The Poop on Foreclosures
A couple bought a house at a foreclosure sale, but when they got inside they learned they found stacks of dead animals and mountains of animal poop. The buyers are scrambling to get out of the deal, but, at least from the news report, there are no obvious grounds for reversing the sale.
The story is pretty gross, but it highlights something that lots of people don't realize: A homeowner is entitled to stay in possession of the home until after the foreclosure sale. No one --not the bank or the potential buyers--have any right to enter the house to see if the room arrangement is pleasing, the plumbing is functional or there isn't poop several inches deep on the floor.
As the subprime market continues its downward trend, keep your eye on the poop.
A foreclosure sale isn't like a regular sale, with all the attendant warranties. The owner can stay in possession and keep the door bolted, for clear policy reasons: Until the legal process is completed, the homeowner is the owner. Besides, there would be a huge cost imposed on struggling homeowners if the mortgage company could take the property away without giving the homeowner some kind of day in court.
But the consequence of the owner-in-possession rule means that mortgage foreclosure sales can bring a LOT less than the market value of the home. An angry, frustrated, judgment-proof homeowner may destroy the property. Once a homeowner knows the house will be lost, any delays mean that the homeowner can live rent-free for a long time. I was talking with a mortgage lender last week who estimated that by the time the mortgage lender company paid expenses, that it would clear about 15-30% of the actual market value of the property.
Not everyone facing foreclosure is destructive (although some may be). Not everyone in foreclosure has a weird or ugly home inside (although some may). But the market analysts have told us that rational pricing should be all about risk management. A mortgage lender holding a $125,000 mortgage on a $100,000 home may have a lot of leverage against a homeowner who doesn't want to lose the house, but that if the lender has to push all the way to foreclosure, the leverage changes and the risk of write-down could be in the 80-90% range.
In past housing downturns, homeowners and their lenders often came to the table to negotiate. But as Gretchen Morgenson reported two weeks ago, the new asset securitization pools often mean fractional ownership and pooling arrangements that leave no one with authority or incentives to negotiate a deal that is better for the lender--and for the homeowner.
Foreclosure is in no one's interest. But this market seems to be stepping deeper and deeper in poop. (PS Thanks to Colin Marks at St. Mary's for the poop story.)
One suggestion for anyone looked to buy foreclosed property: only go for REO (real estate owned) property. That means the foreclosure is complete and the house is empty. You can indeed inspect it first, and generally there will be no lien or title issues left since those were cleared in court already. Also, you can generally finance the property the normal way rather than paying cash. And since the company that owns the property has a strong incentive to sell (they're paying property taxes and upkeep and some utilities as needed with nothing coming in) the property will be priced to sell.
September 8, 2007 5:38 PM | Reply | Permalink
Believe it or not, the guy who bought the $2.6 million New Jersey mansion in a foreclosure sale that was filled with animals and poop has reportedly succeeded in getting a court to void the foreclosure sale. He reportedly is entitled to receive his deposit back. Check out:
$2.6 Million NJ "Cat House" Foreclosure Sale Voided; "Duped" Buyer To Get Back Deposit, at:
http://HomeEquityTheft.blogspot.com/2007/09/26-million-nj-cat-house-foreclosure.html
September 9, 2007 7:51 AM | Reply | Permalink
Hey, JP, I've never heard of REO. How does that work? Is it listed liked that or what? Could there be remainin lien issues if a second or third mortgage was foreclosed, or is it only listed as REO after all liens have been wiped out?
September 9, 2007 4:09 PM | Reply | Permalink
all real estate agents know this. This is why you can't make a guaranteed return by going to a foreclosure auction, buying on debt, and then flipping at a higher value. What you're buying has likely been junked and will need extensive renovations. People who know they are losing their homes have no incentive to take care of a mold problem.
The issue here is that most of these foreclosures shouldn't happen. In a foreclosure, the lender loses money and the borrower loses everything. The lender should renenogiate in order to get the best possible return. Drop some late fees and 3 points of interest in favor of a consistent lower monthly payment.
