Can I buy a home directly from an owner facing foreclosure?
Real Estate Agent · Emerald Coast, FL · Member since 2016 · 820 posts · 486 votes
Can I buy a home directly from an owner facing foreclosure in advance of the foreclosure auction? For example, I see a home up for auction, and the amount owed is about $38,000. Assuming this is the only debt (and I understand the importance of a title search), could I make a deal with the owner to buy the house for $38,000 (paying it directly to the bank where it is owed)--effectively saving them from having a foreclosure on their record and getting a house worth way more for only $38,000? This seems possible but too simple. Looking forward to your sage advice!
You can purchase it BEFORE the auction. You must reach a deal with the owner and it must be at least enough to extinguish the mortgage. If it is worth far more than the amount owed there may be another reason such as a superior lien, etc. You would need to get a contract with the owner, and use a title company. They would get payoff figures, etc and you would need to close before the sale. I purchased one last year and we closed three days before the auction. Although it still showed up on the county auction website and was "bid on", we closed prior to the sale. Time is going to be of the essence in these types of transactions. Generally, it may be tough to get fast quick answers due to attorneys and banks being involved. In my deal, I had a contract for several weeks before the auction. The owner found out about the sale roughly a week in advance, and I didn't get payoff figures till four days prior to sale. We waited and waited weeks before they finally were able to provide that info, and it quite possibly might never have occurred being so close to sale date. Last but not least: DON'T sign contracts with owners unless you have funds. They are already in a bind and the last thing they need is their hopes raised and then get let down.
In Washington state, the states main concern when your buying a pre-foreclosure is in the area of equity skimming. This means that you bought the property subject 2 and in any way you defaulted on the property within the first 2 years. Typically people would rent the property out and collect the rents and not pay the mortgage and just pocket the cash. Hence forth the equity skimming laws.
However there is nothing preventing you from buying the home and paying off the existing mortgage completely at closing. I would check your states laws before proceeding, maybe even have a conversation with a real estate attorney as well. Then if all looks good, plan to payoff the balance at closing and you end up with the good deal that your looking for?
@Huninder Mann That actually is not true. Be very careful on generalities. These are State Specific Laws
Washington State does it one better:
"Chapter 61.34 RCW provides that the conduct of buying Washington distressed residential real property purchased from a homeowner who is behind on mortgage payments (or unpaid property taxes) and facing bank foreclosure (or tax sale) may be construed as ‘equity skimming’ and therefore, may be illegal (both civilly and criminally).
@January Johnson I have no idea about laws in Florida, but buying "pre-foreclosure" has been a common investment strategy. You see the ones on the list, you see how much is owed, if there is a big enough spread you make offers and do your due diligence during the option period. You can help everyone...If the house in question is really worth $100K, then you probably need to offer more than the $38,000. Offer $45,000 or $50,000. That gives the owner some money to move, some money for rent, etc. Chances are a pitch that I'll save you from foreclosure alone is NOT going to work. These typically aren't ready home buyers....out looking for their next property....their credit already shot if they aren't paying the mortgage, etc. So you need to give them some kind of real incentive to sell.
If it is an inherited house the original loan may not be in the name of the seller, but the deceased where credit is no longer an issue....so the incentive for the seller is some cash and maybe quick cash....chance for orderly move, chance to have money for a deposit or double deposit or triple deposit on a new place...money to pay rent for 2-3 months at the new place etc.
You still have plenty of equity capture that would make most investors happy.
You pay off the lender, who now doesn't have to loose money on a foreclosed home and gets the bad debt off their books.
Everyone should be happy.
I personally think you have to be in the mindset of helping everyone solve issues. Maybe your attorney can help you set up a strategy to avoid getting targeted as an equity-stripper. I can't imagine if you play fairly most of the time you're going to get prosecuted. If you're out to take take take from everyone, like too many investors, yes, then perhaps you get targeted....there always seems to be some bad players, that get the laws changed for everyone.
