Help Me Understand Foreclosures (Example Included)

[Michael B.]

Hi BP. Not too long ago, I took an opportunity to learn a bit about foreclosures. The information sounded interesting at the time, but now that I think about it, I'm having trouble making it make sense.

So, say you obtain a list of addresses for which banks have filed to foreclose. You contact the owner of a house and express interest in buying their house. Perhaps you can make them a deal before the foreclosure goes through.

It sounded like it could be a win win, which I would be a fan of. I'm not a fan of the idea of someone's hardship being an opportunity. So, what's in it for the owner? Is it that they can get a better deal from you than from the bank/lender? Why would they not just sell the house prior to foreclosing? What's in it for the buyer/investor? If you have to pay all the back payments and whatever else, how will it be a good deal? I've heard of owners walking away from a house. Why would they do this instead of trying to sell? Why would they abandon a house and not go through the process.

If you're willing to offer insight on that, perhaps you'll look at considering this example for me. Check out the price history. 

https://www.zillow.com/homedetails/121-Cooper-Dr-H...

1/13/17: Sold: Foreclosed to Lender - $65,444. Does this mean the bank bought it for 65,444? That doesn't make total sense to me as why would they "buy" it but I'm not sure what else the 65,444 price means.

8/8/17: Sold: $79,000. Would you assume an investor, flipper, or other purchased the house from the bank/lender for 79K?

From there, it was listed, then price dropped to 129K, then removed. I think there is still a for sale sign in the yard though. 

In the example above, does my understanding of the sequence seem pretty close?

Your analysis is much appreciated.

[Cara Lonsdale]

So, you have this MOSTLY right, but you are off a little bit.

When you see that the property was "Sold - foreclosed to lender" This means that no one bid on it at auction and it reverted back to the lender who held the note. From that point, it becomes an REO. Depending on what type of loan it was, it could be sold from the lender directly, or turned over to HUD (FHA) or HomePath (Fannie Mae), etc. Then they sell it.

It is hard to say by the tax records who bought it from the lender because it isn't listed.  However, with the timing of each action, it appears to be a flipper.

To answer your question about the Seller's inactivity.... Often times Sellers go into denial.  They just don't believe it will happen, and often times don't do anything until it is too late.  They may think that something will come along to financially resolve it, or just forget that it exists.  People that are about to lose their home usually have more than that going on in their lives.  So, the strees and emotional strain can be overwhelming.  This may not make sense to someone without peril in their life, but anyway, that is why these things happen with no movement from the Seller.  Sometimes they could be angry, and are determined to go down with the ship....so to speak.  In the market downturn, I was driving to a listing for sale and passed a house where the owner had spray painted on the garage "B of A STOLE this house".  I never forgot that.

To answer your question about what's in it for the Seller.....saving their credit, for starters.  By the time they are nearing foreclosure, their credit is BAD.  However, a foreclosure ENSURES that they will not be able to by a home under traditional means for 3-5 years....sometimes longer.  So, if you can negotiate a deal prior to the trustee sale, that could help them in the long run.

What's in it for you?  You get to make a deal with the Seller and avoid having to compete for the property at trustee sale.  You also get the opportunity to look inside, which is something that isn't offered with a trustee sale.

Sure, you may have to pay back taxes, but there should be enough equity for the deal to make sense which still accounting for this.  Example:  Just this week I found a property up for trustee sale.  It was worth $775K.  It had $15K in back taxes due.  It sold for $630K.  There was PLENTY of room to pay the back taxes and still have money to be made as the investor.

I hope that helps explain a little bit about the process.