Poconos Real Estate Blog

Minimizing Risk & Reducing Stress While Buying a Foreclosure in the Poconos

Bank foreclosures are old hat for us here in the Poconos. Long before the recent rash of foreclosures experienced across the country, we have had a steady supply. (The reasons for this are a whole 'nother article.) Fortunately for our market here, we have had a steady supply of investors and bargain-hunters coming in to the area, too, so these homes have always sold at a decent pace.

So I do have some experience in helping buyers navigate through the process of buying a foreclosure as an investment or as their home. Furthermore, my first house was a foreclosure sale, so I have first-hand knowledge of the experience from the side of a buyer. To summarize, yes, a root canal is almost as fun as buying a foreclosed home, but once the immediate effects wear off, the reward is usually pain-free.

(As clarification, the term foreclosure in this article refers to bank-owned listings being sold through the MLS - other areas call these REO or Real Estate Owned properties)

Buying a bank foreclosure is not for the faint-hearted. For first-time buyers, the process of buying a home is, under the best of situations, stressful and confusing. But even for those who have some experience with previous home purchases, buying a bank foreclosure can be scary.

You are dealing with properties which are usually in need of repair, have no Seller Disclosure or representation with regard to condition and maintenance history, and have been abandoned. Do not discount this last fact, the idea of abandonment, as there is a subconscious effect from this fact for many of us. Why would someone let this house go? What's wrong with it? What did they know that I don't know? No one wants to feel like they are picking through someone else's trash!

But once a purchaser works through all of these emotions, weighs the market facts and finally comes to the realization that there is a huge opportunity to maximize equity by buying a foreclosed property, good decisions can begin to be made. Once a buyer firms up in their mind what kind of repairs they are willing to undertake and shops for and locates the appropriate property, they can approach a transaction armed with the information they need, minimizing their risks and anticipating & addressing possible stress points along the way.

So, what's the big deal? How is buying a bank foreclosure different from buying a property from a 'regular' seller?

THE DREADED BANK ADDENDUM
The banks have their own rules when it comes to selling property. While they do have to comply with real estate law as it exists in the particular state they are selling in, they have gone through this process hundreds or thousands of times and these experiences have caused them to streamline their process. They have corporate attorneys who analyze the risks the banks expose themselves to by virtue of being a seller in a highly regulated industry, and oftentimes have been involved in lawsuits, justified or not. In response to this, most of these banks have come up with a lengthy list of requirements and policies which they spell out on the dreaded Bank Addendum. This Addendum is <usually> a requirement of any offer they entertain, is non-negotiable, and can seem very one-sided and unfair to a purchaser. But the banks are well versed in CYA, so learn about the requirements and cover your own appropriately! Here are some of the more commonly questioned clauses included in these addenda. A discussion with your real estate attorney about their implications may be in order:

• Per Diem Penalty: A penalty for not closing when you say you will. Sure, the bank will extend the contract for you but will often charge you around $100 per day. Remember, time is money to the bank!
• Inspections: Yes, you can inspect. Usually the addendum states that it is for your information only and that they will not make any repairs. The buyer usually retains the right to cancel the contract if there are problems they aren't able to accept. Many times the purchaser is responsible for dewinterizing the property and turning on the utilities for the inspection, but not always. Also, the bank usually requires a fast turn-around on the inspection, often mandating that it be done in as little as 7 days from the time the bank accepts the offer. This is sometimes tricky for an out-of-town purchaser to pull off, but it is not impossible.
• Title Work: Sometimes the bank will pay for the title work on behalf of the buyer. This can be a big savings for a purchaser and, as long as your attorney reviews the policy, should be welcomed. However, be aware that title issues are not uncommon in foreclosure transactions. If the foreclosure proceeding was done sloppily, it will sometimes create a cloud on the title that can take some time to clear. Sometimes it is a simple fix, but other times, like when a Quiet Title Action is necessary, it can delay a closing for months. In these situations a buyer has the option of waiting or cancelling the sale.

Of course, every bank has their own Addendum and the document can vary in length from one page to eight pages or more. One other little tidbit of info: most banks provide the addendum up front so you can review it before making your offer, but sometimes the bank will provide the addendum as part of the counter-offer. Having an idea of what to expect is especially useful in this scenario.

MAKING AN OFFER
Just like with any other listing, an offer on a bank foreclosure is done in writing and utilizes a full Agreement of Sale (AOS). I use the standard Pennsylvania Association of REALTORS® form which is very thorough yet easy to understand. Of course, the Addenda described above would be attached to this form, and if there are conflicting clauses on the AOS and the Addendum, the Addendum takes precedence, unless State Law requires otherwise. Having an attorney help you navigate these nuances is important.