But in the current economy, with loans packaged and sold to the investment community, renegotiation is not an option. The hedge fund that bought the loan wants it's 7% a month. They'll accept nothing less. They'd rather foreclose and take the loss than negotiate the terms downward because they're afraid of setting precedents that will bring down the returns of the entire portfolio that they've purchased. Better to take a loss on one loan than to negotiate a thousand loans down.
The secondary market is the problem here. Institutional investors who have purchased loan portfolios should be forced to negotiate with home owners in trouble, just the way an initial lender would.
thosethingswesay.blogspot.com
September 9, 2007 5:33 PM | Reply | Permalink
"That means the foreclosure is complete and the house is empty"
an additional note of caution, for the squeamish (amongst whom I count myself...) The buyer who takes title via the foreclosure sale itself is then obliged to bring on an action to evict the heartbroken family. Think tear-stained five year old faces and moving cartons with kittens...
Welcome to Bush/Bernanke World. Enjoy the boom.
September 9, 2007 5:33 PM | Reply | Permalink
A property reaches REO status once all the court proceedings are complete*. It basically means that the bank/mortgagee holds title to the property outright and can dispose of it as they see fit-- but must also take responsibility for the property in regards to taxes, upkeep etc. (though the upkeep will be as minimal as possible).
I have no idea how such property is marketed. Often of course it is "distressed" and so may need $$ put into it. But you will at least know that going in and you have all the usual protections, such as they are, of a new owner buying a property.
All past liens, including 2nd mortgages, should be settled and released when a property is classed as REO-- the main lien holder has arrived at a deal, or the courts have imposed one, with any other lien holders (including taxing authorities, unpaid workmen, and anyone with any sort of legal suit against the former owner). Otherwise the mortgagee could not have gained clear title. However beware of subsequent liens (unpaid taxes, maintenance work performed by the local authorities from after the mortgagee took title). These should be openly stated but they do have to be paid.
* This may takle up to two years-- be aware that REO property has probably been sitting vacant, and unrepaired, for a long time.
September 9, 2007 6:40 PM | Reply | Permalink
Re: The buyer who takes title via the foreclosure sale itself is then obliged to bring on an action to evict the heartbroken family.
In my post above I referrenced REO property-- the previous owner has long been evicted by the time a property reaches that point. However if you buy property in a foreclosure auction (which is the first action once the court approves the foreclosure) you may well have to deal with the mortgager still residing there.
Also, you have to pay hard cash at a foreclosure auction, and bidding begins usually at the amount owed on the property (often including second mortgage debt).
I don't know how it is elsewhere but here in S Florida our forelosure auctions have been ghost towns. Everyone shows up who must-- but not would be buyers who are sitting on their hands waiting for the property to fall still further in value.
September 9, 2007 6:46 PM | Reply | Permalink
"In my post above I referrenced REO property"
just so. In most such cases the bank has bid in the amount of the mortgage and will undertake to evict the prior owner before attempting to market the property.
I believe that most banks have an actual department of "real estate owned" which may well be the subject of a link on a bank web site. (I have never troubled myself to look further, 'cause even when the bank does the dirty work for me, I can't get those kittens out of my mind...)
September 9, 2007 7:35 PM | Reply | Permalink
Most of the bank owned/corporate owned real estate will be sold through a real estate agent. One way to identify such property from my experience, in Kansas City, is to search a real estate listing service and look for such phrases as "corporate owned, bank owned" Also a requirement that the offer must be accompanied with a "proof of funds" letter is usually repoed property. Contacting the real estate agent on such a listing will often give you a list of property from one or more banks/mortgage co.
As alway your milage may vary.
