Bits Bucket for March 5, 2012

March 6, 2012, 12:01 a.m. EST
Harder for non-investors to buy foreclosures
For average home buyers, a short sale might be the better way to go
By Amy Hoak, MarketWatch

CHICAGO (MarketWatch) — It’s getting harder for non-investors to buy foreclosures in some parts of the country, as lenders shift their strategies on how to deal with distressed inventory.

When a home buyer looking for a place to live considers a foreclosure, they’re usually looking at those listed as “REO” or “bank-owned,” meaning that the lender has taken back the property and is now putting it up for sale. But REO sales have been shrinking.

There are a couple of reasons why.

First, more properties are selling at auction, typically the first opportunity the lender has to sell the property, and where buyers are mostly investors. Buying a foreclosure at auction often requires full payment in cash, and the buyer often doesn’t get the chance to fully inspect the property before buying it — both turnoffs for a home buyer looking for a place to live.

“Anecdotally, we’re hearing from investors that the lenders are more aggressively pricing the opening bid at the auction to attract more bidders,” said Daren Blomquist, vice president of RealtyTrac, an online foreclosure marketplace. In a more typical market, the lender sets the opening bid at what they’re owed on the property, he said.

A sale at a trustee’s sale or sheriff’s sale auction gets a property off the lender’s books before it becomes an REO. Lately, there are many investors willing to bid on the properties at auction, as many see opportunities in rehabbing foreclosures and renting them out or selling them.

Second, there has been an increase in short-sale transactions, so more distressed properties are being saved from foreclosure altogether, statistics show. A short sale is one in which the lender accepts less than what is owed on the mortgage as payoff from the homeowner.

“The longer the foreclosure timeline, the larger the severities for the lenders,” said Sam Khater, senior economist for CoreLogic, a provider of consumer, financial and property information. “The foreclosure is the worst outcome for everyone involved — the borrower, the lender the community.”

From the lender’s perspective, one benefit of going the short sale route is that the place doesn’t have to sit vacant, since the seller often remains in the home until it’s sold. Legally, a short sale is also a safer move.

“It’s become a lot more risky for lenders to foreclose and costly as well,” Blomquist said. “You have the risk of being sued later on for improper foreclosing, because of the questions that have come up about paperwork and documentation. And the cost to maintain the property is a consideration that lenders have to take, and one of the trends we’re seeing is more municipalities are imposing fines on lenders if they’re not properly maintaining [foreclosed properties].”
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