Normal contingencies like mortgage financing and inspections are acceptable to the banks. However, a sale contingent upon the sale of another property usually is not. They prefer to have the contract as clean and unencumbered as possible, thus reducing the risk of the transaction failing to close.

The bank will want to see a pre-approval letter before accepting an offer contingent on financing. Because pre-approval letters are not always a guarantee that a borrower is qualified, they sometimes require the prospective purchaser to fill out a Buyer's Financial Information form in lieu of or in addition to the pre-approval. This is to satisfy themselves that you are, indeed, a good prospect for the mortgage you are applying for. Again, risk reduction in action.

If you are paying cash for the purchase, or even if you are financing the purchase, expect to be required to provide 'proof of funds.' This can be in the form of a bank statement or a letter from your accountant. The bank needs to know that you have enough money to complete the transaction.

GETTING YOUR OFFER ACCEPTED
Keep in mind that the bank is evaluating your offer based on money, timing and risk so, besides carefully evaluating the price you are willing to pay, think hard about the other terms of your offer. The bank wants the transaction to close as soon as possible in order to minimize their carrying costs, and usually require a closing date within 30 days of acceptance. If you want to sweeten the deal, make it two weeks if at all possible. And keep the contingencies to a minimum. No 'Sale is contingent upon seller having the chimney cleaned' or the like. Simple mortgage contingencies and inspection contingencies are expected.

Of course you need to protect yourself and there may be unusual circumstances that require an odd contingency, but try to keep it as simple and as clean as possible.

Another caveat: While banks do value the cost of time and risk, they also have balance sheets to worry about. So keep in mind that your offer is mostly about the price. Cash offers are, very often, favored over those involving financing, but they don't always translate in to huge reductions in price. Buyers who need to get mortgages will often make their offer a little more desirable by raising the sale price. A few thousand dollars more in their offer translates in to small monthly payments for them, while giving the bank the needed plus signs in their ledgers.

Evaluate your position keeping in mind that it is all dollars and cents to the bank.

THE BANK'S COUNTER-OFFER
It is very likely that, if you like a property enough to make an offer on it, other Buyers do too. Even in the slow-ish market we are experiencing right now, multiple offers are very common on bank-owned homes.

When the bank gets more than one offer in on a property, they will usually counter-offer all of the prospective purchasers with a request for their Highest & Best offers.

This means that your offer was not accepted and that they are giving you an opportunity to revise it if you wish. They are letting you know that they have another (or multiple) offer on the table, but will not disclose the amount or terms of competing bids. They want to get the most for the house that they can so this is often the way they go about it. You do not get to know what the other offers are. At this point your choices are: 1-leave your offer the same 2-change your offer 3-withdraw your offer.

Once you go back to the bank with your highest and best offer, they will make a decision. This decision could include accepting one of the offers, negotiating with one or more of the potential buyers, or rejecting all of them. They are not under any obligation to accept anything, and are free to accept any other offers that come in in the meantime.

KNOW WHAT YOU WANT & GET IT!
Do not think that because the real estate market is a bit slower than normal that you are going to steal a foreclosure listing. Banks are well prepared to compete in this market and know what many sellers do not: that pricing a property well will generate offers quickly, in any market. They are not in business to own real estate and do what it takes to sell quickly and for top dollar, which is to price the listings slightly or drastically under market value to generate lots of interest and competition between buyers. This is why Buyers often find themselves in this 'highest and best' scenario - the banks plan it that way!

Moral of the story? Don't mess around. If you want the house and see the value in it, chances are someone else does too. Ask your agent for advice on the value of the property...as-is and as-fixed...to determine how high you should go. And, although the average foreclosure has sold for 96% of the asking price in 89 days this year**, these situations often generate fairly quick, full-price-or-higher sales. If the property is not worth that to you, fine. But don't lose a property you love because you think you SHOULD be able to negotiate it down.

This is not to say, of course, that every foreclosure listing is one you should fight for, but once you and your agent see a few homes in the neighborhood and analyze comparable sales, you will know good value when you see it. If you have analyzed the market properly, you should feel comfortable making an aggressive offer that will win you the sale.

For expert Buyer Representation in your foreclosure purchase, contact me today via email at info@lisasanderson.com or toll free phone 888.794.5589 !

**Information gathered from the Pocono Mountains Association of REALTORS MLS system on 5/12/08.

Foreclosure Heat Map For Monroe County

A picture is worth a thousand words.

