What is a Foreclosure? A Foreclosure is a property which has been acquired by a lender when the borrower no longer makes the payments on a loan. Banks refer to these properties as "REO", an acronym for "Real Estate Owned".
Bellingham & Whatcom County real estate markets have been changing and more properties for sale are now owned by a lender who has acquired title by foreclosing on a loan. Lenders typically list these properties with agents in the local multiple listing service. In some cases, the pricing is very aggressive and offers an opportunity for a below market purchase to a buyer. In other cases, the lender is striving to get as much return on their investment as possible and is very firm on their price.
The process in purchasing a REO is much more straightforward than trying to purchase a short sale, because the lender has established the price. While the response time may be longer than with an individual seller, it is usually within a week or two.
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The current Bellingham/Whatcom County housing climate has created crisis for some homeowners and opportunity for some home buyers. As in any time of instability, there is the potential for risk on both sides. The first step to managing risk is to know the terms; the second step is to have some knowledge of the process; the third step is to have some knowledge of the potential pitfalls.
Short sale and foreclosure are terms we are hearing a lot recently in discussions of the Bellingham and Whatcom County real estate market, and many people use them incorrectly, which gets everybody mixed up. Let’s try to make some sense of all this…but to do that we need to add a few additional terms. We’ll talk about equity, default, distressed properties, bank-owned, REO and foreclosed. Don’t worry, it really isn’t all that hard once you know the vocabulary.
Let’s start by defining the basic terms:
Equity – The amount left over after you sell your house and pay off all the liens (think mortgage, taxes, etc) and costs of sale (think real estate commission, repairs to sell, Washington State and Whatcom County excise taxes, title insurance for the buyer, escrow or attorney fees, etc). Many sellers forget about the costs of sale when calculating their potential equity, which is why you should always get a "net sheet" from your real estate agent. Note: an appraisal, a listing price, an estimate of value allow you to calculate only "potential" equity – you don’t know how much you really have until the check is in the bank.
Short Sale – A sale in which there is negative equity. In other words, the sale price does not cover all the liens and costs of sale, so the seller must bring money to the table to close. If the seller can’t or won’t add money to close the transaction, (s)he may ask the lender to take less than is owed. The seller cannot sell under this circumstance unless the lender agrees, because the seller cannot provide clear title to the buyer. Note: whether the seller is or is not current on the loan payments has nothing to do with whether a sale is "short".
Default – A borrower (property owner) is in default when they have violated the terms under which they agreed to pay back their loan. Typically, this means they are at least 30 days past due on a payment. At this point they will most likely get a call from their lender or a written Notice of Default. It is very foolish to ignore these. Note: a seller in default can have a huge potential equity or none at all.
Distressed Property – An owner’s primary residence which is in the foreclosure process or in danger of foreclosure because the owner 1) has defaulted on the mortgage; 2) is at least 30 days delinquent on the mortgage; 3) believes that they are likely to default on the mortgage within 4 months or 4) at risk of loss due to nonpayment of taxes. This is fully defined under RCW 61.34 and holds pitfalls and additional responsibilities for buyers who offer to help a seller avoid foreclosure. This is a Washington State consumer protection law and penalties are steep.
Foreclosure – The process between the Notice of Default and the auction on the steps of the courthouse. After default, fees & penalties are assessed and the interest rate jumps to the "default rate" as specified in the promissory note that the seller signed when they borrowed the money. During the early part of this process the seller can "bring the loan current" by making all past due payments plus extra interest, penalties, etc. The time comes, however, when a seller’s only option is to pay off the amount owed (which at that point has grown substantially due to the extra fees). This can be done by refinancing the loan (but by this time they probably can’t qualify) or selling the house. The seller does not need permission from the lender to sell, so long as there is sufficient equity to pay all liens and costs. Remember, a seller can be in the foreclosure process but still have equity in the house.
Foreclosure Sale – The final step in the foreclosure process, when the house is put up for auction on the steps of the courthouse and is purchased, usually by the lender, but potentially by anyone. The details of foreclosure sales are an article in themselves (there a number of books available on the subject), so we won’t go into them here. Suffice it to say that when it is over, the borrower no longer owns the house and has a period of time to vacate.
Bank Owned, REO (real-estate owned), Foreclosed – These 3 terms all mean the same thing: the foreclosure process is over and the bank (or whoever bought it at the auction) owns the house. As you can probably tell by now, the primary confusion arises because people often refer to a home at any point in this process as "a foreclosure". What we have just seen is that the conditions which govern what can happen to that home at various times in the process are very different, which means that the impacts on a homeowner and a buyer are very different . . . .
To view the rest of the Short Sale & Foreclosure article by Lylene Johnson click here