How To Buy Foreclosed Homes In California
How to buy pre-foreclosures | How to buy properties at auction | How to buy REOs | How to buy HUD homes | Summary | FAQs
California is a famously expensive state to buy real estate, particularly in popular cities. However, California foreclosures can be an appealing option for buyers looking for a discount.
Before you dive into the foreclosure market, you need to manage your expectations and know what you’re doing. If youâre an investor, California has made it a bit harder to acquire foreclosed homes recently, but that doesnât mean you canâtstill find good deals.
We recommend working with an experienced team of professionals, especially if youâre new to the process, to ensure you have a positive and profitable experience.
This guide will tell you everything you need to know to get started finding, evaluating, and buying a California foreclosure.
How Do You Contact The Homeowner
You can talk to the homeowner before the auction and tell them you know they are in a tough situation. You can first either send a letter or postcard, or just knock on the door.
But Blomquist warns people that homeowners may not be so cordial, and you never know what situation you will encounter. But if the owner is willing, take a tour through the property. Make sure you take note in your head of how much repairs and renovation might take.
Having great tact and empathy can help. Remember that these homeowners are in distress.
Failure To Make Payments Triggers Pre
The borrowerâs obligation, outlined in the promissory note, is to pay the lender back their money. When the borrower fails to make a payment, a red flag is raised and the lender will notice.
The promissory note was an agreement made between lender and borrower. The lender had to make a financial decision based on the borrowerâs ability to make payments. Now that the lender is not receiving money, they will look for alternative ways to get compensated. Otherwise, theyâll be out the money loaned to the borrower.
This is how pre-foreclosure starts.
Pre-foreclosure is when a property is in the process of being repossessed. The minute a borrower defaults on their promise, a pre-foreclosure takes place.
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Who Preforeclosure Properties Are Right For
Preforeclosure homeowners frequently face financial difficulties, and some would prefer to sell the home rather than have a foreclosure appear on their credit report. Preforeclosure homes are commonly available at a reduced rate to market value for investors.
Preforeclosure property investments are right for the following investors:
- Fix-and-flippers: They use a hard money loan to buy preforeclosures that need extensive repairs, then flip the property for a profit to pay off the loan.
- Long-term investors: They purchase homes that are about to go into foreclosure, make the necessary repairs, stabilize the property, and then finish the renovations to make the property eligible for a long-term loan.
Title Reporter Series #5
It is an unfortunate commentary, but when economic activity declines and housing activity decreases more real property enters the foreclosure process. High interest rates and creative financing arrangements also are contributing factors.
When prices are rapidly accelerating during a real estate “bonanza”, many people go to any lengths available to get into the market through investments in vacation homes, rental housing and “trading up” to more expensive properties. In some cases, this results in the taking on of high interest rate payments and second, third and even fourth deeds of trust. Many buyers anticipate that interest rates will drop and home prices will continue to escalate. Neither may occur, and borrowers may be faced with large “balloon” payments becoming due. When payments cannot be met, the foreclosure process looms on the horizon.
In the foreclosure process, one thing should be kept in mind: as a general rule, a lender would rather receive payments than receive a home due to a foreclosure. Lenders are not in the business of selling real estate and will often try to accommodate property owners who are having payment problems. The best plan is to contact the lender before payment problems arise. If monthly payments are too hefty, it may be that a lender will be able to make some alternative payment arrangements until the owner’s financial situation improves.
Your local title company will be happy to provide additional information.
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Always Set A Bid Limit
On the day of the sale, you will probably be very excited. This excitement can often cause people to spend more than they should on a home. Thats why it is a good idea to set a bid limit.
This will help you save money and avoid overspending at the same time. It is suggested that you set a bid limit of 80% of the total value of the home.
If you are not willing to spend that much, you can lower that amount to a more comfortable level.
Buying A Foreclosure Home At Auction: The Basics
If youre interested in buying real estate as an investment, the local multiple listing service isnt your only option. Real estate auctions are growing in popularity. Experienced investors often buy property this way, but technology has simplified the process and has made it less intimidating to new investorsas long as you do your homework and use free tools from Auction.com to find homes close to you.
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How To Find Foreclose Homes
The process for finding a foreclosed home in any location is the same. The most common method is through online listings and searching for the exact area you want a foreclosed house in. With the help of a reliable real estate agent, you can find foreclosed homes up for auction in LA in no time. You can get information like how many rooms the house has, status of the loan, how much to bid etc. This includes information such as the estimated value and the auction date for the house. If youre prefer to do your research beforehand then realtytrac.com and foreclosure.com can be quite useful.
