HOW TO BUY A FORECLOSURE IN NJ
So, you want to buy a foreclosure. That’s great! Bottom line…you want to get a good deal on your next home. Foreclosure, Short Sale, Bank Owned Home, Corporate Home, Fixer-upper, etc… You don’t care what it’s called, you just want it to be worth more than what you paid, when all is said and done. Well here you go. Here is an article that will give you an overview of all of these, and more.
First and foremost, knowledge is power. If you are going to go down the road of getting a “deal” on a home, you need to be able to act confidently and quickly. In order to act fast, and not make a mistake, you need to know the process inside and out. What you learn here will give you the confidence to act fast because if you discover a good deal, you can be sure, there are other people out there, looking at that home too. The biggest reason people lose out on the perfect deal or buy a home that looks like a deal but turns out not to be, is they don’t have the knowledge and confidence to act when they need to act, and walk away when they need to walk away. Knowledge begets confidence. Confidence begets good decisions.
The Foreclosure Process:
The foreclosure process starts when the owner of a home stops paying their mortgage or gets so far behind on their mortgage payments that they can’t catch up. Often, the mortgage is higher than the homes current Market Value. Each home has its own narrative. Foreclosures are like books in a library. They are all books, but no two are exactly the same. Sometimes homeowners will try to refinance or modify their mortgage through the new HARP or HAMP program. The HARP or HAMP program will lower their interest rate and/or extend their loan term (spread their payments over a longer period of time). In rare cases it may even reduce the loan amount to keep the homeowner and their family in their home.
Short Sales: (Should be called “Long Sales”)
The next option that is more favorable to the homeowner is a Short Sale. In this case the homeowner puts the home on the market with a Realtor and informs the bank that they are trying to sell the home and will most likely receive offers for less than what they owe. The Sellers almost always use a Realtor because they are not going to walk away from the home with any money either way so they let a Realtor do all the work. Plus, it is particularly important to have someone who has done this before on their side when going through something like this. So if you are looking for a Short Sale, look no further than your local MLS. It is required that the Agent disclose that it is a Short Sale. In New Jersey, it is generally noted in the “Comments” section of the listing.
The bank will then send a local Realtor or Appraiser to the home to do a BPO (Broker’s Price Opinion). Sometimes they will get two or three BPO’s. Then, when an offer comes in, both the homeowner and the Bank must sign it. Since the homeowner is not getting any money from the sale, they will usually sign any reasonable offer and the Realtor will send it to the Bank. If the offer is too low, the Seller and their listing agent may be afraid to accept it because it will deter other offers from coming in while the bank is considering the lowball offer. Then comes the part of the process that can take a while. When the economy first hit the skids it could take 6 to 12 months to finalize a contract with a bank. It was a very hard time in the Real Estate Market. Many Realtors were refusing to sell Short Sales. For their sanity, and to protect their Buyer from the pitfalls of a Short Sale. The long time frame being only one of the potential pitfalls. Another being that banks were being very unreasonable with their expectations. There were many cases where the banks would raise the price from what the seller was asking even after the offer came in and in some cases even after the processer had given a verbal commitment. A Supervisor, or someone who took over the file, would decide that they felt the price should be higher and just send it back. Buyers would be spending money on inspections, appraisals, etc… and the bank would come back and ask them to pay more. If you ever consider buying a Short Sale, never spend any money until both the Homeowner and the Bank have signed the contract. They should still allow you a fair amount of time, after all parties sign the contract, to inspect the property. The bank won’t usually agree to fix anything at this point but you should still be able to back out if you find anything substantially wrong with the home. These days you will often see a short sale listing say something like “Bank Approved Price” or “Approval at $xxx,xxx by lender”. This way people will be less afraid that they will get the run around.
Today most banks are better at handling Short Sales, but still, you never know. You are at the mercy of the Bank Processor and their Supervisor. Always get everything in writing and be prepared for a longer than normal process. Also, be careful of Realtors who say they know ways to make a Short Sale go quicker. If it goes quicker, it is because the Bank is prepared and willing. You can lose a lot of money if you don’t prepare properly. You are much better off preparing for the worst, and being happy when it ends up going faster than planned. If none of this works (Short Sale or HARP/HAMP) the bank will eventually go forward with the foreclosure process.