Jack
September 10, 2007 6:36 AM | Reply | Permalink
most often when a bank-owned/REO property is marketed for sale it is listed with a realtor - because listing with a realtor and marketing via MLS (multiple-listing service) exposes the property to the largest number of potential buyers and nets the bank the most money.
the primary benefit of buying bank-owned/REO is that the fair market value will often be at least a little bit on the low end for the location (neighborhood) mostly due to deferred maintenance (if the previous owner couldn't make the mortgage payments, chances are they couldn't afford to take care of regular maintenance issues either - and as was stated, the property has sat vacant for quite a while). think, 'fixer-upper' and 'sweat equity'.
with bank-owned/REO properties you can also find homes that have been nearly destroyed from intentional abuse but since the previous owner/destroyer has moved out, the dead animals and the like will have also been cleared out. but again you will be purchasing the property for a price that takes into account the condition of the property which you will be able to inspect before making an offer just as you would any other property.
buying foreclosure properties at sheriff's sale on the other hand is more speculative and is not for the dabblers or the faint of heart. it really requires a lot of research and a lot of risk-taking. it is a game for investors, not buyers looking for a place to call home.
September 10, 2007 7:01 AM | Reply | Permalink
right. and more often than not, the original mortgagee (bank) is the one who 'purchases' the property at the sheriff's sale/auction by bidding the amount of the debt.
September 10, 2007 7:09 AM | Reply | Permalink
The lender should renenogiate in order to get the best possible return. Drop some late fees and 3 points of interest in favor of a consistent lower monthly payment.
this doesn't make sense to me given your scenario. if the homeowner ca'tn afford the current mortgage, how can they afford to clean up the mold you're talking about? or fix other things around the home?
when I was out, and looking at homes, the interest rate wasn't the issue; instead, I thought the prices of the homes were too high and, as you know, higher home prices imply higher taxes too!
if home maintainence is a problem then perhaps the lenders need to write an "inspection clause" into their contracts to protect their interests. but, unfortunately, by the time a house goes into foreclosure, that house might already be an unmaintained wreck.
Institutional investors who have purchased loan portfolios should be forced to negotiate with home owners in trouble
why? wouldn't that give a better hand to the buyer? until you own more than half your house outright, the investors have a bigger financial stake in your house than you do.
To boldly go...
September 10, 2007 7:23 AM | Reply | Permalink
i don't believe that there is any credible evidence to suggest that loans bundled and sold in the secondary market are serviced any differently than loans that are serviced by primary lenders who don't sell their loans in the secondary market. the vast majority of all mortgages are sold in the secondary market. and the majority of the companies who service these mortgages do indeed work with mortgagors who have trouble making their payments.
the fact is that the overwhelming majority of people who lose their homes to foreclosure lose them not because the bank won't work with them, they lose them because they simply can't afford them. either they over-extended themselves by trying to purchase a home they couldn't afford (adjustable rates coming home to roost) based on their credit-worthiness or their income, or their financial situation changed significantly (most often through loss of a job or divorce) and they can no longer afford what they once could.
in my experience (and i've had quite a bit of it as a realtor) most people who lose their homes to foreclosure because their financial situation changes, lose their home because they don't react rationally to these changes. a lender/loan servicer can only do so much and one thing they can't do is help someone stay in a home they can't afford. nor should they. (and if as in your example you've got a 7% interest rate on your mortgage and you can't make the payment, the problem isn't that you can't afford the mortgage, the problem is you can't afford the house.)
September 10, 2007 9:22 AM | Reply | Permalink
Is it illegal to burn your own house down? -- assuming that you do not try to collect on the insurance? I am not planning on doing any such thing, but a few years ago I was in a position where I might have been tempted. The textile company where I worked went out of business, there was a recession in progress and I had heavy medical expenses for my mother-in-law.
September 12, 2007 7:25 AM | Reply | Permalink
September 19, 2007 1:10 PM | Reply | Permalink
I realize now how much I still have to learn about real estate deals.There is no doubt that I need professional help for my next investment and I am considering a real estate broker for that. I hope I won't have a bad experience with Real Estate in Long Grove.
July 18, 2008 12:59 PM | Reply | Permalink