Distressed properties in Louisville, Kentucky
There are several distressed properties in the Louisville, KY and Jefferson County area.
What makes a property distressed?
Distressed properties are typically those that the homeowner is having trouble making their payments, or there has been some kind of lien placed on the property. There are 3 main categories; Pre-foreclosure, Foreclosure, and Real Estate Owned (REO)
Houses in pre-foreclosure are also called "short sales". Unfortunately, short sales are becoming more and more predominant across the country. A Short Sale occurs simply when there is more owed on the mortgage, or mortgages, than a property will bring minus expenses.
It starts with a homeowner having trouble making his mortgage payments. It can be caused by many things, often out of the homeowner's control. A job loss, medical emergency, divorce, etc can trigger financial problems. A job transfer may trigger a short sale without ever missing a payment. If the homeowner needs to move because of a job situation and the local home values have dropped, a short sale situation is created.
THE BUY SIDE
Let’s look at this from the buyers standpoint and what is entailed. Normally your realtor will be able to tell by the listing that the property is a "short sale" situation or "possible short sale". There may even be other wording such as "approval by a third party needed". If it is advertised as "possible short sale", they are indicating that it will be close if there is any equity. We think that if it is listed as "possible", it will be a short sale. In a short sale, the buyer will make an offer. It is then submitted to the seller. Negotiations have started with the seller. Let’s assume that the seller accepts the offer. It then has to go to the bank for approval. It is the bank that is taking a hit on this and they can make or break the deal. Once the bank approves; the deal progresses normally. Some points to consider:
- This can be a good deal. The house is going to sell below "market price".
- Normally this will be an "as is" sale. If the seller is already short cash, we can hardly ask for more money to be contributed either in closing costs or repairs.
- You should still go through the home inspection process. There is no need to be surprised later. If there are needed repairs, we can ask for them. Even though we know that the sellers are in trouble, the bank may contribute. We won't know if we don't ask.
- Not mentioned earlier, but a complicating factor is "What if they have a second mortgage?" or third? These deals are still done every day. It just takes a little more negotiating. There can also be other factors such as tax liens and HOA liens.
In Kentucky, the foreclosure process is normally lengthy. Once the bank ceases to be paid and gives up in collecting payments, they go to the court system and file a "Lis Pendens" (LP). This is a Latin term that "gives notice" to the world that there is a cloud on the title. In Jefferson County, the commissioner's sale is every other Tuesday. The dates of the upcoming sales are every two weeks. You can also view the upcoming properties for sale. There are several search parameters. The database is fairly easy to use. A common searches would be the property address. You can enter part of a street name here and get results. The sale date will tighten the search to just one date. Or, if you just click "Auction Search", all the upcoming auctions for the next few months will be displayed. This list will be lengthy with hundreds of listings. If you choose this method, you can use "control F" on your keypad and this will enable your browser's "find" function. You will notice that several listings are marked "withdrawn" before the sale.
Once you see a property that you are interested, click the "view details" tab. Now you will see the "Handbill" and "Appraisal". Click on the "Handbill" tab and you will see a document that will list the details of that particular sale. You will see that amount to be raised, deposit required, and "sold subject to". The amount to be raised is somewhat important. If you are looking at a house valued at $200,000 and there is $100,000 against it, the sale is probably going to be withdrawn as somehow the homeowner will find a way to placate the bank. If in this same situation, the amount owed is over $200,000, the odds increase of it going to the auction block. The deposit is crucial to success at the sale. It states that it must be cash or same as. You can make a cashier's check out to yourself and endorse it after the sale if you are successful. Pay close attention to the sold subject to clauses.
The next tab is the "Appraisal" tab. This is the commissioner's appraisal. There will be a fairly recent picture of the property and a few rudimentary facts. The price that the bidding usually starts is 66.7% of the commissioner's appraisal. If the property were to bring less than this, it would trigger "the right of redemption act". Basically, this means that the homeowner has a chance to buy it back within a year for the auction price plus 10% interest. So, in theory, you could lose all of your improvements.
Back to the main menu, the "Auction Results" tab will give you results for the last few years. Links here will give you a "Word" document with the details for each sale. You will see the property, owner, new owner, price paid, etc. You will also see if it was withdrawn before the sale. Some withdrawals happen very close to auction time.
Do you want to go to the Jefferson County Commissioner's sale and buy a house? Just one thought; perform your due diligence. If the house is listed for sale with a Realtor®, this is by far the best. The opportunity exists to go through the house with a fine tooth comb and find all of its good points and flaws before you risk any money. The chance of a For Sale By Owner (FSBO) close to the auction date are extremely remote. These people are getting ready to lose their house. They are not anxious to have strangers traipsing through their home. However, the very least that you should do is drive by the house. Remember, that it is still private property and you would be trespassing by peering in the windows and walking around the back yard. What is the condition of the exterior? Landscaping? More often than not, the inside will not be immaculate. Can you determine if the electricity is on? No electricity equals no sump pump running or air circulation. In the winter, it could mean frozen pipes. Is the house still occupied? This could be a concern post auction. There could be costs of eviction and unpleasant confrontations.
