Waiting period to buy again after foreclosure or short sale

Posted under: Home Buying, Financing, Foreclosure  |  August 25, 2014 9:41 AM  |  1 view  |  No comments

After a distressed sale, how long is the wait before you qualify for a new mortgage to help you get back to becoming a homeowner?

a) If you did a short sale for your last house, you normally have to wait for 4 years before you can qualify for a loan to purchase a house again.  However, with Extenuating Circumstance, you might be able to get a loan after 2 years.
b)    If you let your last house go to foreclosure with a valid hardship, then you still need to wait only 4 years to qualify for a conforming loan to get back to becoming a homeowner.
c) If you let your last house go to foreclosures with no valid hardship (i.e. strategic foreclosure), then for both conforming and non conforming loan, you will need to wait 7 years
For an FHA loan, you only need to wait 3 years.

Buying at courthouse steps to flip for profit

When you camp outside Best Buy the overnight before Black Friday with the hope of getting a couple hundred discount on an iPad, you have to weigh the risks and opportunity cost of your time vs. the potential discount. The same goes for buying a property at trustee sale on the courthouse steps. You need to take into account your risk and your time in trying to get a potential good deal that might not end up a good deal.

A recent home in a good school district didn't show up in traditional real estate searches because it was not put on the traditional market and instead bought at the riskiest phase of the foreclosure process, the auction at the courthouse steps. When you buy real estate at auction, you don't have title insurance and you risk owing unknown liens (IRS, etc.) on the property. Also, you have to bid higher than what the bank thinks it is worth to get it. The bank won't let you get it at a bargain. If they think your bid would be too good of a deal, they outbid you and take over that property for themselves.

Here are the risks when buying at the courthouse steps:
Homes aren't guaranteed to have a clear title
--The house might have liens
--IRS tax debt owed to the US government
--Property tax owed to the county government
--No title insurance to protect you and make sure the title is clear
--Without the legal proceeding of foreclosure, all subordinate liens remain
--Home-equity loans
--Construction liens
--etc.
Inside condition of the house not guaranteed
--No guarantee the current occupant will move out peacefully
--Might need to negotiate to get occupant out

Here's the time you have to invest:
--Need to do a huge amount of research and due diligence
--You won't be protected if you miss something.
--Have to go to the county courthouse typically a weekday morning.
--Takes time from your other money-making endeavors, such as your JOB :-)
--Bidders must go to the trustee sale flush with CASH.
--You must make a sizable deposit or pay the entire sum on the spot.

Even after buying, the flipper has much work to do:
--Need to fix/repair/renovate. Costs time and money.
--The selling time may not be as quick as hoped.
--The property could sit on the market.

It's safer and better to buy the properties in the REO phase because then you'll have title insurance to protect you from liens on the property.

Selling or Buying a Short Sale Rental Property in a Rent Control Neighborhood

Be careful when you are selling or buying a short sale rental property in a rent control neighborhood.

Below is a list of California Bay Area Localities With Rent Control Ordinances:
City of Campbell
City of East Palo Alto
City of Berkeley
City of Fremont
City of Hayward
City of Oakland
City of San Leandro
City of San Jose
City of San Francisco

Before buying or selling a rental property in a city with rent control, you should consult a real estate attorney familiar with the Rent Control Board of the particular city in which the rental property is located.

For example, what happens if in the months leading up to the short sale, the tenants threaten to move out and in response the landlord drastically reduces the tenants' rent? Will this set a new monthly rental base with which the new owner must use in calculation of his future potential monthly rental rate? Or does a long history of higher market rental rates take precedence over a few short months at the drastically reduced rental rate? One real estate attorney associated with the Oakland Rent Control Board stated that as soon as the owner dropped the rent, he created a new rental rate that was subject to rent control.

The new owner would inherit the drastically lowered rent as his base and could not raise the rent for the existing tenants back to market rate. This killed off any interest from real estate investors.

In one case study, the seller did drastically lower the rent to his tenants soon after putting his investment property on the market. Did the seller unwittingly hurt his own chances of selling? Maybe that was exactly what the seller wanted. It was a short sale, and the seller might have simply been trying to collect as much rent as possible before losing his property to the bank.

To the seller faced with renters who are threatening to leave, then it might be in the seller's best self interest to lower the rent. This has two advantages in the mind of the short sale seller. #1) Better to collect some rent rather than no rent, and #2) The owner collects free rent for longer before losing his home. Making the property less attractive to buyers effectively delays the sale of the property. Since the deal no longer appeals to real estate investors, it will take longer to find a buyer. Only buyers willing to buy and live in Oakland as their primary residence will still be interested.

Every extra month of delay is extra rental income for the seller. However, when faced by an owner attempting such tactics, the banks would probably save a lot of money by simply foreclosing, booting out the tenants, and selling the property as a vacant unit. That seller is counting on his hope that a bank will not respond in this manner.

Disclaimer: I am not a real estate attorney. This discussion is just so you know what issues to think about and what questions you should ask. The bottom line is whether you are selling or buying a short sale property in a rent control neighborhood, you should consult a real estate attorney familiar with the Rent Control Board of the particular city in which the rental property is located.