Foreclosure properties by Banks is subject to Federal Regulations.  Banks can be penalized by current accounting requirements for holding foreclosure properties on their books.
• Banks with too many assets in real estate are also penalized by credit rating agencies, making it difficult for them to raise capital.

3. REO Property Condition

• Foreclosed homes often have not received needed repairs or general maintenance for a while. This may include roof leaks, tree limbs in front yards, broken appliances and windows, and dirty carpets, floors and walls.

• In some cases foreclosed homes may have holes in doors or walls, may be missing fixtures or appliances, or may have even been vandalized.
• Houses in poor condition may sell at a discount, but it’s important to factor in estimated costs of repairs in order to understand how much of a good deal you’re really getting.

4. REO Financing Concerns

• Banks want to sell their REO properties “as-is”, and this is often stated in the Bank’s Addendum to the Contract.  However, many REO properties will not pass an FHA or VA appraisal, and may not even meet the standards for conventional financing appraisals.
• A property may have problems that make it un-financeable, such as no heat, or a roof that needs replacing, or a non-functioning septic system. These properties must be purchased by  investors who can pay all cash or find private money lenders or other unconventional sources of financing.
• In some cases a foreclosed property may qualify for a Rehab loan, which will include the costs of repairs in the amount financed, but there are restrictions and added costs, so it’s important to discuss this ahead of time with your Lender.
• The Bank may require a Buyer to get pre-qualified for a mortgage through them, before they will consider your offer.  This is typical with Wells Fargo and Bank of America.  Also if you are trying to purchase a Fannie Mae REO, you may be required to get pre-qualified for the HomePath Program. However, you are not required to actually use these lenders or programs for your loan.

5. REO Pricing

• It’s possible to buy foreclosures for as cheap as 30% or 40% below market value in Southern Oregon, but it’s difficult to save that much on higher quality properties, because of competition from other Buyers. Generally you may expect to see a savings of 5% to 20%, depending on the competition for the property.

• Banks usually list their REO properties with a real estate agent.  When they are first listed the price tends to be at or slightly below market value.  If the property doesn’t sell within a few weeks at that price, the Bank may reduce the price every few weeks until it sells.
• When an REO property first comes on the market, the Bank generally will not consider low offers.
• If the REO property has been on the market for a few weeks, Banks are more likely to accept lower offers.

6. Competition from other Buyers

• Because REOs are generally priced below market value, they attract many potential Buyers.
• It is common to see multiple offers on higher quality and low-priced REO properties.
• Your competition will often include Buyers who are looking for a steal and are making low-ball offers.
• It is less likely that your competition may also include Buyers who are not aware of the market value of the property and offer too much over the list price.
• If you know you’re competing with other Buyers, I’ll discuss Buyer Strategies in Part 2 of this article.

Oregon’s senior economist,  Josh Harwood, believes that Oregon’s foreclosure rate is remaining higher for a longer period of time than other states because the recession hit Oregon later, and consequently our recovery will also take longer.  Because foreclosures often follow job losses,  Harwood does not expect the foreclosure rate to drop until our employment situation improves.  With the region’s struggling economy, that is not expected to happen for many months.  Oregon’s high proportion of timber products workers, real estate and mortgage professionals and construction workers has made it particularly vulnerable to the declining housing market. On top of this, Oregon’s growth rate means that its population is increasing faster than the creation of new jobs, so there is more competition than ever for the non-housing related jobs that have not been lost.  As a result, Oregon’s unemployment rate reached 11.6% in early 2009, and has since hovered around 10.5%.  Jackson County’s unemployment rate was even worse at about 12.3% as recently as May of this year. 