If the lender prevails in Superior Court, the court orders a Sheriff’s Sale. In New Jersey, each County has an elected County Sheriff. In Morris County, NJ there is a Sheriff Sale every Thursday at 2:00 pm in the Records & Administration Building, Court Street in Morristown, NJ. The website to see the list of homes that are scheduled for Sheriff’s Sale in Morris County, NJ can be found at this web address: mcsheriff.org/sales/
Fair Warning: A wild card throughout this whole process is that the Homeowner can, at anytime, file for Bankruptcy Protection. Usually this is done to allow the Homeowner and their family to stay in their home. If this happens, the Sheriff Sale is cancelled and the Bank is forced to work it out with the Homeowner under the terms directed by the court. So when going down the path of buying a Short Sale or Sheriff’s Sale, always keep in mind that the home may be taken of the table at any time by the courts.
Anyone can come to a Sheriff’s Sale and bid on any property on the Sheriff’s list. The Sheriff’s Office must advertise the properties for sale in local newspapers and most Sheriff’s Offices post a list of all homes scheduled for sale online. The property is sold by an “Open Type” Auction to the highest bidder. The successful bidder MUST pay a minimum of 20% of the final bid price at the time of the sale. By Cash, Certified Check or Cashier’s Check. This is not negotiable.
Now the crazy thing is, after all that, the original homeowner does have 10 Calendar Days to redeem the property if they can. This rarely happens.
Then, if the original homeowner doesn’t redeem the property, the balance of the sale MUST be paid within 30 Calendar Days from the date of sale or the Buyer will lose their deposit. Because of this, Buyers of Sheriff Sales rarely, if ever, get traditional bank loans. They generally have cash or borrow via a personal loan or line of credit from someone or a bank they have a personal relationship with. This makes it very difficult for the average buyer to buy a home at a Sheriff Sale.
On top of all this, the deed is not guaranteed to be clear. The new owners are required to pay off any other liens or encumbrances that are left behind. Because of this, the Buyer will usually run a title check on the property before the Auction Date. Any title company can do this for a small fee. It is worth every penny.
Last, but definitely not least, the original owner or renter may still live in the home. If this is the case, it is the responsibility of the new Buyer to have the Ex-Owner or Renter removed/evicted. There are many laws in place that protect Renters so this can take a while. So, the bottom line is, do your homework. Cross every “T” and dot every “I” when purchasing a property at a Sheriff’s Sale.
Also, keep in mind that the original Homeowner has rights prior to the Sheriff’s Sale also. No one is allowed to access the property for any reason prior to purchasing the property. i.e. inspections, view layout, assess condition, etc. Also, many homes do not receive a bid that is acceptable to the bank so the Bank will purchase them at the Sheriff Sales. Usually for the minimum price of $100. Lenders will ALWAYS attend a Sheriff Sale where one or more of their homes are being offered. They often hire companies to do it for them.
Buying Directly From the Bank
Because of all this, most buyers wait until after the Sheriff Sale to buy the property directly from the bank. This way they will have the time to get a traditional bank loan (FHA, VA, USDA, Conventional, etc.) and have inspections done and not have to worry about evicting anyone. They let the bank do all the hard legal work, and then they buy it. These properties are usually vacant and sold “as is”. The Buyer can still have it inspected but the only recourse they have, if they find something unsatisfactory, is to back out of the sale. The banks usually won’t do any work after they put the home on the market, unless law or code requires it.
The bottom line here is if you don’t have the cash to buy the property outright without a loan, I strongly recommend you do not buy at a Sheriff’s Sale, and wait until the bank has taken the property. If you are fortunate enough to have the cash to buy at a property at a Sheriff’s Sale, please do ALL your homework, and have an iron stomach. You will need it!
Where to Look:
Once the bank owns the property, the process is more palatable. There are still pitfalls, but you can simplify and expedite the process by knowing a few simple things. First of all, when Banks first originate mortgages they usually sell them off to Fannie Mae or Freddie Mac. When a property with a loan that was sold to Fannie Mae or Freddie Mac is foreclosed on, it will be listed for sale on HomePath.com (Fannie Mae), or HomeSteps.com (Freddie Mac). The other site that lists a lot of the Bank Owned homes is: HUDHomeStore.com. HUD Home Store is the website of HUD (The Department of Housing and Urban Development). HUD takes many homes for various reasons.
