With all the negative press that the real estate market has been suffering lately, you are ready to look for homes in Dutchess, Rockland, Westchester, Putnam or Ulster County. You have that money burning the proverbial hole in your pocket seeking to purchase a foreclosed home for investment. Do you even know what you are talking about?
What is a Foreclosure Sale?
Foreclosure is the legal proceeding brought by a Lender acts to recover the “security” represented in a home for an overdue loan. Since banks don’t really do a good job or want to own real estate, they often want to unload the distressed property just get the bad loan off their books. In this politically charged landscape, and election years, the rules are constantly changing. Government is increasingly intervening on the behalf of the “consumer,” meaning that a foreclosure sale is not as simple as making the winning bid at auction.
In New York State, it is no longer as simple as taking several certified checks to the foreclosure auction because there are various statutory protections that give the original homeowner a second chance (and possibly third) chance to rectify the defaulted loan. Even then, after the gavel drops, you, as the foreclosure buyer might get stuck paying back taxes, transfer taxes, and rectifying various liens taking other risks that might not have occurred had you purchased the home through more conventional channels. You are not an investor unless you have done your homework and understand the substantial risks attendant to foreclosure auctions.
In short, a foreclosure sale is risky business if you don’t know what you are doing, or have competent legal counsel to wend your way through the process. Without proper legal advice, you could end up paying thousands of dollars for a house you’ll never own.
Short Sales, Another Alternative?
A “short sale” as the term has come to be known involves a distressed homeowner whose real property is valued less than the mortgage amount. To avoid walking away from the debt, the owner, brokers, and bank team up to identify a “way out” of the disaster for all through the short sale. For a bank, the cost to foreclose, and then sell the property, may exceed the expense of just letting the homeowner sell the home for less than the mortgage amount. The process works out more like a cross between a normal house sale and a foreclosure, where the auction buyer has to clean up the problems without help.
With the assistance of an attorney and a broker, the homeowner can usually pick a real estate agent and market the home, but the bank negotiates the real terms of the deal by dictating the prices, and many of the terms of the contract. If the bank refuses, the buyer loses, which is often frustrating to buyers. A “short sale” may look like a great buy, but you are at the mercy of the Seller’s banks whims, even though they know nothing about the house or local market conditions.
In a short sale, the multiple listing service (MRIS) must disclose that the property is subject to a short sale. From the buyers’ perspective, you have a right to know this because, regardless of the owner’s good faith and intent to sell you the property, the bank (a third party) might be controlling the final decision as to whether the house closes. Only patient buyers can withstand that waiting. The busted deals and additional paperwork of short sales also lead to increased costs for buyers.
From the seller’s perspective, make sure that you know your rights under current law. Although your mortgage contract says, “If you pay, you stay, if you don’t, you won’t;” the Legislature may have offered you a handy life line. Sometimes, despite the emotions, sale is the only rational way to protect your situation.
Either way, whenever you contemplate a foreclosure or short sale, be open, honest and candid with your real estate professional, whether that be the agent, broker, attorney or bank. To conceal your condition will do nothing but make it worse for everyone involved.
The bottom line, be sure that you know what you are doing when you contemplate investing in this world we live in. Oh, and hire local New York real estate counsel to help you wend your way through the morass.