Other than this, you can hire a real estate agent who has access to the Multiple Listing Service to help you out. Normally, people do not have access to this service, therefore, hiring a real estate agent could be a smart option.
You could drive around in troubled neighborhoods and find different signs related to foreclosed homes being up for sale. This is sort of a long shot method but does occasionally end up working.
Finding California’s Redemption Laws
To find the California statutes that discuss the right to redeem after a judicial foreclosure, go to the California Code of Civil Procedure and look at §§ 729.010 to 729.090. Statutes change, so checking them is always a good idea. How courts and agencies interpret and apply the law can also change. And some rules can even vary within a state. These are just some of the reasons to consider consulting an attorney if you have questions about foreclosures.
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Attend The Auction And Bid
Check-in at least one hour before the auctions start. Get an Auction Bidder Card and raise it when the auctioneer announces a price that youre prepared to accept as your winning bid.
If you win the auction, your payment is due immediately or the following business day . Once youve paid in full, youll complete a certificate of sale or an execution of sale receipt, deed upon sale and IRS Form 8300, subject to state-specific laws.
What Types Of Properties Are Sold At Auction
While virtually any type of property or asset can be sold at auction, most home auctionsand the type youve probably heard the most about, thanks to the housing crisisare foreclosures. Depending on the state, a trustee assigned by the lender or an officer of the court conducts a foreclosure sale to recover the balance of a loan from a borrower whos defaulted on their mortgage payments. We estimate the foreclosure backlog will have grown to more than 1.1 million residential properties by the end of the first quarter of 2021, said Daren Blomquist, vice president of market economics at Auction.com.
There are two types of real estate auctions: live and online. The latter is becoming more and more prevalent as people grow more comfortable with making major purchases online.
No matter which route you choose, remember that home buying can be complicated. Companies like Auction.com are making the process more efficient and transparent, but in most cases there are still long contracts, escrow, disclosure documents and other paperwork required by law.
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Why Are Houses Foreclosed
Foreclosure is rarely a choice homeowners make willingly. In general, foreclosure only occurs when there are no other options. Foreclosures are most common due to job loss, serious medical conditions that prevent ongoing employment, serious maintenance issues with the home that a homeowner can’t afford to fix, divorce, or other drivers of consumer, educational, or medical debt.
Is Now A Good Time To Buy A Foreclosed Home
The moratorium on foreclosures due to the COVID-19 pandemic ended on July 31, 2021. Investors predicted a wave of foreclosures when the moratorium ended but so far there is no evidence that has occurred.
People looking to buy foreclosures in today’s market should expect to find a limited supply and competition on most deals.
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How Do You Buy A Foreclosure In California
When most people think of foreclosures, they are thinking of foreclosure auctions. Buying a foreclosure this way requires acquiring the necessary funds in cash â either yourself or from an investor or hard money lender â and then submitting bids at auction with the hopes of being the highest bidder. These can take place in person or online, depending on the county. If you submit a winning bid, you must pay up-front for the property.You can also buy foreclosures that donât sell at auction, which are called REOs. The process for this is the same as conventional purchases, except youâre buying directly from a lender.
What Is A Short Sale
If a pre-foreclosure home is listed for sale, it will be considered a short sale, not a pre-foreclosure. Most pre-foreclosure homes are not for sale.
However, not every short sale is a pre-foreclosure. Some sellers can be current on their mortgage payments and still do a short sale. Sellers who are current on their payments would not fall into the pre-foreclosure category.
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S On How To Buy A Foreclosed Home In California
When you buy a foreclosed home at any of the three stages, there are seven steps you will have to go through, one of which is optional:
Step 1: Get Pre-approved for a Mortgage
Getting pre-approved or pre-qualified for a mortgage means submitting your financial information to a lender. If you are pre-approved, they will give you a pre-approval letter showing that they could give you a home loan up to a certain amount. You could also use this letter as proof that you can afford to pay with the pre-approved amount, which would set you apart from other homebuyers.
Note that if you are buying a foreclosure at an auction, you are likely required to pay in cash. If you do not have enough cash to pay for a foreclosed home, consider securing financing through other means like borrowing from friends and family, getting a home equity line of credit , or withdrawing funds from your 401k or IRA.