Below is a screen shot of a map I generated at HotPads.com which illustrates the severity of the 'foreclosure crisis' here in the Poconos. It demonstrates quite clearly the eratic nature of real estate markets, even in our immediate vicinity. Check out the map for the entire country and zoom in on other areas to see how local real estate markets, and foreclosure problems, really are.

The maps are compiled using data from Realtytrac and then color-coded to illustrate foreclosure densities. The cooler the colors, the less foreclosures there are...as the maps changes over to yellows, oranges and reds, the number of repossessed homes is higher.

 

Are you surprised?

FHA Loan Limits Increased

This is good news for homeowners who are in trouble because of an adjusting ARM or other sub-prime mortgage, and could help them avoid foreclosure.

It is also a boon to many home buyers who now have a larger selection of homes because of the higher loan limits.

FHA is an affordable alternative for those borrowers who do not qualify for regular conventional programs, without exposing them to the risks involved in the creative financing that created the problems we hear so much about these days.

Here in Monroe County, the limit for a single family home is raised to $271,050, well above the average sale price here. In Carbon, Northampton & Lehigh, the limit is $402,500, and in Pike County, $729,750. There are higher loan limits available for multi-unit properties.

These new loan limits expire at the end of 2008 so there is some incentive for owners and potential buyers to complete their transactions this year as the limits could revert to the 'old' limits of $200,160 in Monroe County, $305,666 in Carbon, Northampton & Lehigh, and $362,790 in Pike.

Need a recommendation for a local FHA loan expert? Click here.
For more info on the changes, read the HUD announcement.
For info on FHA loan limits in other areas, search here.

Free Foreclosure Prevention Advice

The Hope Now Alliance is a program which offers free counseling to homeowners in jeopardy of defaulting on their mortgages. Whether the borrower is already behind in payments, is facing problems when the adjustable mortgage rate resets, or is able to stay current once the rate resets, help and advice is available.

The first step is to call the 24/7 hotline at 888.995.HOPE (888.995.4673).

HUD-approved counselors are on hand to gather information on the homeowner's situation and to determine eligibility for various options. The call will take around 45 minutes and the caller can expect the counselor to recommend action steps if the information gathering goes well, or a follow-up call if income and debt information is not readily available.

Recommendations vary based on individual circumstances, but options include refinancing, temporary rate freezes, and loss mitigation strategies such as a short sale or deed in lieu of foreclosure. Most often, the best advice is to be pro-active and not avoid the situation because of fear or anxiety.

When homeowners call they will NOT be judged or even billed for the service...it really is intended as a free resource for troubled borrowers to get the help they need, as it is in everyone's interest to rectify these problems quickly.

My best advice to you is MAKE THE CALL.

Further reading:

Avoiding Foreclosure in PA

FHA Refinancing

Representative Kanjorski's 2/4/08 Announcement Re: Fed Funding For Counseling

Refinancing a Sub Prime Mortgage

From the Desk of:

Andrew Williams

President

Abacus Regional Mortgage

Many recent homebuyers have been misled into buying their homes using sub prime Option-Arm mortgages.  An Option Arm mortgage is the kind you see advertised on the internet with lower teaser monthly payments.  The buyer has the option of the lowest payment which is artificially low to start.  Ultimately, the monthly payment goes up dramatically at some point throughout the life of the loan, most likely after the 24th month.  Many mortgage brokers led unsuspecting home buyers to believe that they are unable to qualify for a conventional mortgage.  Some may not, but many were able to qualify for FHA  mortgages.  FHA stands for The Federal Housing Authority.  This agency grants buyers the ability to purchase a home with little money down and forgives some past credit problems.  The truth is that most mortgage brokers aren't able to do FHA mortgages due to regulations.  Instead of offering this type of mortgage, or referring them to someone who can, they talked the buyers into using sub prime mortgages.

The mortgages of choice for most were the Option Arms.  These rates start much lower with no required principal payment.  The buyers loved this option since they could have a manageable  payment to start.  These mortgages have a possibility of "negative amortization".  This is a phenomenon where the principal balance owed on the mortgage can actually increase over time resulting in a much higher amount owed.  Many buyers didn't see this as a problem as long as the value of their home grew faster than the increase in the mortgage balance.  Now we can see with a weaker hosuing market that these loans can be a problem for most Option Arm borrowers.  If the home prices go down over the next few years,  these people are in for a real problem.

