SO YOU WANT TO BUY A FORECLOSED HOME
Late night TV and HGTV has turned many people on to the idea of flipping houses. What these shows don’t tell you is the process of purchasing one of these homes takes plenty of time and patience What I’d like to do is inform the reader about the seller’s (bank) process, the financing and offer process, the title work and appraisal process, and finally the closing process. Understanding these processes will alleviate a ton of stress, re-doing paperwork and understanding the wait time.
1. Bank buys home back at master commissioner sale
2. Bank contracts with
A. asset management company
B. title company
C. preservation company
3. Asset management company contracts with local REALTOR®
A. REALTOR® will do drive by evaluation
B. REALTOR® will do interior valuation after trash out
4. Title company does preliminary title work
5. Preservation company contracts with local vendor
A. Vendor will change locks and winterize
B. Upon approval & undetermined waiting time, vendor will trash out, sales clean & mow
6. Seller will order
A. 2nd opinion of value by a 2nd REALTOR®
B. Order an appraisal.
7. Title company will give go ahead to seller that title is clear
8. Seller will contact listing REALTOR® with list price & terms determined by valuations of 2 independent REALTORS®, appraisal and amount still owed on loan
The offer process is totally different than traditional sales. The buyer will sign a purchase offer with their REALTOR® which will be presented to the listing agent. The listing agent then has to go to seller’s particular web site and input the data from the purchase offer. Each seller (bank) has a different web site with different criteria needed. This information goes to the assigned asset manager that the bank has contracted with.
The asset manager will then look over the information and make a counter offer via the web site. This can take 1-7 days depending on the asset manager’s case load. If information is missing (such as financing information, email addresses, phone numbers, etc.) this can delay the process even more. It is imperative to have all information at the start. It is also VERY IMPORTANT that the name on the purchase offer matches that on the pre-approval letter and how the buyer wants it on the deed.
Please note, the asset manager can only make a decision to certain factors determined by the seller. A good case in point would be the seller will take no less than $X.XX (the listing agent does NOT know this value.) If the offer is near the seller’s bottom line, the asset manager must contact the seller to get counter offer, rejection or approval which delays the counter process even longer.
Financing can be one of the hardest parts of the entire process. Since the seller was “burned” once, they want to know that a prospective buyer is qualified. Hence, a pre-approval or proof of funds letter is REQUIRED with all offers. Buyers should be prepared and have this documentation before they make any offer.
A pre-approval letter must have the following
1. Financial institution name
2. Loan officer’s name, phone number and email
3. Terms of the loan
c. Interest rate
d. Type of loan (conventional, FHA, VA, USDA)
e. Expiration of pre-approval letter (letters cannot be more than 30 days old)
f. No contingencies
Proof of funds letters can be in the form of a bank state with the account number marked out or a letter from the financial institution on their letter head stating that buyers have the funds available up to a certain amount for the purchase of property at (address of home for sale). Again the proof of funds letter must have the bank official’s name, phone numbers and email address. Many web sites will not allow the listing agent to submit the offer without this information.
The second most important thing a buyer needs to know about financing is that not all bank foreclosed properties will qualify for all types of financing and all buyers do not qualify for all types of financing. Some foreclosed homes will only qualify for cash deals or “in-house” conventional loan. (In-house is defined as loan not being sold to 3rd party). Some buyers will only qualify for VA or FHA loan due to down payment or primary mortgage insurance requirements. Make sure the home you want to purchase qualifies for the type of loan you can get.
APPRAISAL & TITLE WORK
These two processes will be happening at the same time by different entities. The bank will order an appraisal. They will either do it themselves or order an independent 3rd party, depending on type of financing. The seller’s title company will order an updated title search and if not financing with cash, buyer’s lender will order title work. It is imperative at this point that buyer’s lender provide name, phone number, and email address of the title company they are using so the two title companies (sellers and buyers) can coordinate with each other and the buyer isn’t paying duplicate charges. Sometimes the seller will pay for title insurance if the buyer uses their title company. It is highly encouraged that buyer get title insurance!
There may be some delay to closing if there is a cloud on the title. Past experiences have shown that not all signors have signed during the foreclosure process; there has been typing errors or wrong deed description on master commissioner’s deed; the master commissioner deed has not been recorded yet. Sometimes a new year has started and taxes weren’t paid or there was a code violation and a municipal lien has been put on the property. The buyer must have patience during this period.
Once appraisal and title work are complete the entire package goes to under-writing. Most banks have their under-writing team or loan council meet once a week. After under-writing signs off then a closing date can be scheduled. The closing date must occur on or before the date on the purchase contract to avoid per diem charges.