Pre-Foreclousures and Taxes

Pre-foreclosures, Short Sales/Buying from the Bank


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By Money Coach Elaine Zimmermann

Finding a foreclosure before anyone else or a “pre-foreclosure” can be a worthwhile investment. Buying a preforeclosure from a bank as a “short sale” can guarantee the purchaser equity on the day of closing. A “ short sale” or “short payoff sale” is one in which the lender allows the property to be sold for less than the exiting loan balance.

Understanding the foreclosure process gives you some insight into locating foreclosures at their earliest stages.

The Federal government forecloses on hundreds of thousands of homes each year that have been financed through several of its funding source: Veterans Administration (VA), Housing and Urban Development (HUD), FANNIE MAE and Federal Depository Insurance Corporation (FDIC). These homes can make lucrative investments and there are many special programs to allow purchasers to buy these homes with little or no down payment and many have repair allowances. Once the homes are taken back by these federal agencies they appear on the http://www.foreclosuresus.com database.

Banks and financial institutions take back homes that they have loaned funds against. They refer to the properties they retrieve as REO’s or real estate owned. Within larger banks, they are REO departments solely devoted to the resale of these properties. Banks supply their REO listings to the foreclosuresus.com database. Most contain the bank’s name and the contact person’s name and phone number.

New homes can also appear on bank REO lists. Builders who build “spec” homes, homes not presold but built “speculatively”, finance the construction through banks. Sometimes when a builder has several homes that have remained unsold for an extended period of time, the bank will take back the homes. These homes will also appear within the bank’s REO listings.

In some cases and with some additional effort, you can find these homes prior to going into foreclosure or pre-foreclosures. In the case of bank REO’s, when reviewing the list of banks and their contacts become familiar with local contacts of REO departments at banks in your city. As you become acquainted with these contacts, you can tell them the type of home you are looking for and the area. If you check back on a regular basis, you may obtain information on homes prior to it being added to the public database.

When you review the database further, you will notice that many smaller banks do not include their REO listings. They may have too few foreclosures to have a REO department. You should contact these institutions directly and ask who is the person designated to dispose of these properties. Again, your effort may reap you information about properties that are not in any public database.

“Preforeclosure Short Sales” are not handled in the REO departments of banks, but rather in the “Loan Loss Mitigation” Departments. You can find current, nationwide preforeclosures at http://www.ipreforeclosures.com

Bank Loan Loss Mitigation Departments

When a borrower begins to miss payments the loan is sent to the bank’s loan loss mitigation department. Most banks also consider short loan payoff sale requests in their loss mitigation departments.

Lenders only will approve a short sale as a last resort. The circumstances that would lead a lender to resort a short sale for a property are directly related to the property’s value as it relates to the amount owed to the bank. If a property was purchased in an inflated market that has experienced a severe downturn, the home may have decreased in value and the loan maybe “upside down”—more is owed than it is worth. The lender may consider a short sale. The same holds true if a property was refinanced at 100 percent plus leaving the property without equity. Another circumstance where a bank may consider a short sale would be in the case of a deteriorating property with would require extensive repairs to make it marketable.

Lenders also require borrowers to show hardship before they will approve a short sale.
These can include financial hardship bought on by: catastrophic illness, death or divorce of a spouse, employment loss or incarceration of the borrower or borrower financial insolvency without any realistic chance of improving in the near future.

Cash Only

A short sale is always a “cash only” sale, which will keep many investors away. Also, it is an “arm’s length sale”, meaning you cannot purchase a home of a relative. If you do you are open to a lawsuit and the sale being reversed.

Buying a foreclosure or a pre-foreclosure from a motivated seller can be a good investment for you and in the case of pre-foreclosure a good solution for someone else. A “short sale” is one way to purchase a home with guaranteed equity to the investor.

Elaine Zimmerman is the author of How to Retire With a Million Dollars and the president of www.ForeclosuresUS.com.







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