I can't imagine you present your case as....hey this guy gets nothing in 3 days. I stepped in and paid off the loan, helping the lender out. I kept a foreclosure off his name/family name. I paid him $5000 cash and let him get all his stuff out, and helped him find a new place to live. Here are pictures of the ugly house before, here are pictures of the beautiful house now. Value then was x, value y is now contributing an additional x$ to our local taxing entities and schools. Here is the time I spent doing this, here are the costs I incurred, Here are pictures of the new family I helped get in an affordable home. Here's a picture of the new loan officer who made a few dollars, here is a picture of the contractor who made a few dollars, here's a picture of the landscaper who made a few dollars. Here's a picture of a local teacher who is paid by the tax dollars generated and PAID.
Does a judge or jury prosecute you for equity stripping?....could happen....but then they have to prove you are an opportunist evil investor out to screw everyone.
Since you are an agent, you might run it all past your broker to see what they say.
Thank you so much, @Bruce Lynn! Yes, I would totally offer him more than the $38K. I'm going to make my move today - I'm a little scared since I'm TOTALLY GREEN at this, but it's worth a shot.
In Washington state, the states main concern when your buying a pre-foreclosure is in the area of equity skimming. This means that you bought the property subject 2 and in any way you defaulted on the property within the first 2 years. Typically people would rent the property out and collect the rents and not pay the mortgage and just pocket the cash. Hence forth the equity skimming laws.
However there is nothing preventing you from buying the home and paying off the existing mortgage completely at closing. I would check your states laws before proceeding, maybe even have a conversation with a real estate attorney as well. Then if all looks good, plan to payoff the balance at closing and you end up with the good deal that your looking for?
Hi Kevin, it goes deeper than that. Consult a real estate attorney for details. It doesn't limit it to Subject To and defaults. That is the previous law, which has been added to. In your example of paying off the existing loan. If the house is worth $200,000 and the loan is $100,000 and you simply paid off the existing loan, with out follow the formulas established in the Statute, you will receive fan mail from the Attorney General asking for your presence at a party being held in your honor, and oh, we want your attorney to come along with you.There are a lot of hungry attorneys out there taking cases of "distressed" homeowners pro bono, since you will end up paying their fees. Not worth it. Don't do it. Slap yourself if you are thinking of doing that in Washington without first consulting an Experienced real estate attorney who has been practicing at lest 5 years and has been to trial on a couple of cases.
"Chapter 61.34 RCW provides that the conduct of buying Washington distressed residential real property purchased from a homeowner who is behind on mortgage payments (or unpaid property taxes) and facing bank foreclosure (or tax sale) may be construed as ‘equity skimming’ and therefore, may be illegal (both civilly and criminally).
Okay, @Account Closed not to say that I'm the authority on this subject matter, I'm not, but please show me in the RCW where it prevents a straight up sale? Maybe I missed that section?
(1) An "act of equity skimming" occurs when:
(a)(i) A person purchases a dwelling with the representation that the purchaser will pay for the dwelling by assuming the obligation to make payments on existing mortgages, deeds of trust, or real estate contracts secured by and pertaining to the dwelling, or by representing that such obligation will be assumed; and
(ii) The person fails to make payments on such mortgages, deeds of trust, or real estate contracts as the payments become due, within two years subsequent to the purchase; and
(iii) The person diverts value from the dwelling by either (A) applying or authorizing the application of rents from the dwelling for the person's own benefit or use, or (B) obtaining anything of value from the sale or lease with option to purchase of the dwelling for the person's own benefit or use, or (C) removing or obtaining appliances, fixtures, furnishings, or parts of such dwellings or appurtenances for the person's own benefit or use without replacing the removed items with items of equal or greater value; or
(b)(i) The person purchases a dwelling in a transaction in which all or part of the purchase price is financed by the seller and is (A) secured by a lien which is inferior in priority or subordinated to a lien placed on the dwelling by the purchaser, or (B) secured by a lien on other real or personal property, or (C) without any security; and
(ii) The person obtains a superior priority loan which either (A) is secured by a lien on the dwelling which is superior in priority to the lien of the seller, but not including a bona fide assumption by the purchaser of a loan existing prior to the time of purchase, or (B) creating any lien or encumbrance on the dwelling when the seller does not hold a lien on the dwelling; and
(iii) The person fails to make payments or defaults on the superior priority loan within two years subsequent to the purchase; and
(iv) The person diverts value from the dwelling by applying or authorizing any part of the proceeds from such superior priority loan for the person's own benefit or use.
