Buying a foreclosure, a short sale or a REO (real estate owned) is one of the most misunderstood topics in real estate. We’ll teach you how to buy a foreclosure in NY and what happens to a property from pre-foreclosure all the way to a property becoming a REO.
Foreclosure refers to the entire process of a lender taking legal action to possess a property where the owner has stopped making payments on their mortgage.
Being in foreclosure is an often misunderstood status for a property. A property might be in the pre-foreclosure process or the bank might have started the foreclosure process on a property, but that does not mean the property is a foreclosure until a judge has made a decision.
At that point, there will be a foreclosure auction at the local courthouse where investors will be invited to bid on the property with no contingencies nor an opportunity to inspect the property.
If a property doesn’t sell during the courthouse foreclosure auction, it will become a REO property and truly bank owned.
Most of the time when an owner says “the bank owns my home,” it’s simply not true. That’s because most owners will not understand the difference between properties being in the pre-foreclosure process versus actually being a REO. What they usually mean is that the bank has a lien on their property for the amount of mortgage principal.
You can stop a foreclosure in NY at any time before a judge has decided to foreclose and auction your property.
To do so, you’ll need to either resume your mortgage payments plus pay any late fees for missed payments, or you’ll need to find a buyer for your home.
If you find a buyer whose purchase price exceeds the bank’s mortgage principal plus any closing costs so that the bank doesn’t take a loss on their principal, then you can do so without needing permission and stop a foreclosure in NY.
It’s very easy to get out of foreclosure in NY early on in the process, but getting out of foreclosure becomes progressively harder as you accumulate late fees for missed mortgage payments.
Let’s take for example an owner whose next mortgage payment is due on March 1st. Remember that mortgages are always paid in arrears, meaning that the March 1st mortgage payment is for the month of February.
While not encouraged, this owner can make the mortgage payment at any time up to March 15th without incurring a penalty.
This is the grace period for mortgage payments, though keep in mind that the funds need to hit the bank’s account by the 15th.
If the owner still hasn’t paid by the 15th, they’ll now be subject to a late fee ranging from 2% to 5% of the payment amount. As we mentioned, these late fees can accumulate so it’s always easier to get out of foreclosure in NY early.
Once the owner is more than 30 days late on the mortgage payment, the owner’s credit score will become negatively impacted. The effect on the owner’s credit score will become worse for each additional month that the payment is late.
Missed mortgage payments are considered one of the absolute worst things you can have on your credit report.
At this point the owner’s mortgage will be counted in the lender’s books among their 30, 60 and 90 day delinquent loans. The bank will start sending threatening and generally nasty letters to the owner at this stage, but it could be months or even years before the bank actually takes legal action. That’s because banks don’t have to list a mortgage as a non-performing loan (NPL) on their books before they start the foreclosure process.
Once a mortgage becomes classified as a NPL, local regulators require banks to set aside more equity and equity like capital as a reserve against potential losses. This means that not only is the bank not getting paid for their loan, they’re now being required to set aside additional capital as a buffer against potential losses in their NPL portfolio. Since this is not an envious position for a bank, it sometimes take years for a bank to finally start the foreclosure process.
Once the bank initiates litigation, makes the required filings with the courts and starts the foreclosure process, you may still have months or even years before a judge makes a decision to foreclose and auction the property. The owner still owns the property and can still sell it before the judge makes this decision.
Buying a foreclosure at any point before the judge makes a decision is called buying a property while it’s in pre-foreclosure. If the purchase price will be less than the bank’s loan amount, or if the bank will take a haircut in any way perhaps because of closing costs, then the transaction is called a short sale and subject to the bank’s approval.
However, selling it before the property goes to auction is the most common method to get out of foreclosure in NY. That’s because owners who have missed mortgage payments are typically financially strapped and unable to pay off their missed payments plus late fees. For many owners who are in pre-foreclosure, the only way to get out of foreclosure in NY is to just sell the apartment and hopefully walk out with some equity.
It’s often said that the process for getting approval from a bank to do a short sale is the opposite of getting co op board approval when buying a coop apartment in NYC. That’s because sellers in pre-foreclosure who have found a buyer whose purchase price is lower than the mortgage amount will need the lender’s approval for the sale.
