Foreclosure: Capitalizing on a crisis
December 9, 2008
PITKIN COUNTY ” Think a recession might be a good time to get a deal by buying a property in foreclosure?
Not so fast. Doing so is harder than you may think, experts say.
True, 2008 foreclosure filings in Pitkin County ” while still extremely low relative to state foreclosure rates ” are twice as much as 2007. Roughly 30 foreclosures have been filed in 2008, compared to 15 in 2007, according to the Pitkin County Office of the Public Trustee. The number of homes actually going to auction has remained roughly the same so far, according to Pitkin County Deputy Treasurer Desiree Wagner ” five in both years.
County records currently show 11 Pitkin County properties in foreclosure proceedings. In general, the homes that have gone into foreclosure proceedings in 2008 don’t appear to be Aspen’s high-end properties. While seven of the properties that have gone into foreclosure this year in Pitkin County are listed as having unpaid loan balances of more than $1 million, the vast majority have unpaid balances of less than $1 million. Nearly half have unpaid balances less than $500,000.
Garfield County also is seeing a rise in foreclosures this year, according to county officials. The county has seen 94 foreclosure filings so far in 2008, compared to 81 in 2007.
Meanwhile, across Colorado in the first three quarters of 2008, foreclosure filings rose 3 percent compared to the same period in 2007, according to the Colorado Division of Housing. Average foreclosure sales in Colorado, however, actually decreased by 14 percent in the first three quarters of 2008.
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But the division report acknowledges that changes in the law depressed the number of foreclosure sales in the first three quarters of 2008, possibly skewing the data.
And while the report indicates the agency remains “cautiously optimistic” about the 14 percent decrease in foreclosure sales (particularly given the 30 or 40 percent increases of the last few years), it also notes that if job losses continue, so will the number of homes in foreclosure.
Nationwide, the Mortgage Bankers Association reported Dec. 5 that as of the end of September, one in 10 Americans was at least a month behind on their mortgage, or already in foreclosure. Job losses are beginning to play a greater role in foreclosures, in addition to bad loans, said the report.
“I think [the number of local foreclosures is] going to go up,” said local real estate agent Steve Carter, acknowledging recent layoffs and the fact that the country has two more years of adjustments on adjustable rate mortgages. Carter, the owner-broker of the Glenwood Springs ReMax real estate office, has helped buyers through roughly a dozen foreclosure sales locally in the past several years.
Still, despite the profusion of foreclosure infomercials and articles with titles like “How to buy foreclosures in four easy steps,” the process of buying a home in foreclosure is complex and can be fraught with risk.
“I have people all the time wanting to buy the foreclosures,” Carter said.
But he warned that buying homes from a bank isn’t necessarily going to be a great deal, since a bank is always going to try to get the most money for the least amount of work.
And first-time foreclosure buyers may well be advised to consult a real estate attorney or agent.
“The thing is, there’s people that all they do is buy foreclosed properties,” said Ben Genshaft, a real estate transaction attorney with Aspen’s Thomas Law Firm. “But for someone just meandering into this that doesn’t understand it, I would say get some advice.”
In general, foreclosure sales fall into three categories: pre-foreclosure sales, auction sales, and post-foreclosure sales.
In Colorado, a foreclosure officially begins when an owner defaults on an obligation and a document called “A Notice of Election and Demand” is filed with the Public Trustee.
Once the document is filed, the potential foreclosure is a matter of public record. Would-be buyers can request a list of homes about to be auctioned and contact those owners to see if they are willing to sell ” and many would-be buyers do.
But that strategy deserves a word of caution. Many homeowners may not wish to sell their house at that point, as they are likely working with their lender to be able to keep the house. Carter said lately he has seen lenders become much more willing to work with buyers who have defaulted on their loans because banks have so many foreclosed homes already.
“Banks are in the business of lending money, not real estate,” he said. “Banks don’t make money on owning houses.”
Buyers who purchase homes in pre-foreclosure will often try to execute what is known as a “short sale.” In that case, the bank agrees to sell the home for less than what it is trying to collect from the current owner, Carter said.