@Kevin Romines I guess you should read the WHOLE statute, but hey, partial information just gets you into trouble, who am I to worry? Ok, here it is:
61.34.030 Criminal penalty.
61.34.120 Distressed home purchaser—Prohibited practices.
A distressed home purchaser shall not:
(3) Enter into repurchase or lease terms as part of the distressed home conveyance that are unfair or commercially unreasonable, or engage in any other unfair or deceptive acts or practices;
Please clearly define "unfair" to the satisfaction of the judge
(6) "Distressed home purchaser" means any person who acquires an interest in a distressed home under a distressed home conveyance. "Distressed home purchaser" includes a person who acts in joint venture or joint enterprise with one or more distressed home purchasers in a distressed home conveyance. A financial institution is not a distressed home purchaser.
(7) "Distressed homeowner" means an owner of a distressed home.
Since this is state specific and boring to the rest of BP, PM me with any other insights on this one. ;-)
@Account Closed I'm trying to follow your information here, but it doesn't seem to match what the actual 61.34.120 says?
It seems you have been jumping around a bit Ken. Here is the actual 61.34.120 in its entirety.
A distressed home purchaser shall not:
(1) Enter into, or attempt to enter into, a distressed home conveyance with a distressed homeowner unless the distressed home purchaser verifies and can demonstrate that the distressed homeowner has a reasonable ability to pay for the subsequent conveyance of an interest back to the distressed homeowner. In the case of a lease with an option to purchase, payment ability also includes the reasonable ability to make the lease payments and purchase the property within the term of the option to purchase. An evaluation of a distressed homeowner's reasonable ability to pay includes debt to income ratios, fair market value of the distressed home, and the distressed homeowner's payment and credit history. There is a rebuttable presumption that the distressed home purchaser has not verified a distressed homeowner's reasonable ability to pay if the distressed home purchaser has not obtained documentation of assets, liabilities, and income, other than an undocumented statement, of the distressed homeowner;
(2) Fail to either:
(a) Ensure that title to the distressed home has been reconveyed to the distressed homeowner; or
(b) Make payment to the distressed homeowner so that the distressed homeowner has received consideration in an amount of at least eighty-two percent of the fair market value of the property as of the date of the eviction or voluntary relinquishment of possession of the distressed home by the distressed homeowner. For the purposes of this subsection (2)(b), the following applies:
(i) There is a rebuttable presumption that an appraisal by a person licensed or certified by an agency of the federal government or this state to appraise real estate constitutes the fair market value of the distressed home;
(ii) "Consideration" means any payment or thing of value provided to the distressed homeowner, including unpaid rent owed by the distressed homeowner before the date of eviction or voluntary relinquishment of the distressed home, reasonable costs paid to independent third parties necessary to complete the distressed home conveyance transaction, the payment of money to satisfy a debt or legal obligation of the distressed homeowner, or the reasonable cost of repairs for damage to the distressed home caused by the distressed homeowner. "Consideration" does not include amounts imputed as a down payment or fee to the distressed home purchaser or a person acting in participation with the distressed home purchaser;
(3) Enter into repurchase or lease terms as part of the distressed home conveyance that are unfair or commercially unreasonable, or engage in any other unfair or deceptive acts or practices;
(4) Represent, directly or indirectly, that (a) the distressed home purchaser is acting as an advisor or consultant, (b) the distressed home purchaser is acting on behalf of or in the interests of the distressed homeowner, or (c) the distressed home purchaser is assisting the distressed homeowner to save the distressed home, buy time, or use other substantially similar language;
(5) Misrepresent the distressed home purchaser's status as to licensure or certification;
(6) Perform any of the following until after the time during which the distressed homeowner may cancel the transaction has expired:
(a) Accept from any distressed homeowner an execution of, or induce any distressed homeowner to execute, any instrument of conveyance of any interest in the distressed home;
(b) Record with the county auditor any document, including any instrument of conveyance, signed by the distressed homeowner; or
(c) Transfer or encumber or purport to transfer or encumber any interest in the distressed home;
(7) Fail to reconvey title to the distressed home when the terms of the distressed home conveyance contract have been fulfilled;
(8) Enter into a distressed home conveyance where any party to the transaction is represented by a power of attorney;
(9) Fail to extinguish or assume all liens encumbering the distressed home immediately following the conveyance of the distressed home;
(10) Fail to close a distressed home conveyance in person before an independent third party who is authorized to conduct real estate closings within the state.