We need to get as many people as we can to refinance into an FHA or a conventional mortgage within the  next 2 to 3 years before their mortgage rates adjust upward. Most of these loans contain a 2-3 year prepayment penalty made to deter the homeowner from refinancing out of these loans.  Almost all of these Option Arm and other sub prime mortgage rates change and adjust upward after the second year.  This can be a potential problem for the entire housing industry with potentially devastating financing repercussions.  Many of these homes will be foreclosed from the lender.  Current mortgage delinquencies are  already at twice the historic norm.  FHA has instituted and will be implementing a new emergency mortgage bail-out for homeowners with adjustable rate sub prime mortgages.  If the homeowner's mortgage has become late as a result of the higher payment adjustment,  FHA has said that they will refinance the current home.  The stipulations read that the homeowners may not have been late prior to this adjustment.  They will not rescue people who haven't shown the ability to maintain their mortgage current up to the point of rate adjustment.

For many unsuspecting misled home buyer this is a great opportunity for them to get out of their current situation, keep their house and obtain a much lower fixed interest rate.

FHA Saves the Day with Distress Refinances

FHA now allows distressed homeowners to refinance with current late payments on their credit report.  If someone has a full documentation ARM that adjusted recently and is now having trouble keeping up, an FHA refinance might be able to help.  The catch?  Late payments on  your mortgage must have only occurred since your loan adjusted.  Also, there are limits on the amount of the loan you can get depending on the county the property is located in:  Monroe County, PA is $200,160; Pike County, PA is $362,790; Carbon County, PA and Northampton County, PA are $305,666.  Current legislation in Washington proposes raising these loan limits dramatically, so these numbers could possibly change soon.

If you need more info on the FHA refi program, send me an email and I will get you in touch with an FHA-specializing lender.

Avoiding Foreclosure in the Poconos (and everywhere!)

I ran across a blog post from a fellow real estate agent blogger, Jay Thompson, which features an excellent real-life illustration of the power of the information I presented in an article back in January.  Both of these pieces point to the same advice about what to do if you get behind in your mortgage payments.  And with all the reports (still) about sub-prime lending and its effect on the number of foreclosures across the country, I feel it is important to keep this information out in front of everyone.  This is why I am re-posting the information today by providing the links above.  If you are one of many facing financial difficulties here in Monroe County, PA, or anywhere else, this information is timely and important.  So please help get the word out to people, send this to your friends and family members who you think might benefit from some sound advice.  As always, your comments are appreciated.

 

Doing homework is homebuyer's best strategy

This bears repeating:  A homebuyer's best strategy is to do her/his homework.

Alot of times, potential homeowner's think that looking at houses online, before actually getting out to look at homes, qualifies as research.  While this may be true to a certain extent, finding the house is really one of the last steps.  I have written before about the importance of choosing a professional Buyer's Agent early on in the process, so I won't get in to that here.  However, the next-most-important piece of the puzzle is the money...how are you going to pay for the home that you choose, and how are you going to convince the seller to negotiate with you (ie with a pre-approval letter)?

While looking at properties online, no matter what site or sites you use, you will be bombarded with offers of financing from a myriad of companies, brokers and banks.  Be wary, be VERY wary.  Predatory lending is a huge problem these days, especially online.  I highly recommend that you get lender references from people you know who have had good experiences, work with the bank that currently handles your other accounts (checking, savings, etc), or, the absolute best choice, ask your Buyer's Agent for some lender references!  This is the best choice because your Agent knows who does a good job in the area you are purchasing in and, hopefully, the recommendations will be based solely on his/her successful transactions with them and past client satisfaction.

The two rules of thumb with regard to obtaining mortgage financing are as follows:  1) The more questions you ask, the better; and, 2)  If it sounds too good to be true, it probably is.  I am not making light of this but these are the simplest, basic truths when it comes to avoiding predatory lending and, worse, possible eventual foreclosure.

So, here is your homework: write to me at info@lisasanderson.com for a list of reputable Pocono lenders and a copy of a great pamphlet, 'How to Avoid Predatory Lending', which was put together through a joint effort of the National Association of REALTORS (c) and The Center for Responsible Lending.  It details warning signs, what can happen and what questions you should be asking a prospective lender.  This is only available in hard copy, so please send me your name, snail-mail address and phone # (in case there is a problem with your order-don't worry, I won't harrass you on the phone or give or sell the # to anyone!).

Additionally, do some reading online:  www.hud.gov/buying/index/cfm is a great place to start. 

And of course, post your questions here, give me a call, or send me an email!   

Avoiding Foreclosure in PA

Foreclosure rates are big news these days, especially here in Monroe County where the rate of foreclosure – that is, how often lenders take properties back for non-payment of the mortgage – is one of the highest in the State. It is becoming more common in this era of financing ‘creativity’ for borrowers to get upside-down on their obligations, with the advent of a highly competitive lending market offering low- and no-down-payment loans, adjustable rates, balloon loans and myriad other products to help just about anyone get into a home regardless of their solvency. And the proliferation of Predatory Lending hasn’t helped any. All of these things have exacerbated the usual problems that cause a borrower to get behind, like job loss, medical problems, divorce, etc.

