This article was originally published on Realtor.com:
There’s an old adage that says women searching for their true love may have to kiss a few frogs before finding their prince. If those women are also searching online for a foreclosure today, they might just be kissing a whole lot of frogs, or something worse altogether. Someone should tell them that there is a frog-free market full of princes right at their fingertips.
The landscape of “foreclosures” in online real estate search is unnecessarily confusing. Real estate websites use a vast array of terms to draw potential buyers in to their claws: Foreclosures, pre-foreclosures, auctions, bank-owned, REO, ORE, defaults, and sheriff’s sales, just to name a few. While these terms mean many different things, they’re often used to draw buyer traffic, but not necessarily educate the consumer about their meaning.
So, for that frustrated frog-kisser, here is a straightforward guide to what foreclosures really are, and where you can find one online that you might actually be able to buy:
Princes: Bank-Owned Homes
The vast majority of home buyers searching for a foreclosure are actually looking for a bank-owned home. These properties are sometimes called REO (Real Estate Owned) or ORE, and they are homes that have already gone through the entire foreclosure process. They are now owned by a lender, and that lender wants to sell them.
These homes will usually, at some point, be listed by a broker on the local MLS. A buyer can get a mortgage to finance the home. Most of the regular home buying transaction applies to buying a bank-owned home. Buyer protections, including most seller disclosures and contingencies, are available to a buyer who wants to purchase a bank-owned home.
The best part: these homes are easy to find. Consumers don’t have to scour county records or subscribe to foreclosure-tracking services. They’re listed on sites like Realtor.com, and your local Realtor’s website, directly through the MLS.
As far as minimizing risk to the buyer, allowing for mortgage financing, confidence in the sales process, and ease of finding the foreclosure inventory, bank-owned homes are by far the preferred foreclosures of most consumers. There will still certainly be buyers competing for bank-owned homes, but they’re sold in a much more transparent playing field than other types of foreclosures.
In short, bank-owned homes on the MLS are princes–ready, qualified, and able.
Frogs: Foreclosure Auctions
Buying a foreclosure at an auction is a strikingly different process. In most cases, all-cash purchases are necessary. This rules out a lot of buyers.
More importantly, there are much higher risks to the buyer in an auction, or sheriff’s sale, scenario. The title or lienholder may selling the home, but the home could still have other outstanding associated liens that the buyer may not be aware of. Buying a home at auction requires detailed research of a property’s title history to ensure there are no other outstanding debts that the buyer might automatically take on if he/she purchases the home.
Furthermore, homes sold at auction can often not be entered by the buyer until after the closing the transaction. Since the current owners retain property rights until the sale takes place, the tenants can not only forbid buyer tours, but also trash the home before leaving. Auction buyers often have to pay the former owners or tenants a “cash for keys” bribe to get them to move out of the home peacefully after the sale has concluded.
There are definitely some diamonds in the rough that can net a foreclosure auction buyer a princely profit. There are a whole lot of plain old frogs in the pond, too.
Imagine this scenario for a moment: A hospital administrator goes to a headhunter and says, “I need to hire a new doctor. Find me one.” The headhunter comes back to the administrator with 10 college freshmen and states, “These are all pre-PhDs. They’ll be doctors soon.”
This, in a nutshell, illustrates the validity of the term “pre-foreclosure.” The term encompasses a wide range of properties in a vast number of situations, and attempts to market them as homes for sale. They are useless to most consumers.
Pre-foreclosures are simply homes that, at some point, had owners who missed mortgage payments and received some sort of default letter from their lenders. They very well may be:
- Homes that are now back on track, current with mortgage payments
- Properties with a loan modification in the works
- Houses that will be transferred to a family member
- Homes that will actually go through foreclosure–1 to 3 years from now
The reality of pre-foreclosures is that there are only a small fraction of them that will ever be available to the public who are viewing them online. These homes are not “for sale”, and most never will be foreclosure sales. Even the few that do go through the foreclosure process will often not be made available at auction until a couple of years down the road. This is in no way useful to a home buyer who is trying to purchase a foreclosure now.
So, why would a website advertise these kinds of “pre-foreclosure” listings? Simply put, to sell subscriptions to foreclosure data companies, and more ad space to their partners. These listings generate traffic, generate home buyer leads, and drive revenue. The two things they don’t generate: foreclosure purchases and education for the buyers.
It’s cynical. It’s a disservice to consumers. Wasting hours searching through these phony listings only to find out they were never even for sale might make you feel like you kissed something far worse than a frog.
Trust The Sources That Align Their Goals With Yours
You want to buy a foreclosure. You want clear options, and you want them quickly. Focus your foreclosure search on a real estate site that displays the integrity to only list properties that are actually worth your time. Whether that is Realtor.com on the national level, or your local Realtor’s MLS-fed site in your city, you’ll find only bank-owned foreclosures that are available now.
Now that you understand how to discern the princes from the frogs and the phonies, go find your foreclosure and pucker up.