Real estate bargain hunters have the potential to capitalize on the number of distressed properties that have surfaced over the past few years, including Steamboat Springs foreclosures and Steamboat Springs short sales, but these are not for the faint of heart and buyers need to have realistic expectations in the process. Buying a foreclosed property has become very popular over recent years – so much, in fact, that the Steamboat Springs Multiple Listing Service has added a foreclosure and short sale feature to allow REALTOR members to search for properties (or be aware of properties) that may fit into one of those two categories. Your Exclusive Buyer’s Agent (EBA) would be happy to conduct a personal search to see if such a deal is in your future.
If you’re wanting to play the distressed market game, it is very important to know the different types, processes and challenges you may be facing.
Foreclosure A foreclosed property is one where a lien holder (lender) has taken legal ownership of the property. There are three types of foreclosures in Colorado: 1) Public Trustee; 2) Judicial Foreclosure; 3) Tax Sale. The most common type of foreclosure is the Public Trustee Foreclosure.
The Public Trustee Foreclosure is a process that is initiated from an owner's inability to meet loan obligations (payments) on a deed of trust (an instrument which grants the Public Trustee the right to sell the property at public auction in the event of default). When lenders provide a loan to a borrower, the tangible security the lender receives is typically in the form of real estate. That way, if the borrower defaults on the loan contract, the lender could recoup his investment by taking ownership of the security and either selling or retaining title. Lenders are in the business of lending money, not property ownership and management, so they typically will sell the property to recover their investment, then loan that money to another borrower. This is where the foreclosure process begins. It can end in one of four different ways:
The borrower pays off the default amount during the Cure Period. In Colorado (foreclosure law is different from state-to-state), when a foreclosure proceeding occurs, the lender sends a Notice of Election and Demand (NED) to the Public Trustee. The Public Trustee then has 10 days to record the NED, which then starts the Cure Period. The Cure Period lasts between 110 to 125 days. Within this Cure period, all parties who have an interest in the property (of public record) will be notified of the foreclosure. The property owner (borrower) may reinstate the loan by paying off the default amount during this period.
The borrower sells the property during the Cure Period. The Cure Period is also known as the Pre-Foreclosure period. For buyers, this is the best time to purchase the property. To avoid foreclosure, the owner will most likely have it listed for sale in the local Multiple Listing Service. Buyers will be negotiating directly with the owner, and the seller may be willing to take a discount on the sale to keep the looming foreclosure off of his/her credit history. Furthermore, a buyer will eliminate the daunting task of working with the lender, attorney and other parties that will be involved in the process once this period has passed.
A third party buys the property at Public Auction. Near the end of the Cure Period, if the loan has not been paid off, the Public Trustee will schedule the property to be sold via Public Auction. The highest bidder will then take title to the property. When pursuing a property within the Public Auction timeframe, Buyers (and your exclusive buyer's broker) will have to work fast to conduct a comparative market analysis, as well as research the title work, liens and encumbrances that would run with the property.
The lender takes ownership by buying it back during the Cure Period or Public Auction. Should no third party step up to the plate and purchase the property, the lender then takes ownership and the property is considered Real Estate Owned (REO). Once a property becomes REO, they will typically list the property for sale with a local REALTOR. Any negotiations will be conducted directly with the lender, which can be frustrating, as layers of corporate protocol take precedent.
Short Sale A short sale is when an individual owner still has legal ownership of the property, but is advertising the property at a price less than the amount owed, or selling short on the indebtedness. It is most likely at a time when the owner/seller is delinquent in loan payments. Being that the seller is offering the property for an amount less than what is owed, the seller needs to obtain lender approval for the sale. The lender is the one who will be taking the loss along with the seller. Not only will a seller's credit be impacted by this unfortunate situation, but the amount of debt relief (amount the seller is short on the mortgage) is considered income by the Internal Revenue Service, and taxes will need to be paid. Furthermore, short sellers have to wait at least two years before being approved for a mortgage to purchase another property. Short sales require patience, tenacity and (did I mention) patience. Lenders have stacks of delinquent mortgage files on their desks, and it takes anywhere from 30 to 120 days for lenders to even look at an offer, let alone accept one. The percentage of short sale offers making it to closing is below 30%...mostly due to lender consternation, but also because buyers lose patience and interest in a property; find a better one during the wait; or have a timeline to relocate that does not meet the timeline of the mortgage company.
Buyer Beware! There are many technical issues in dealing with foreclosure and short sale properties, and the above is only the tip of the iceberg when dealing in this field. Opportunities certainly exist in the foreclosure arena. However, a great amount of due diligence needs to be performed to ensure the property is worth considering. Careful consideration needs to be given to the condition of the property, as it may have been a while since occupied. Plumbing, electrical and structural components all need to be inspected thoroughly. Don't be surprised if some of the plumbing and electrical fixtures are missing, as the former owners may have decided to take them on their way out.
Most all foreclosed properties are sold “as-is”. Lenders just want to get the property off of their books and do not want to deal with repairs the home may need to make it habitable, so a rehab cost will be involved. However, most will allow a buyer to conduct an inspection so you can know what you will be dealing with once you take ownership.
Another caution buyers need to keep in mind is not to get too focused on just foreclosures or short sales. Most were purchased at market peak, between 2005 – 2008. There may be a better property available from a private seller (non-distressed) who bought the property prior to peak and with a lower cost basis and who consequently has more equity and who would take a lower price. Chances are this type of property would be in better condition and more items (including repairs) could be negotiated.
Foreclosures and short sales will continue to be a part of the Steamboat Springs real estate market and create some great buying opportunities for some time. When buyers are searching for a property it is possible a bank owned property will be one of the options to consider, so it is wise for any buyer to first get in touch with me. I’m very well versed in the various processes and will be looking out for your best interests throughout the entire process.