The bank will need to approve the sale even if the buyer’s offer is exactly equal to the bank’s outstanding mortgage principal because the bank will still lose money due to closing costs.
Therefore, in order to convince the bank to accept an offer that will cause the bank to lose money, the seller has to make a convincing argument for why taking this offer is the best course of action. The seller will try to convince the bank that the property is in horrible condition, and re-iterate to the bank what a terrible borrower he or she is.
However, even if the bank is eager to off load the property, the property will still have to roughly appraise in line with the buyer’s offer.
For example, if the property appraises at $1 million, then a $950,000 offer might be acceptable as the bank understands that someone buying a foreclosure is looking for a deal. However, the offer can’t be too far off from the appraised value.
Furthermore, the fees have to be reasonable for a bank to accept a short sale. While the bank will pay mandatory NYC real estate taxes such as transfer taxes, they’ll usually push back on excessive broker commissions. For example, they’ll typically refuse to pay the typical real estate commission in NYC of 6% if the buyer doesn’t have an agent.
They’ll typically cap the commission at 3% per broker. That means the listing agent will only earn 3% even if he or she found a direct buyer. If the buyer is represented however, the bank will typically agree to pay 3% to each broker, for a total of 6% commission.
The bank will also want to see a personal financial statement, similar to REBNY Financial Statement, for the seller in order to make sure that the seller is not too wealthy. If the seller has substantial other assets and is asking the bank to take a loss on their loan, the bank may not agree to such a short sale.
Even though our broker partners have seen short sales get approved by the bank within two weeks, the process can often take months and months. The most frustrating part of a short sale process involves getting various parties to actually respond.
Often times the bank may take weeks to respond to an offer, perhaps because they’re not even interested in taking a loss on the property. Other times, the delay can be caused by the fact that the original bank sold the servicing. As a result, it may be even harder to find and get a response from the new mortgage servicer!
Once a judge has ordered a foreclosure auction, investors will have an opportunity to buy the property at the local courthouse at a specified date and time.
The foreclosure auction will take place in person, for example in the lobby of the NY State Supreme Court. Buying after foreclosure means buying without any contingencies, seller disclosures or mortgages.
You’re expected to make the decision right then and there, with a check for the contract deposit expected on the spot. Because you’ll be liable for any liens or unpaid taxes on the property, it’s extremely important to do your due diligence before attending the foreclosure auction. That means conducting a title search or condos and houses or a coop lien search for co op apartments.
If someone stops paying their mortgage, their property is more likely to have judgments or other violations you’ll want to be careful about.
Buying a foreclosure at a courthouse auction typically means paying more than the bank’s reserve price of the outstanding loan amount.
However, banks can set their minimum reserve prices higher if they believe that a courthouse auction won’t result in a fair price for their property.
If a property fails to sell at the courthouse foreclosure auction, it officially becomes a REO property owned by the bank. Banks are not the greatest property managers in the world nor do they aspire to be.
Furthermore, because banks will continue to pay property taxes, common charges or maintenance until the property is sold, the main priority for banks is to get rid of their REO properties.
REO properties are listed with individual agents with no specific pattern.
Contrary to what you’d expect, banks do not work with exclusive brokerage houses for different areas, and the choosing of listing agents is rather haphazard. As a result, REO properties can look no different from regular property listings you’ll find on popular real estate websites.
In fact, whether a property’s status as a REO is even disclosed among brokers depends on the local MLS.
For example, the HGMLS (Hudson Gateway Multiple Listing Service) will require brokers to disclose whether a property is bank owned; however, the RLS (REBNY Listing Service) makes no such disclosure requirement.
However, since real estate agents are required to be truthful, honest and fair in their dealings, you can always ask a NYC listing agent whether you would be buying a foreclosure.
In the off chance that a property does not get sold by a REO listing agent, the bank may offload the property through an auction company. Be careful of unique fees such as a buyer’s premium that can be charged during such auctions.
Disclosure: Hauseit® and its affiliates do not provide tax, legal, financial or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, financial or accounting advice. No representation, guarantee or warranty of any kind is made regarding the completeness or accuracy of information provided.