Over the last couple of years writing this blog and seeing many investor questions on discussion forums, I see a question pop up over and over. “How can I buy a foreclosure that is not for sale yet?” Typically investors are asking how to buy a house that has been foreclosed on and is currently owned by the bank. The home has not been listed by a real estate agent yet, but is vacant and may have been vacant for a long period. In most parts of the county it is getting harder and harder to find awesome deals since REO inventory has decreased. These vacant properties appear to be great opportunities to buy cheap houses if you can buy them before they hit the market.
How does a foreclosure work?
The foreclosure process is different in every state. In some states foreclosures must be handled by the courts and in other states foreclosures are handled by state appointed offices. In Colorado we have a public trustee that handles all the foreclosures and it is a relatively quick process. In states where the courts handle foreclosures the process can take years. Here is the basic timeline of how foreclosures work.
- Borrower falls behind on payments.
- Bank sends warnings, starts charging late fees.
- If borrower does not catch up in a certain amount of time the bank can start the foreclosure process.
- The bank hires an attorney to start and complete the foreclosure process.
- During this time the bank will usually try to complete a loan modification with the borrowers or use a short sale to sell the house to avoid foreclosure.
- If no loan modification or short sale is completed the bank will proceed with the foreclosure process.
- The property will go to a foreclosure sale where the bank sets the minimum bid for someone else to buy the home. The bid is usually how much the bank is owed including attorney fees, late fees and interest.
- The general public is allowed to bid at the foreclosure sale, but it must be cash and in some states the borrower still has a chance to redeem the home or a junior lien holder has a chance to redeem. Redeem means they would pay off the person who bid on the house at the foreclosure sale.
- If no one bids on the house at the foreclosure sale or the bank is the highest bidder the bank will gain possession (assuming no one redeems the property).
If you are looking to buy a house that is a foreclosure and is not listed you have to first figure out what stage the home is in. If the house is still in the foreclosure process the borrower owns the home, the bank does not. The banks cannot sell a house if the foreclosure process has not been completed. The owner of the home may sell the houses if they can pay off the bank and all other lien holders or they may try to complete a short sale. If you are an investor looking to buy a short sale be careful how you do it to avoid short sale fraud.
If the house had gone through the foreclosure sale then you need to make sure the bank is the current owner of the house and it was not bought by another investor. Public records will show who the owner of the property is.
How can you buy a foreclosure before it is listed by the bank?
Buying a house from the bank before it is listed is going to be very difficult and depending on the bank it might be impossible. I have tried to buy houses from banks before they were listed and I know many investors who have tried as well. I am also a REO agent for banks and I know how their sales process works. Here is a basic outline of how the process usually works when you try to buy a foreclosure from the bank before it is listed.
- The investor spends hours trying to figure out who the actual owner of the property is. The title of the property can be under some crazy names like electronic mortgage registration C3121. If you do a little more digging and look at who the bank was that loaned on the house before it went to foreclosure you can usually find out who the bank is.
- The investor finds out who the bank is and spends hours on the phone trying to talk to someone who has a clue about how to buy houses from the bank. Usually the investor calls about 20 departments and might talk to someone in the REO or defaulted loans department (the banks all have different names for their foreclosure department).
- Once the investor talks to someone who has some idea what the investor is talking about, the bank will tell the investor another company handles our REOs you will need to talk to them. Or the bank will tell the investor we don’t sell our houses before they are listed.
- If the investor was told another company will sell the property then they might try to call that company. The investor will go through the same circus and then be told we don’t sell our houses before they are listed.
It is a rather frustrating process and a huge waste of time when you try to buy foreclosures from the bank before they are listed. The only time a bank might agree is if the bank is very small and local.
Why don’t banks sell their foreclosures before they are listed?
Most investors want to buy foreclosures because they are cheap and they can get a great deal. That is why I like to buy foreclosures as well. When a home is listed on the MLS there is usually a lot of competition for houses that are priced very well. Many times there are multiple offers and the house is not as good of a deal as it first seemed. Investors think if they can buy a house before it is listed they might be able to get a better deal.
This is exactly why banks do not sell their houses before they are listed on the MLS. The banks also know the more people that know their houses are for sale, the more the houses will sell for. Contrary to some opinions, the banks are not looking to get rid of houses as fast as possible with no regard to how much they sell for. The banks are just like you and me, they want to make as much money as they can. Even after a house is listed on the MLS the banks will sometimes not look at offers for weeks. They want everyone to get a chance to make an offer who wants the home.
When a bank lists a house they will get multiple values from real estate agents. They will usually order an appraisal and they will want the home marketed just like a traditional listing. The banks spend a lot of money on making sure they value a home correctly, on the real estate agents who sell the house and on the lawyers who complete the foreclosure. They want to recoup as much of that money as possible and selling a house on the MLS is the way to do that.
The big banks will sell thousands of foreclosures a year and they have set up their systems to work with real estate agents or auction companies to sell those houses. For the banks to sell one house before it is listed to one investor they have to change their system, change the valuation process and it takes more work to make those changes. Plus it may prolong the time it takes them to list a house if they are dealing with an investor who may not even end up buying the home.
Banks want to sell their houses for as much as possible just like most sellers. It simply does not make sense for them to sell one house before it is listed and mess up their system. You may hear about banks selling houses in bulk sales before they are listed. This does happen, but the banks are selling hundreds or thousands of houses at a time all over the country. Those sales make sense to the banks because they can sell many houses at once, with no agents right away. There are also many investors out there who claim to have access to off-market bank owned REO. In my experience none of these claims are legitimate, because it makes no sense for the bank to sell one property off market.