We are often asked about properties found online by our clients that are "pre-foreclosure" or are auction or "courthouse steps" sales.
They are interested in purchasing, or at least looking into purchasing, these properties - often the posted prices are more than appealing! Given the number of inquiries we've had we thought it might be a good idea to outline the differences, pros and cons, of buying foreclosures or pre-foreclosures.
For the purposes of this article we'll refer to all entities that could end up in possession of a property throught the foreclosure process as "the bank".
For a specific outline of foreclosure proceedings in North Carolina click HERE
A foreclosure is a property that has been taken by a lender, bank or other entity to enforce a "deed of trust" that secured a financial interest in the property. More simply in this case, it is a property owned by one of these entities - "the bank".
A pre-foreclosure is a property that is somewhere in the foreclosure process (see this process for North Carolina outlined below and at the link above). The bank or other entity does not yet own the property and it is still titled to the person or entity that received the loan which is being foreclosed. More simply, the bank hasn't taken the property yet, but has begun the process.
In the case of a foreclosure, the bank has taken possession and is the title holder of the property. Before reselling the property on the open market, the bank is required to clear the title of all defects. These "defects" can include judgements against the former owners, liens by contractors who have done work on the property but not been paid, liens and judgements from government agencies (think back taxes both personal for the former owners and property taxes), 2nd mortages, equity lines, and other claims against the title, property and/or former owners.
The banks employ trustees and law firms to clear the title so they can then market and sell the property. They are also responsible for dealing with hold-over tenants - in many cases these are the former owners - working out remaining leases if not. They will work out remaining lease terms if they are valid or evict former owners if they refuse to leave.
In the case of a pre-foreclosure anyone or entity that purchases the property will be responsible (or their representative or attorney if they employ one) to clear title and deal with tenants or former owners if they are in the home. Furthermore, access to the property will - in almost all cases - not be possible before purchasing and closing on the property. This is definitely a "buyer beware" situation.
A buyer at public auction or "courthouse steps" should always have the title searched to make sure there are no surprises with title - these can often be very costly - I've seen a property at auction valued at less than $50,000 have more than double that amount in liens, judgements and back taxes attached to title. An unaware buyer could have purchased the property at a price that was low but would then have to settle all the title issues - big expense and big problem.
A bank owned foreclosure property has only minor differences in the process from buying a "regular" listed property. The property is marketed for sale by the bank, in virtually 100% of the cases with a listing agent / broker, and offers are accepted and considered. The 2 primary differences between regular and foreclosure listings are:
The process for pre-foreclosure is as different as it can get! North Carolina Statutes outline a very specific process for buying at public auction. Generally, though, the process begins with the initial foreclosure filings by the trustee for the bank. This is when the property begins showing up on the various lists found online as a "pre-foreclosure". There are various filings and procedures that occur after this initial filing, and many opportunities for the title holder / owner to bring the deed of trust up-to-date and keep their property. ***All pre-foreclosures do not end up going through the full process, very many don't***
Once again the sale will be "as is", the primiary difference from a property already owned by the bank is potential buyers will not be able to inspect the property or know exactly what is wrong before making the purchase.
On the day of auction at the public forum or courthouse bidders can place bids to purchase the property. If no bids exceed what is owed to the bank with the deed of trust the property will go to the bank. If bids exceed that amount the initial "deal" will be awarded to the highest bidder. After that there is an "upset bid" period of 10 days - during that time bidders can place bids at the courthouse to "upset" the earlier bid and become the highest bidder. Each time a new bid is placed that 10 day period starts over again, and a required 5% deposit is required for each bid.
Once the final bid is accepted and the 10 day upset period expires the purchaser will work with the trustee for the bank to finalize the sale and pay the bid amount for the property. Timing for this to take place normally falls within a week or two. See notes below about financing.
With most foreclosures, financing is as much an option as it is for any other property. The exceptions are most often properties that are in such disrepair or require so much work that most banks are unwilling to lend money for their purchases. There are some options to buy this type of property (see this link for one example, the FHA 203k loan). Otherwise in typical sales the buyer will have 30 - 45 days to close - plenty of time to obtain a mortgage.
With pre-foreclosures the timing to close is normally very soon after winning the final bid and passing the upset bid period. Due to this timing most courthouse steps purchases are either via cash or, in some cases, through expensive private lenders. While there may be some cases where rapid financing can be obtained, this is rare and normally on an individual basis, not from any conventional lending sources. Almost all public auction purchases are cash purchases.
This is the biggest question to be answered of them all - and YOU are the only one that can make that personal decision!
At times a public auction property can be a great purchase with a great price - but buyer beware! You'll need to have funds for immediate deposits (which will become immediatley non-refundable if you are the winning bidder whether you close or not), funds available for rapid closings whether by cash or by financing of some type, and you will need to be extremely careful to make sure that you have identified any possible clouds or defects to title and are comfortable with them - they will become "yours" once purchased!
If all of this seems to be just too much risk, and in many and most cases it is, a simple foreclosure purchase may be your best bet - the bank will have taken care of title issues so you won't have to - and you'll have sufficient time to get financing if that is necessary.
Buying at public auction and courthouse sales come with potential pitfalls. Making sure the "deal" is what it might appear to be is essential to not making a huge mistake.
We are happy to discuss in detail the process and find out if it would work for you.
We have helped clients buy at public auction and can recommend real estate attorney's to handle the title search and other legal aspects of the sale.
For regular foreclosure and bank owned slaes: As always, if you work with our firm or choose another, USE A BUYERS AGENT! For properties that the bank has already taken they will pay the agent you choose their commission. If you go directly to the listing agent they will be paid both their commission and the one available for your agent, BUT they will be representing the bank and the best interest AND PRICE for the bank.
We've helped over 100 clients make purchases of dozens of bank owned properties in the past 2 years - we know the process and we know how to obtain the best deal for you - often with the bank paying your closing costs!