Step 2: Hire a Real Estate Agent
If this is your first time buying foreclosed homes, you will have an easier time navigating the process with the help of a real estate agent. They can:
- Negotiate on your behalf
- Tell you about any local regulations that you should be aware of
- Help you draft an offer letter
- Inform you of any issues to look out for
- Answer any questions and concerns you may have about the process
You can use this opportunity to learn more about buying foreclosures, so you could choose to do it by yourself next time.
Step 3: Search for Foreclosed Homes
Should I Get Qualified Before The Sale
If you are going to use a home lending company to pay for your real estate investment, it is a wise move to get qualified before the day of the sale.
This will help the process go much smoother and you will know how much you can afford to spend.
Knowing how much you have will help you rule out some of the more expensive foreclosures. This will save you a lot of time by not having to attend each and every auction.
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Drive By The Property If Possible
This will let you see the homes conditionfrom the outside. Homes in the foreclosure process are usually occupied by the owner whos being foreclosed upon or a renter. Do not trespass or disturb the occupant! Doing so is a criminal offense.
When you bid on a foreclosure, youre bidding on the property as-is. You wont know what condition youll find inside once you take possession. Extra, unexpected repairs could cost you thousands of dollars, so take that into account when figuring out how much you can comfortably bid. Theres a saying among investors thats a pretty good rule of thumb: How it looks on the outside is what its going to look like on the inside. In other words, an unkempt exterior indicates an unkempt interior, while a home with great curb appeal will probably look similar inside!
Mortgage Vs Deed Of Trust
Both a mortgage and a deed of trust are legal documents that secure repayment of a real estate loan by placing a lien on a property. A lien gives the lender a remedy in case the borrower defaults on the loan, allowing the lender to sell the property to recoup its money.
There are several differences between mortgages and deeds of trust. One is the number of parties. A mortgage involves two parties, the borrower and the lender. A deed of trust involves three parties: the borrower who is termed the trustor, the lender who is termed the beneficiary, and the trustee. The trustee is an independent third party who holds the deed of trust. The other difference involves whether the foreclosure must occur through a court action.
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Final Thoughts On The Foreclosure Process
One of the most crucial aspects of the foreclosure process is time. Itâs all about the timeframe. If the borrower is having any difficulty making the payments, the best thing to do is to contact the lender immediately.
Things get messy when the borrower procrastinates the issues. This isnât a problem that goes away if the borrower ignores it. It has the potential to leave a devastating impact on the borrowerâs life.
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Real Estate Bubble Communities
Another easy way to find these types of homes is to target communities that were built during the real estate bubble, where many original owners remain.
Some of these homes might still be under water, especially if there was no full recovery in that area. These homeowners are probably not delinquent, although they might not be able to sell without doing a short sale, because they might have no equity.
When a home is listed as a short sale, most agents will expose the property to the greatest pool of buyers in the marketplace, which will no longer give you the edge. If you’re buying a home in pre-foreclosure, keep in mind that you’re buying it as-is. You’ll need to cover inspections and repairs, so it may take more time for the lender to approve the sale.
Most first-time homebuyers would do better to concentrate their efforts on locating regular sales. Pick a good real estate agent to help you buy a home and help you negotiate.
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Receiving A Nod And The Borrowers Financial Options
Once a lender flags a borrower for missing their loan payments, they send a Notice of Default . A NOD is a court-filed public notice that declares the borrower has defaulted on their loan.
As the name suggests, this is a letter from the lender to the borrower notifying them of their missed payments. The borrower has 90 days from when they receive the NOD to fulfill the overdue payments.
Oftentimes, financial hardships are the reason why borrowers miss payments. They simply cannot afford to make the payments. If thatâs the case, the borrower has a few financial options to escape the foreclosure process:
Option #1: Equity
In a pre-foreclosure, the borrowerâs first option is their homeâs equity. If the borrower has equity in their home, they can sell their home to get the money needed to pay off the loan.
For example, the borrower withdrew a home loan for $1 million. If the house they bought is worth $1.5 million, they can sell it to pay the loan in full.
Option #2: Short Sale
A short sale is a request by the borrower when their home is worth less than the loan amount. For example, the total amount of the loan is $1 million but the home is only worth $800,000.
Does the borrower still owe the remaining balance on a home loan after a short sale? No. The remaining loan balance is forgiven. But, the borrower does undergo massive damage to their credit score. This will make it harder to borrow money in the future.