Although the bank gets less money than is due, it saves money by not going through an expensive foreclosure procedure. The owner escapes the situation without a foreclosure on his or her credit report. And the buyer may get a house for a below-market price.
But such short sales can be hard to negotiate, said Carter, who is currently in the middle of helping a buyer negotiate one.
“It’s time consuming,” he explained. “It’s a great unknown … you don’t know what the bank is going to do.”
In the short sale Carter is currently helping to negotiate, there is a $35,000 difference between the home’s appraised value and the buyer’s offer.
“So, the first thing the bank said is ‘we want more money,'” he said. Before the bank will take an offer below the appraised amount, Carter will have to convince the bank that the home isn’t likely to sell at auction for its appraised value.
If the homeowner cannot cure the foreclosure, the home is scheduled for auction.
Between 45 and 60 days before the home is sold, a legal notice is printed in the paper of record, (in Pitkin County, that paper is the Aspen Times Weekly) giving the date of the foreclosure auction and providing basic property information.
In Pitkin County, the audience at an auction generally depends on the property but typically doesn’t include more than two parties, said Wagner, Pitkin County’s deputy treasurer. And for a timeshare property, buyers are rare, she added.
When an employee housing unit is auctioned, qualified buyers will sometimes show up and try to get into government-subsidized employee housing that way, Wagner said. Otherwise, attendees often include real estate agents. Once, a woman who was trying to start a business buying and selling foreclosures showed up to an auction, Wagner said.
However, because of the owner’s option to cure, there is no guarantee the home will ever go to auction. Interested parties often call the Office of the Public Trustee between the public notice and the auction, to confirm that the property is actually going to sale, Wagner said.
If the home does go to auction in Pitkin County, the auction will be scheduled on Wednesdays at 10 a.m. at the south front door of the courthouse.
Literature from the Office of the Public Trustee warns would-be buyers that they are responsible for researching the property before coming to the sale, and experts agree that doing proper research may be the most important piece of trying to buy a home in foreclosure.
“I think the due diligence is really important from a legal perspective,” Genshaft said. Would-be buyers should always research the property, find any encumbrances or liens against it, and figure out how any encumbrance will affect their ability to purchase the property.
Would-be buyers likely will not have the opportunity to research the inside of the home, and many experts warn that homeowners evicted by foreclosure may not leave the premises in good condition.
Buyers willing to take the risks must contact the Pitkin County Office of the Public Trustee after 1 p.m. on the Tuesday before the scheduled sale date to learn the minimum bid. Potential buyers must bring to the auction certified funds for the minimum bid amount.
If the buyer wins the home for an amount over the minimum bid, he or she has until noon on the day of the sale to provide the remaining funds to the Public Trustee.
Even once the property is purchased at auction, any junior lien holders have eight days in which to purchase the property from the buyer for the sale amount, plus interest.
When no buyers come forward to purchase the home at auction, the home is returned to the lender, who then attempts to sell it through a real estate agent. That type of transaction is called a Real-Estate Owned or REO sale.
Carter suggested that that type of purchase may be the easiest on the buyer. But again, he warned of pitfalls.
Like homes sold at auction, they are sometimes left in bad condition by frustrated mortgage-holders, Carter said. He once viewed a home that had been stripped of not only the refrigerator and stove but also the water heater, toilets and outlets. The bank is unlikely to remedy any of the damage unless required to by state law, Carter said. Nor is the bank likely to let a home go for a song just because it’s in foreclosure. The longer the property sits on the market, the more likely the bank will accept a low bid, Carter said.
Still, he acknowledged, deals can be found. Carter recently helped a buyer obtain a great deal on a REO after the house sat on the market for a long time. But he added that the buyer had to do a lot of work on the property, which was not in good condition.
“I’m not saying there’s not deals out there,” Carter said. “I just think the general public has an unrealistic expectation of buying foreclosures. They all hear these stories … and hear the infomercials. Buy a home for $1. Does that happen? Absolutely. [But] it’s not going to happen in the Roaring Fork Valley.”
And right now, he confirmed, the deals in the general real estate market may be good enough to avoid the hassle of buying from the bank.