What are the alternatives to using a real estate broker for foreclosure purchase?
Real estate brokers play an important role in house-buying. They simplify the buying process for purchasers and sellers by collecting a selection of properties, advertising them for sale, marketing them and steering the buyers and sellers through the legal process of exchanging title and financing. However, in the case of foreclosures, there are some situations where the additional fees charged by a real estate broker are an unnecessary cost.
Foreclosure properties
Many first time buyers and seasoned property investors are discovering that there is better value to be found in the foreclosure market. Foreclosure properties are the result of the previous owner defaulting on their mortgage repayments. They are given a grace period during which they should make the loan current by bringing the repayments up-to-date otherwise the lender will prosecute them to foreclose the deal and seize the property.
Foreclosed properties can vary considerably in condition. Some are still in good condition and will attract near their market value, others will be in a “distressed” state through neglect, intentional damage and may have been left vacant, making them a target for vandalism.
If foreclosure is completed the lender will normally auction off the property to the highest bidder.
Buying a property pre-foreclosure
Real estate brokers rarely get involved in foreclosures until the time of the auction. However this neglects a prime purchasing opportunity where a foreclosure buyer can gain advantage. The property owner is normally at liberty to sell the property at any time prior to the completion of foreclosure. This mechanism should allow him or her to clear their debt and avoid damaging their credit record; however few are motivated to take this step.
There are risks attached to purchasing a pre-foreclosure especially if there are liens and other encumbrances on the title. Simply put, the owner may be financed to the hilt, using the property as security and a number of agencies may have a claim on the title or part of it. These parties need to be satisfied before the title can be termed “unclouded” and any new owner will inherit these liens.
Purchasers intending to buy pre-foreclosures must conduct their own research and need to make the approach to the owner themselves as it can be a sensitive negotiation.
Foreclosure auctions
Although some auctions are structured to involve real estate brokers, there are plenty where a buyer can basically turn up with a cashiers check and start bidding. The US Department of Housing and Urban Development (HUD) and the Department of Veteran Affairs (VA) operate an electronic system where bidders can participate from anywhere in the country. They bid by way of a sealed bidding system operated through a network of real estate agents who also hold “earnest money” provided by the bidder and help winning buyers to complete the sales contract.
Although a substantial number of foreclosures are sold by this method, there are still many foreclosure auctions to be found every week on the County Court steps. Where a local owner has had a foreclosure judgment held against them, the court will order the auction to be conducted. Potential buyers only need a money order, a cashier’s check or a bank draft to the value of 10% of their maximum bid to participate. If they win the auction they may have 30 days to organize finance, however some auctions demand immediate payment in full.
REO properties and buying from the lender
In the banking industry foreclosures are termed Real Estate Owned (REO). If the foreclosure is the result of defaulting on a bank loan and the property does not sell at auction, the title will revert to the lender. Potential purchasers can approach the lender to make an offer without the intervention of a real estate broker and can often negotiate, not only a good price for the property but they may even receive finance from the lender at preferential rates in order to smooth the course of the transaction.
Engaging a real estate broker for the majority of foreclosure purchases will incur extra cost for no real benefit as you must involve yourself in substantial research to ensure that you make a sound investment.