Now that you have seen the house, check out the neighborhood. Is this where you want to live? Or, if investing, is this the neighborhood where I can easily resell? Or rent?
It would also be good to do some detective work in the public records on this property. You already know the owner's name from the auction notice. From that point, you will be able to trace mortgages, liens, judgements, etc.
Lets assume that you have found a property. To own this property, you just need to be the last bidder. Normally, the bank will start the bidding. The court will state the rules of bid increments. Bids under $50,000 are in increments of $500, between $50,000 and $100,000 are in increments of $1,000 and bids over $100,000 are in $2,000 increments. During the bidding, be alert, the action is fast. It is not like an private auction that you have attended in the past where the auctioneer tries to wring every penny out of each potential bidder. There are no "bid spotters". You will need to speak out loudly and clearly what your bid is. The action is usually less than a minute. Even though several listings are withdrawn, an auction of 200 listings is done in less than 2 hours.
If you are the successful bidder, you will be asked to come forward immediately with your information and cash deposit. Within 30 days, you will need to come up with 25% of the bid price. The entire price must be paid within 6 months. Interest is at 12% per annum on the unpaid balance. A title search by a competent real estate attorney is very important and the process should be started immediately. This is simply an overview, more details and FAQs are here.
It might be a good idea to go to one auction in advance to get a lay of the land. There will be several individuals looking to buy a bargain as well as seasoned investors.
The real estate crowd knows this class of properties as REOs. We think that it may be easier to think of them as "bank owned" instead. There are some REOs that are not "bank owned", but "investor owned" due to repossession.
Normally the bank acquires these properties at the commissioner's sale. If they are the high bidder, they then become the legal owners.
The bank can acquire property through a "friendly" foreclosure. This is often known as a "Deed in Lieu" foreclosure. In this situation, the homeowner moves out and gives the keys to the bank. The bank does not have eviction costs or as many legal fees. However, it is still regarded as a foreclosure on the homeowner's record.
Now, lets get to it. How do we get a deal on a REO? Banks are not in the real estate business and use local real estate agents. Their thinking is that the Louisville real estate agents know the Louisville real estate market.
As a general rule, the pricing of a REO, or bank owned property is aggressive. Again, they are not in the real estate business, they are in the banking business. Their goal is to cut their losses and move inventory. Some banks will price their listings at a little lower than market price. Some banks give a fire sale price to encourage lots of offers. This often leads to multiple offers and a small bidding war. After receiving several offers, the bank may ask for "final and best".
We are licensed and approved to buy HUD homes through Pyramid Real Estate Services. It is a fairly complex procedure that requires a Real Estate Agent's help. Their website is fairly easy to use and you can set up a search that notifies you of new properties or changes. HUD homes typically will require some work.
Fannie Mae owned homes are another source of a bargain. Home Path is the clearing house for these properties. They also have special financing set up for these properties.
SOME THINGS TO CONSIDER WHEN SHOPPING REOS:
- Response time to an offer is normally good; often within 48 hours.
- These listings normally don't stay on the market long. If it is a smoking good deal, someone is going to jump on it. It helps to have a Realtor® in this process as they have tools to alert them when the property first comes on the market.
- What is "final and best"? It doesn't necessarily mean the highest price. It often means the offer where the bank knows they are going to convert their house inventory to cash.
- Cash is King! If you are going to make a "cash" offer, they are going to want proof that you have investments that you can convert to cash and pay them.
- Financed deals are fine. The banks are going to want to see the pre-approval letter. Some even ask for the buyer to be pre-approved by them, even if financing is done elsewhere.
- Contingency deals are frowned upon. If you want to buy a REO contingent on selling your house, think again. The bank wants a sure thing and will take less to get such.
- On the subject of "earnest money" and how much to submit, we want the bank to know that we are serious with our offer. If the deal falls apart and we have not violated the contract, we will get our "earnest money" back.
- Since the banks look on a property as "inventory" as opposed to a "home", time is important to them. The quicker the close the better.
- Banks will typically want to sell a house "as is" meaning that they will do no repairs. It doesn't mean that we can't ask for repairs. This should be on a case-by-case basis.
- The home inspection process is still important. There may be things that we cannot see. We should be concerned with the physical characteristics such as plumbing, wiring, heating, etc. We should also be concerned with things that we cannot see such as termites and Radon.