In today's market, there continue to be distressed sales that are either short sales or foreclosures.  First we will discussforeclosures.  In Cincinnati, foreclosures make up a relatively small portion of the inventory in some areas and a large portion of the sales in others.  The stressed areas were often areas with significant subprime mortgages. We expect that will continue to be the case for several more years.

What exactly is a foreclosure?  

Foreclosures occur when a home owner cannot or does not make mortgage payments, until they default per the terms of their mortgage note.  Actually, you are in default if you miss only one payment, but the lender will try to work with you, if they are contacted.  The appointed trustee will force the property to be sold at auction on the courthouse "steps."  Typically, the lender then places a minimum bid on the property equal to the amount still owed on the delinquent mortgage.  If they are the high bidder they then become the owner.  This is where the term REO came from (Real Estate Owned).

The lender's stategy will then either negotiate with Fannie Mae or FHA to take over selling the home.  Sometimes they keep the property and sell it themselves.  When the property owner had an FHA loan, it will be called a HUD home.

So, now, the seller is actually the bank or asset manager and the process is different.  Occasionally, foreclosures do not take much longer to close than a transaction with a normal individual seller.  Every bank will have a different process, so bidding and the paperwork process vary dramatically.  With HUD homes, the bidding process is straightforward and easy to understand, though there is also a lot of paperwork.

Why would you want to buy a Foreclosure?

  • HUD may allow you to roll some of the costs of repairs into the loan.
  • Sometimes homes are priced below market value, but recognize that they often, but not always, need extensive repairs and upgrades.
  • Occasionally lenders offer incentives, such as HUD's $100 Down Program

Are there Disadvantages to buying a Foreclosure?

  • It may take longer to close a sale...longer to do inspections because utilities need to be turned on, longer to get all paperwork and title work to be completed.  Because of the lender's beauracracy, each step takes longer.
  • Buyers must rely of the home inspection.  The lender will not make the typical seller disclosure.
  • Often the lender's contract required that you pay extra if you cannot close on time, so be sure your lender can get the job done!
  • Lenders will not make repairs to the property.  However, this can create a difficult situation if the lender requires a termite treatment or structural repairs be done.
  • The lender's contract addendums often supersede the local real estate contract.
  • It is often extremely difficult to get financing on homes that need extensive repairs.  (Check into 203 loans for these)

If you are hoping to purchase a foreclosure, you need to start looking quickly if you plan to take advantage of the tax credits offered by the government.  You will need to have your contract in place by April 30th and closed by June 30, 2010.