@Kevin Romines Yes, I've jumped around because it is a boring subject to everyone but you and me. ;-)
If you want to start a Thread devoted to this issue, invite me to it and we will carry on.
You must be a "technical wonk" like I am. Anyway, here is the rest of the story.
YAWN!! LOL
(If 61.34.030 doesn't bother someone, in light of the fact that it's up to the court to decide if it was a "Fair" transaction; the word "FAIR" is NOT defined by law; then they need to have the side of their head slapped. Why risk it? 61.34.030Criminal penalty.
Incidentally, in Washington and probably Oregon and California, when it involves a distressed seller, the Investor is always assumed to be in the wrong until proved otherwise. That is not hyperbole, that is what the judge told me over coffee and unofficially. I know two Ex-Washington real state lawyers (not partners, separate practices) that I used to use, that moved from Washington and stopped practicing law in Washington specifically because of the unfair bias, particularly in King Co. (Seattle)
Chapter 61.34 RCW DISTRESSED PROPERTY CONVEYANCES Chapter Listing | RCW Dispositions
Sections
61.34.010Legislative findings.
61.34.020Definitions.
61.34.030Criminal penalty.
61.34.040Application of consumer protection act—Remedies are cumulative.
61.34.045Arbitration not required.
61.34.050Distressed home consulting transaction—Requirements—Notice.
61.34.060Distressed home consultant—Fiduciary duties.
61.34.070Waiver of rights.
61.34.080Distressed home reconveyance—Requirements.
61.34.090Distressed home reconveyance—Entire agreement—Terms—Notice.
61.34.100Distressed homeowner's right to cancel.
61.34.110Notice of distressed homeowner's right to cancel.
61.34.120Distressed home purchaser—Prohibited practices.
@Kevin Romines It's recommended that you review
Washington State Supreme Court Ruling Feb 6, 2014
Jametsky v. Olsen, No. 88215- 1
NOTE: "any discrepancy between the sale price and the fair market value of the property,"
Do you want to spend two years in court and $150,000 just to convince a judge that it was a "Fair" deal?
“and (4) any discrepancy between the sale price and the fair market value of the property, trial courts will be able to accurately conclude whether a distressed property was conveyed and whether the protections of the DPCA apply to the transaction in question. That said, this basic framework should be viewed as a starting point and does not purport to account for unique factors and circumstances that may exist in certain cases. “
It's been fun, see you at the next thread, I'm OUTTA here.
My (very impressive) real estate attorney had a brilliant idea (caveat: he has the expertise/specialty and the resources to find the right stuff) was to find properties that were about to be foreclosed on. We would go and purchase the loan from the bank (preferably at a discount) and then go through the foreclosure process ourselves and take over the property. So if the loan balance was $100k on a $200k ARV property we would try to buy the loan from the bank at $90k to keep them from having the hassle of a foreclosure. Then foreclose ourselves and take over. We have not done this yet, but it is an intriguing idea.