Regardless of the reasons why someone may get behind in their mortgage payments, there are many opportunities to remedy the problem before the foreclosure process starts. The important and thing to keep in mind is, lenders do not want to foreclose and take the property back! Delinquent borrowers often have the mindset that their lender is just waiting for them to get behind so they can take their house. This couldn’t be further from the truth. Banks and mortgage companies are in the money business, not the real estate business. Foreclosing on property often costs the lender upwards of 20% of the outstanding balance, taking into account the costs to foreclose, hold and maintain or fix-up the property. Addressing delinquency issues early is in everyone’s best interest. If you can, call your lender as soon as you know you have a problem in making your payments – before you are delinquent and before the situation becomes harder to resolve.

Unfortunately, when a homeowner gets behind in their payments, their first response is no response-the lenders’ letters and calls go unanswered due to, most often, embarrassment and a feeling that there is little that can be done. ‘You can’t get blood from a stone’ is a self-defeating mindset. This early time in your delinquency is a prime opportunity to explore your options with your lender, especially if you’ve already decided to sell the property. There are a variety of options to be discussed including the acceptance of partial or interest-only payments for awhile, accepting small additional monthly payments to catch up on arrearages, adding arrearages on to the end of the loan, or even refinancing. All of these options give you an opportunity to get caught up, help you to save your credit, and, if you are selling the property, buy you the time you need to get the sale accomplished, before foreclosure occurs.

If these options don’t work, another option is available through the Pennsylvania Housing Finance Agency (PHFA) called Homeowners’ Emergency Mortgage Assistance Program (HEMAP). A homeowner who receives an ‘Act 91 Notice’ from their lender advising them of their delinquency can apply within 30 days for a HEMAP loan to bring their payments current and may be eligible for continuing payment assistance for as long as 24 months. Criteria that determines eligibility for this program are: home is owned and occupied by a PA resident, mortgage payments are at least 60 days behind, the applicant is suffering financial hardship through no fault of their own, and, the applicant has reasonable prospects of being able to make normal mortgage payments after the assistance ends. For more information contact PHFA at 800.342.2397 or www.phfa.org.

Sometimes, though, these remedies are not enough. Perhaps the borrower’s situation is such that getting caught up is not possible and the amount owed on the home is more than what it can be sold for. Usually this occurs as a result of extreme circumstances and the last-resort option available in this situation is called a ‘short-sale’. Basically a short-sale is when a lender accepts less than what they are owed in lieu of going through the foreclosure proceeding. A borrower must prove that they are financially unable to pay back the loan as originally contracted so be prepared for full financial disclosure. It is a good idea to start this process before you begin to market your property as it can take awhile to get bank approvals. This way, when you do find a buyer, you are able to commit to a closing date knowing that the lender is on board with the plan.

Getting behind on your mortgage payments does not have to be the end of your homeownership career, nor does it have to be the death of your credit score. Communicating with your lender early on can make or break your ability to keep your home. And if that is not an option, selling your home is an excellent alternative to foreclosure. If you do decide to sell, talk to your real estate agent frankly about your situation. An experienced agent can help immensely in the process and NOT being upfront about the situation can sabotage your efforts to sell the home. This is not the time to be embarrassed or less than open about your situation. Remember, your goals and your agent’s goals for your listing are mutually inclusive!

Try to be proactive when you get in to trouble with your mortgage payments by addressing the issue early on. But do be wary of scams. HUD reports that the most common scams which take advantage of homeowners in default are skimming and phony counseling agencies. Skimming is when you are approached by someone who promises to pay off what you owe to the lender if you sign over ownership of the property using a Quit Claim Deed. The skimmer then rents out the property, never pays off your mortgage and the lender ends up foreclosing anyway, leaving you with the credit problems. Phony counseling agencies contact homeowners in default and offer to help for a fee. Once they get your money, they either do nothing, or they contact your lender or advise you to sell your house – remedies you can do on your own.

To avoid scams, take the following precautions: don’t sign anything you don’t understand, make sure you get all promises in writing, beware of contracts of sale or loan assumption that do not formally release you from liability for your mortgage, and check with your lawyer, real estate agent or mortgage company before entering into any transaction involving your home.

The key to making the best of the difficult situation of mortgage delinquency and possible foreclosure is take control of the situation by knowing your options, doing your homework and acting decisively. Remember that it is the rare situation that is hopeless and without remedy!