What is a Foreclosure?
The vast majority of foreclosures in Arizona occur through a “Trustee Sale”, which is a non-judicial legal process. When a borrower is in default (behind on payments), the lender (bank) issues a “Notice of Default” to the trustee who in turn issues a “Notice of Trustee Sale” to the borrower (homeowner). The foreclosure process starts when the Notice of Trustee Sale is recorded. This notice describes the property being sold, the amount of the outstanding loan and the date, time and location of the auction. By law, the date of the auction must be at least 90 days out. Until the property is sold at auction, the property owner has the right to sell, refinance, or pay the past due debt and bring his account back into good standing with the lender. If the property owner is unable to sell, refinance, or bring his account current, the trustee can proceed with the auction.
Foreclosure sales begin with a minimum bid that usually includes the loan balance, accrued interest, attorney’s fees and any other costs associated with the foreclosure process. The successful bidder receives the property in “as is” condition. Since the bidder is usually not able to inspect the property prior to auction, the bidder is taking a risk that the property may not be in good condition. The property could have significant damage, there could be other liens against the property or there could still be someone living in the property. Before bidding at a trustee sale, one should really do their homework.
Since what is owed to the bank is almost always more than what the property is worth, very few foreclosure auctions actually result in a successful sale. If there is no successful bidder, the property “reverts” to the bank. The lender takes title and becomes the new owner of the property. When the lender lists these properties for sale, they are commonly referred to as “bank owned”, “lender owned” or “REO” (real estate owned) properties.
What is an REO Property or Bank Owned Property?
The bank now owns the property and the mortgage loan no longer exists. The bank will handle the eviction, if necessary, and may do some repairs to bring the home to market value. They will negotiate with the IRS for removal of tax liens and pay off any homeowner’s association dues.
Each bank or lender works differently, but they all have a similar goal: they want to get the best possible price and usually have no interest in “dumping” real estate cheaply. Despite what you’ve seen on the news or late-night infomercials, most REO or Bank owned homes are generally being sold at or close to current market value. The homes being sold below market value, are generally homes that are distressed and in need of significant repair.
Are there bargains to be had? Absolutely! But before you go “bargain” hunting, you should do your homework, get the facts and be prepared. The help of a good real estate agent is priceless in an REO transaction. It is important that you get a CMA or comparative market analysis of other homes that have sold in the same neighborhood. You should also consider the cost of any renovations you will have to make.
When you buy an REO property or bank owned property, you will receive a home with clear title and a title insurance policy to insure it. Purchasers of bank owned homes are allowed to inspect the home prior to the close of escrow. The banks would prefer to sell the home in “as-is” condition. However, if during the inspection period significant damage is discovered, the buyer can ask for repairs. The buyer should always give the seller the opportunity to make repairs or adjust the sales price accordingly. Sometimes the bank will re-negotiate the contract rather than putting in back on the market. Keep in mind, however, that the lender is not obligated to make the any repairs. But if the lender chooses not to make the repair, the buyer can cancel the contract and have his earnest money refunded back to him.