March 4, 2015
Recently a friend shared with me her interest in purchasing a home at a foreclosure auction. Many buyers look to foreclosures in the hope of finding a bargain. Foreclosure sales occur year-round. On the other hand, “conventional” sales through realtors follow a seasonal pattern. When the ice and snow melt and winter winds retreat northward, sellers start to put their homes on the market. In March, potential buyers call real estate agents and loan officers. The first crop of “For Sale” signs is a harbinger of spring. Experienced real estate professionals and investors know that finding the right foreclosure purchase is not as simple as reading an advertisement, showing up at the sale and making a bid. But is this option right at all for families seeking a place to live? Sometimes foreclosure investments do not work out well even for seasoned investors. Today’s blog post compares buying a home through realtors versus foreclosure sales in Virginia.
- Salespersons vs. Debt Collectors: Personal interaction defines shopping experiences. Real estate agents advertise the property through internet listings, brochures, signage and open houses. With the help of their own agent, potential buyers bid against each other. In a “conventional” property sale, the buyer’s interface is through these sales and marketing professionals. By contrast, debt collection attorneys lead foreclosures in Virginia. The lender retains the attorney to collect on the current owner’s home loan debt. Interested investors go to the front of the courthouse to bid on the property at the sale. In the sale, the debt collection attorney also acts as a trustee. In a previous blog post, wrote about a foreclosure trustee’s duty of impartiality. Buyers must consider the significant difference between doing business through salespersons vs. debt collectors.
- Motives of Current Owner: Real estate transfers through realtors are voluntary. Agents list properties because the sellers want them on the market. If a buyer thought that the seller might sue them after the closing, or refuse to move out, they would never make an offer in the first place. In foreclosure, the previous owners often refuse to leave willingly. The lender or buyer may need to evict them through court in order to get physical possession of the property. Frequently a borrower suffering a foreclosure files a lawsuit against the new owner, the bank or the foreclosure trustee to test the legal validity of the sale. Foreclosure sales have a substantially higher risk of litigation than “conventional” transactions through real estate agents. Investors can’t count on being handed the prior owner’s keys.
- The Condition of the Property: Real estate agents know that sales require exposing the property to the market through internet listings, disclosures, brochures, open houses, signs and home inspections. However, investigating the features and condition of a foreclosure property is a struggle. The trustee usually provides little more than the minimum amount of advertising and disclosures. There is not much of a budget for marketing. The foreclosure property likely needs repair. When homeowners struggle to pay their bills, they often stop making repairs before defaulting on mortgage payments. Most foreclosure properties require substantial renovation before they can be occupied again.
When people shop for a home to live in, usually they want a “turn-key” proposition. They don’t want to invest time and resources before moving in or renting it out. With so many challenges and uncertainties, who would seek to buy a home at a foreclosure sale in Virginia? Well, it’s all about one’s ability to manage risks. This is why often only the bank bids at the foreclosure sale. The only other bidders may be investors who specialize in distressed real estate. If you are one of these investors, or are interested in becoming one, add a qualified attorney to your “team” to assist with the real estate, litigation and construction aspects of managing these risks.