Because the U.S. Treasury Department has determined that Oregon is one of the 20 states hardest hit by the foreclosure wave, it has conditionally earmarked $88 million in federal assistance funds to homeowners facing foreclosures. The state government is now working on the Oregon Homeownership Stabilization Initiative, and is hoping to distribute these funds to at least 6,300 homeowners as soon as they become available.  Much of this payout is expected to be directed to the Oregon counties with the highest rates of mortgage foreclosures and long term defaults.  Those counties and their estimated distress rates* are as follows:

• Crook, 9.9 percent
• Deschutes, 9 percent
• Jefferson, 8.5 percent
• Josephine, 7.1 percent
• Jackson, 7 percent
• Klamath, 6.1 percent
• Yamhill, 5.8 percent
• Columbia and Curry, 5.6 percent
• Clackamas, Coos, Douglas and Marion, 5.2 percent

On the negative side, walking away from a financial contract feels morally wrong to many people.  Also, most homeowners have an emotional attachment to their home.   Walking away from your home might include declaring bankruptcy, but regardless, it would have a negative impact on your credit, making it difficult to buy another home for several years, plus you could still be liable for any unpaid property taxes, HOA fees, utility bills, etc.   If you did not declare bankruptcy, your lender could still come after you for your financial obligations, and there could even be tax consequences.

What alternatives do you have as a homeowner?  It’s important to know your options.  Before you walk away, you should meet with your Lender to discuss a loan modification or to see if they will accept the “deed in lieu of foreclosure”, which could have a less severe impact to your credit.  The Lender may not accept this offer however, especially if you have a second mortgage or other junior lien against the home.  You should also meet with an attorney and a tax consultant, so that you can understand the consequences of walking away from a bad mortgage.

For more information on  the phenomenon of “Strategic Foreclosure”, check out this video by CBS Moneywatch.

A lot of the foreclosures that you find in Jackson and Josephine Counties need some fixing up. These homes that need repairs may not be financeable with a conventional loan, because of today’s strict lending rules.

FHA to the Rescue!

The Federal Housing Administration (FHA) section 203(k) program could be your answer!   The 203(k) program provides the funds needed to fix the house before you move in. The advantage of this program is that you roll both the mortgage and the rehab construction loan into just one mortgage loan at a long term fixed rate that lets you finance both the purchase and any fixing up that the property needs.

This program is available to everyone.

You don’t have to be a contractor or an investor. This program is available to first-time home buyers also as long as a qualified contractor is named for the necessary repairs.

How to Use this Program

2. Find a house that represents a good deal. Look for a property you like in an area you’re happy with. The 203(k) program currently cannot be used by investors, so you’ll need to live in the house. Together with your real estate agent, perform a preliminary feasibility analysis, in which you identify the repairs necessary, estimate the cost of these repairs, and estimate the market value of the home after the repairs. You can save yourself some money by doing this before you order appraisals or estimates, since you may determine that the cost of repairs is too high.

3. Get an offer accepted on the property. Before you can complete the 203(k) application process, you’ll need a sales contract with a clause stating that the sale is contingent on your ability to obtain financing through the program.

4. Apply for the 203k loan. Contact a HUD-approved lender to apply for the loan. You can obtain a list of approved lenders at the nearest HUD field office or on the HUD website (just enter your location, and check the 203k box at the bottom of the form).

6.  Get an appraisal. Actually, you’ll generally need two appraisals: one for the current value of the home and another to estimate the value after the repairs. The loan amount may not exceed the lesser of either the value of the home in its existing condition plus the cost of repairs and 6 months’ worth of mortgage payments; or 110% of the estimated value of the home after repairs. The amount of the loan is also subject to maximum FHA mortgage limits, which vary from place to place.

8. Complete the purchase of the home. If everything is approved, you can purchase the home with as little as 3% down. If you’re unable to occupy the home immediately, you can use the extra six months of mortgage payments which may be included in your loan to pay the mortgage while you’re also paying to live elsewhere.

9. Be sure to get the work done on time. You have six months after the purchase in which to complete the repairs. The repair fund is held in escrow and is paid out in installments to the contractor (or to you, if you’re doing the work yourself). A HUD-approved inspector must review the progress before each disbursement is made.

10. Get a final inspection. Once work is completed according to the initial plans, get the final inspection. If there is money left over, it must be applied toward the principal of the loan.