My (very impressive) real estate attorney had a brilliant idea (caveat: he has the expertise/specialty and the resources to find the right stuff) was to find properties that were about to be foreclosed on. We would go and purchase the loan from the bank (preferably at a discount) and then go through the foreclosure process ourselves and take over the property. So if the loan balance was $100k on a $200k ARV property we would try to buy the loan from the bank at $90k to keep them from having the hassle of a foreclosure. Then foreclose ourselves and take over. We have not done this yet, but it is an intriguing idea.
LOL! Brilliant! That made my morning. This is an intriguing idea too. Perhaps your attorney can find a builder to make these... ;)
@Chris Martin - LOL. My attorney has actually done precisely what we're talking about, but on a large scale for clients (talking millions at a time). The problem for us would be that we would be doing small deals. Finding a situation where the lender is small enough where we could actually get through would be the issue.
Okay @Account Closed I think we both have book ended the pit falls of Washington states laws. Let the those out there read the actual laws and apply them for themselves.
Although as I clearly pointed out, it is equity skimming when you are putting the home owner / seller back into the home. Not when you are merely purchasing the property and the seller is moving on with no interest from that point forward. However, Ken you have pointed out that you could be at risk if a fair market value inst paid for the home.
Fair market doesn't mean what the judge determines as value, it means what the market will bear for the sale of that home within the time frame that it needs to be sold. Keep in mind, the 1st indication of market value is what someone is willing to sell for and what another person is willing to buy it for. Comps of like type properties within a 1/2 mile radius that have sold within the last 3-6 months and adjusted out for differences in amenities and condition, location, help complete the value picture.
What is funny is, if you had 10 appraisers and 10 realtors all value a home, they would be all over the board with valuations. Who is correct, who is wrong? Its subjective, based on available data and how each person applies that data. It will always be that way.
I do agree with you that extreme caution needs to be used here, because why would you want to cause yourself undue stress and money just to complete a deal.
That said, below is the law of unintended consequences by our legislators in their zest to protect the public.
(11) "In danger of foreclosure" means any of the following:
(a) The homeowner has defaulted on the mortgage and, under the terms of the mortgage, the mortgagee has the right to accelerate full payment of the mortgage and repossess, sell, or cause to be sold, the property;
(b) The homeowner is at least thirty days delinquent on any loan that is secured by the property; or
According to the law, you as a buyer could be at risk if you bought any home that was even 30 days late on the mortgage, weather you knew it or not? How many sellers will volunteer to give you an up to date statement of their mortgage account as part of a sale? They would also need to do so early enough in the transaction to allow you to cancel? Scared now, or does common sense come into play? If taken by that standard, a very large percentage of all sales could fall into that category?
Wouldn't it be prudent to have all of your subject to/lease purchase deals run by a local Real Estate Attorney, and if the paperwork is signed by all interested parties, then the only thing you could face is a lawsuit if you didn't follow through on any of the conditions set by those documents. How could you face criminal penalties for not breaking any laws, and arent all real estate deals submitted to and recorded at the courthouse? I am interested in pursuing these exact strategies in the near future so any advice on Washington state laws would be appreciated.
I would not recommend doing these on a subject 2. I would only consider a purchase where the seller gets cashed out at closing. Due to the Washington State laws, you are running big risks as a subject 2? I would advise that you go to the links of this law and read it carefully, further, I would get the advice of an experienced attorney that specializes in real estate and foreclosures, regarding these matters. To much at risk to just wing it on these.
Hi Kevin,
Thanks for the advice, what are the laws in WA regarding Subject To's that you feel make it not a viable option for an investor? If you could take a mortgage that is not performing and get a new buyer in there that would make it a performing asset for the bank, why would they then want to call the note and take the risk and expense of it on themselves?