Foreclosures

Foreclosures are at an all time high, both for Lane County, and the rest of the nation. This is a result of many factors, including: a housing price decline, an economic slowdown, and the sub-prime lending practices that occurred up to 2008. Presented here are both sides of foreclosure: Facing foreclosure and buying opportunities of foreclosed properties.

If you’re facing foreclosure:
If you’re behind on your mortgage payments, the best thing you can do is to talk with your lender and see what you can work out. This is not the time to become an ostrich, put your head in the sand, and pretend things will get better. If you don’t do something you’ll likely lose your house.

Options When Facing Foreclosure

Sale
If you have equity in your home (what you owe is less than the net value of the home) one good option is to sell the house.

Short Sale
If you are upside down, underwater, or have negative equity (your house is worth less than what you owe) you may be able to negotiate a short sale. In a short sale, the lender agrees to accept less than what they’re owed. You and/or your realtor will need to negotiate this with your lender. The lender, not you, will have final approval or disapproval of offers from potential buyers. A successful short sale will adversely affect your credit score.

A short sale occurring outside the years of 2007-2012 will cause adverse tax consequences. The forgiveness of debt is a taxable event. However, the Mortgage Forgiveness Debt Relief Act of 2007 allows forgiveness of debt, on your principal residence, not to be taxed. There is of course paperwork you must file, namely, IRS form 982.

FHA Loan
Beginning October 1, 2008, signed legislation allows for FHA financing of your troubled loan. You may be able to replace your current loan with an FHA loan of up to 90% of the original loan value. You must qualify, and to do so meet at least these criteria:

  1. Must be for your primary residence
  2. Spending of greater than 31% of your income on your mortgage
  3. The loan must have been originated before 2008

The decision to allow you to replace your loan is up to your lender. It’s not mandatory that they do so, and they may choose to foreclose instead. (As a business, the lender will probably choose whichever option benefits them the most.)

Deed in Lieu
If foreclosure is likely, and none of the previously mentioned options work, then you may negotiate to give your lender the deed to your house in lieu of foreclosure. This does stop the messy process of foreclosure, but you still lose your equity and your home. You may be able to negotiate a slightly better outcome with your lender if you go with the deed in lieu. Your credit scores will be adversely affected. On credit applications, I usually see the question asked about foreclosures or deed in lieu linked together.

Foreclosure
This is your worst option, but may be unavoidable. I’ve heard it said that we’re all only a payment or two away from foreclosure. While this may be an exaggeration, perhaps, the point is that foreclosures happen, and life does go on.

After you miss a payment(s), you will receive a Notice of Default and Notice of Sale from your lender’s trustee. This will also be published in the newspaper. If you don’t do anything to cure the problem (i.e., get caught up in your payments and pay the fees), your house will likely be sold in 120 days on the courthouse steps. You will have 10 days to leave the house after this. You will probably have to wait between 3 and 7 years after foreclosure before you can purchase another home with a loan.

Buying Opportunities in Foreclosures

Much has been written and said about the “fabulous buying opportunities” in foreclosures. Legitimate opportunities do exist in this area. Less savory practices are also common, and you should avoid those. The Eugene/Springfield area is a small place and your reputation is worth more than whatever profits you might chase.

Outright Purchase
A legal, but somewhat cheesy, approach suggested by the seminars is to approach the distressed homeowner and offer to quickly buy their house at less than market value. Homeowners in the foreclosure process probably don’t want to hear from you, and may not greet your “win-win” proposal with open arms. However, if you are able to perform and buy their house quickly, it may be a good solution for both buyer and seller.

Equity Stripping
A variation of the outright purchase, known as equity stripping, is illegal. This scam involves acquiring the title of the soon to be foreclosed on homeowner. An elaborate deal is structured so that the homeowner, in theory, can reacquire the home at a later time. However, this rarely happens and the former owner is left without a house and without any equity.

Courthouse Steps
After at least 120 days from the Notice of Default, if the borrower hasn’t cured their situation, the property may be sold at the courthouse steps at 125 East 8th Avenue in Eugene. The times and dates of sales are published in The Register Guard’s classifieds. If you attend these sales, you can expect to find a representative of the lender there, who will bid for the loan amount plus fees that were incurred. You will probably also see the usual suspects.

There is an active group of people who regularly buy foreclosures in this fashion, and if you’re doing it you’ll get to recognize them.

The upside to buying on the courthouse steps is that you might get a good deal without directly preying on the misfortunes of others. The downsides are that you may not have gotten to adequately view and/or inspect the property; you’re buying as-is, where-is; it may be difficult to get the foreclosee out of the property (they have a right to stay in the property for 10 days), and the foreclosee may do some creative remodeling (known as trashing in the rental biz) before they go. You also need or have access to CASH to buy the property.

Real Estate Owned
When a bank completes foreclosure or accepts a deed in lieu, the property becomes known as Real Estate Owned (REO). Banks don’t like REO, but are ending up with more of it these days. Bigger banks may advertise their properties on their own websites. Much of the REO around the Eugene/Springfield area is listed with realtors.

The realtors do their job on REO listings, namely to sell the property within the owner’s time and money constraints. However, when properties don’t sell and end up sitting on the market, the price often comes down. I think some very good deals end up being sold by our local realtors. I can think of one property that the bank bought back at auction for $310,000, and ended up selling it with a realtor for under $200,000. That fortunate owner got $100,000 of instant equity!

REOs can be a good deal. However, it frequently takes a LONG time to get acceptance/rejection of your offer. They either won’t like or won’t allow any contingencies in your offer. The banks will have their own procedures, which you’ll have no choice but to follow, if you want the house.

Here’s a good story about buying short sales and foreclosures.