Mortgage Info: Buying in the Context of a Foreclosure or Short Sale
Buying Homes: Foreclosures and Short Sale
Buying bank owned homes (foreclosures) or homes for sale conditioned upon bank approval (short sales) can be good bargains; however, with the bargain comes additional risk. Below are a few issues to spot when considering buying such homes.
In general, a foreclosed home means the homeowner defaulted on his mortgage loan and the bank foreclosed on the mortgage. Most foreclosures are conducted as “foreclosures by advertisement.” The bank advertises the Notice of Foreclosure by posting it on the property and publishing in a county newspaper for 4 weeks. On the sale date at the county courthouse the sheriff auctions the property to the highest bidder. The highest bidder is typically the bank, bidding the amount owed. The homeowner has a period (usually 6 months) to redeem the Property. After the expiration of the redemption period the bank owns the property outright. If the home is occupied after redemption, the bank will file a lawsuit to evict the homeowner who is now a holdover tenant; the holdover, who has no incentive to take care of the home that now belongs to the bank, might remove appliances and anything of value. Then the bank will list the property for sale.
Buyer Assumes the Risk
Foreclosed homes typically exhibit conditions of disrepair. Banks are exempt under the Michigan Seller Disclosure Act, MCL 565.951 et seq. This means the bank is not required to provide the buyer with a Seller Disclosure Statement. When you purchase the property you assume the risk of the unknown.
Get an Inspection
Since the bank is exempt from disclosures, the buyer’s inspection is crucial; therefore, the purchase of a foreclosure is usually conditioned upon the buyer’s opportunity for an inspection. Pay careful attention to the purchase agreement – how long of an inspection period is the bank allowing you? Try and negotiate for a long inspection period.
Get a Title Insurance Policy
In our economy where banks fail, loans get bundled and sold to the highest bidder it is increasingly common to find problems in the chain of title. Therefore it is important that you have assurance you are purchasing marketable title. Make sure you obtain a good title insurance policy and have a professional, such as an attorney, review the policy with you before closing.
A Short Sale is a sale of property conditioned upon a bank’s approval of a reduced loan pay off and its agreement to discharge its mortgage. In a short sale a borrower owes the bank more than the property is worth.
Why a Bank Might Agree to a Short Sale
A short sale is in the complete discretion of the bank. However, a bank typically has incentives to agree to a reduced pay off, considering the administrative and legal costs of foreclosure, and the added burden of holding on to foreclosed property. A bank may also receive benefits for participation in a government approved short sale program.
Get an Inspection
Today, decrease in property values plays a significant role in the number of short sales. However, a buyer should always ask the question: is there another reason that would explain the reduced sales price? Pay attention to the Seller Disclosure Statement provided by the seller. Although a bank selling a foreclosed property is exempt from the Michigan Seller Disclosure Act a bank approved short sale is not exempt. The seller must give the buyer a disclosure statement before entering a purchase agreement.
Documents the Bank Requests from Buyer
Most documents a bank requires are directed to the seller. The buyer will need to provide the bank proof of approval of financing. Above that, buyer will also need to execute an Affidavit of Arms-Length Transaction.
An affidavit is a “sworn statement”. The bank will want the buyer to swear, under penalty of perjury, that the transaction is an arms-length one, meaning the parties are unrelated, personally or professionally. Usually the affidavit will require the buyer to agree to be liable for all damages the bank incurs, including repayment of the reduced payoff, in the event the seller falsifies the affidavit. A buyer has no reason to fear liability unless he indeed is trying to commit fraud against the bank.
Buying a foreclosed home or on a short sale is similar to buying conventionally listed property; there may be financial benefits, but there are additional risks, especially in the context of a foreclosure. In both cases, the buyer must exercise due diligence in the process.
One such option for buying Fannie Mae-owned homes is HomePath Mortgage. Learn more with the AmeriFirst Home Mortgage "Buyer's Guide to HomePath" at the button below.
This is a guest post from Real Estate Attorney Jeshua T. Lauka. Jeshua is an attorney at David & Wierenga, P.C., a business law firm located in downtown Grand Rapids, Michigan. Jeshua practice in business, real estate, estate and trust work and related litigation. Jeshua has developed a focus on representing corporate and individual clients in distressed/foreclosure-related real estate matters, whether it is a corporate or construction industry client renegotiating a loan, or homeowners faced with being forced out of their homes.