Fair Warning: There are a few important things you MUST know when looking for homes on these sites. The HUD, Fannie Mae, and Freddie Mac do not want to talk to any Buyers. You must go through a licensed Real Estate Agent who is approved by HUD, Fannie Mae and/or Freddie Mac. The agents who are listed as the “Listing Agents” on these sites are very loyal to the Sellers. Their main Client, the Seller, furnishes them with dozens of properties to sell, and you are only one sale. You really should not speak to the “Listing Agents” at all, if possible. You are best served to find a “Buyer’s Agent” who is familiar with selling these properties. I have worked for companies who list these properties and I am very familiar with their processes. It is just a fact that they represent the Seller and you need to watch everything you say to them. Do the right thing for yourself and find a good “Buyer’s Agent”. They will be loyal to you.
Buying from Portfolio Lenders:
Some banks are “Portfolio Lenders”. This means they don’t sell their loans to after market entities like Fannie Mae or Freddie Mac. These banks will generally be more likely to spend a little money fixing up the property for sale to try to recover some of their loss. These banks generally list these homes with Realtors in the local area. This can vary a bit, but almost all of them will be available in the local MLS (Multiple Listing Service) when they are ready for market. Banks generally don’t want to spend the time and money listing properties for sale “by owner”. It is worth it for them to list them with a Realtor who is familiar with the area and is a member of the local MLS. Sometimes you can try to reach out to a bank to see if you can buy homes directly from them but rarely are they willing to speak with you. They either don’t have the resources or are just not set up that way. They have a set process and can’t deviate from it. The larger the bank, the more likely they are not to speak with you. As a matter of fact, Bank of America has tips for buying foreclosures from them, on their website. The first thing they tell you to do is to find a local Realtor who understands foreclosures and work with him or her.
Also, all of the homes that are being sold by Fannie Mae, Freddie Mac, and HUD are always listed in the local MLS as well as their respective websites. The bottom line is, almost all Bank Owned Homes are going to be listed with a Realtor. If you do not have the cash to buy a home at the Sheriff’s Sale, the best place to look is your local Multiple Listing Service. In Morris County, it is the Garden State Multiple Listing Service. Again, your best bet is to work with a local “Buyer’s Agent” when looking for a Foreclosed Property. Find one who has sold these homes before. There is a special process for putting offers in to each entity; Fannie Mae, Freddie Mac, or HUD. They all require a Realtor, in order to make an offer. So you might as well find one you like, and let them do the legwork for you. Of course you will want to search for properties online yourself, but the Buyer’s Agent can easily provide you with the information you will need to buy at the best price. They can look up exactly what any comparable homes sold for, how long they were on the market, and what you can expect to sell the home for if you fix it up. I have years of experience buying and selling both regular and foreclosed homes. Please contact me if you feel I would represent you well. If I don’t handle your area, I can recommend someone who also has a background handling Foreclosures in your area. You might as well get together with an agent early in the process and get comfortable with them. If they are good, they will be happy to do all the legwork for you and when it comes time to put in an offer, you will know whom you are dealing with. This will also make you more able to act quickly and with confidence.
* EXTRA TIP – Fannie Mae, Freddie Mac and HUD all have programs that help “Owner-Occupants” have a “leg-up” on investors. For example, Fannie Mae and Freddie Mac offer a “first look” program for Owner-Occupants. For the first 20 days a home is on the market, they will only consider offers from Buyers who plan on living in the home. HUD asks bidders if they are going to live in the home and is willing to give a better price, or favorable terms and positioning, to owner-occupants. So keep that in mind when purchasing a home from any of these three entities.
So, the bottom line is, the best price you will find is at a Sheriff’s Sale. These can be very dangerous. Be sure to do all your homework. If a Sheriff’s Sale is not for you (like most people), you can look at buying the home before the bank forecloses, as a Short Sale, or after the bank forecloses, directly from the bank. You might as well find a Realtor who is experienced with Foreclosures, and the process involved. Also, keep an eye on the regular homes that come on the market. Some of them are good deals directly from the Seller. Don’t close your mind to anything. You never know…
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