An unprecedented wave of foreclosures has hit Loudoun County as well as the rest of the nation over the past few years. The primary source? "Subprime" loans and their high rate of default.
But there may be a second wave of foreclosures coming to Loudoun County thanks to "Alt-A" and "Option ARM" loans. Though previously thought of as less risky than "subprime" loans, many are saying that they will have the same, if not higher, rate of default as "subprime" loans. Most of these "Alt-A" and "Option ARM" loans have not yet "reset", but will begin doing so early next year.
Note: "Alt-A" and "Option ARM" loans don't fall into the category of "subprime" loans and have been virtually unaccounted for nor talked about until recently.
If you put a "heat" map of the US showing the number of "subprime" loans next to a "heat" map of the US showing the number of foreclosures and/or bank-owned properties, they look almost identical. The higher the number of "subprime" loans, the higher the foreclosure rate and number of bank-owned properties.
Assuming that "Alt-A" and "Option ARM" loans have the same, if not higher, rate of default, I can't imagine we'd get anything but the same result when comparing "heat" maps of these types of loans with future Loudoun foreclosure rates.
That being said, let's look at a "heat" map of "Alt-A" and "Option ARM" loans in Virginia (click to enlarge):
As you can see, there is a high concentration of "Alt-A" and "Option ARM" loans in the Northern Virginia area, including Loudoun County.
According to a recent 60 Minute special about "Alt-A" and "Option ARM" loans (check out the video), they are just now starting to reset with the worse to come in the next year to three years. If this hypothesis holds true and no real help becomes available for troubled borrowers, according to the map above, Loudoun will see another wave of foreclosures coming on the market over the next few years.
At this point, the data is limited though it's on economist's radar screens and there should be more coming out soon. As more becomes available, I'll keep you posted.
If you're curious as to where all the foreclosures in Loudoun County are located or which areas of Loudoun are most affected by foreclosures, check out the map below (click on map to enlarge)…
As you can see by the where most of the red dots are, the areas of Sterling and SE Leesburg are where most of the foreclosures are located. Incidentally, that's where some of the biggest drops in home values in Loudoun County have occurred.
Another thing the map shows is the total number of foreclosures in Loudoun County for the first, second and third quarters of 2008. Notice the increase in foreclosures as the year has progressed though the rate of increase has decreased.
Back in October, I wrote a post entitled, "Read This Before Writing an Offer on a Bank-Owned Property", which cited several things from a post over at Agent Genius. I'm writing a similar post today because some things have changed while others need to be reinforced. So here goes…
Foreclosures/bank-owned properties are quite different from traditional resales. There are many things to consider and understand before writing an offer on a foreclosure/bank-owned property. For starters, here are the top 10 things you should know before writing an offer on a foreclosure/bank-owned property (click on links for greater explanation):
- Properties are sold "AS IS" - All properties are sold "AS IS" in their present condition. If you are using FHA financing, this may present a problem.
- Multiple offers - If the bank receives multiple offers, buyers may be requested to submit their "highest, best and final offer" by a specific date and time. All offers received by that date will be presented at the same time.
- Proof of Financing/Funds - All offers must have a lender letter with loan and approval amount indicated in the letter or proof of funds otherwise the bank will not respond.
- Countrywide/GMAC-owned properties - If the property is being sold by Countrywide, you must also provide a lender letter from Countrywide prior to or along with your offer otherwise Countrywide will not review your offer. (The same goes for some properties being sold by GMAC - ask your agent to check the MRIS/MLS remarks section of the listing)
- Delay of settlement - If the closing is delayed due to the buyer's inability to obtain financing after the financing contingency has been removed or if the buyer's lender delays settlement by not having the loan docs or funds ready by the settlement date, the bank will typically charge the buyer $100.00 per day.
- Bank addendums - All bank-owned properties have their own set of addendums. They supercede the Regional Sales Contract or other such contracts. Sometimes, these addendums must be signed and submitted at the same time as the offer. Other times, the addendums will be provided to the buyer after their offer is accepted. Until all the addendums have been signed and delivered, the contract is typically not considered "ratified" and the bank may sometimes continue to market the property for sale.
- Response time - Response time on foreclosures/bank-owned properties can vary from 24 hours to several days or a week. In the case of Freddie Mac or Fannie Mae owned properties, a verbal response may take several days while a written response may take several weeks.
- "Sale of Home" contingency - Banks will not accept "Sale of Home" contingent contracts - no exceptions.
- Title company - Banks will want to close at a title company of their choice and do not like to do "split settlements". The bank addendums that you must sign to purchase the property will state that you agree to using the title company the seller has chosen.
- Inspection/utilities - If the property has been winterized and if the buyer is allowed to do an inspection, the buyer must ask for permission from the seller to dewinterize the property just prior to the inspection and rewinterized immediately after inspection. Not every bank allows an inspection so check on that before submitting an offer.
There are other nuances and things to be aware of, but these ten are some of the most important. If you have any questions, feel free to drop me a line - danilo.bogdanovic (at) gmail (dot) com or 703.582.6900 (cell).
Many people have asked me if it's possible to purchase a foreclosure or short-sale property using FHA financing. For some people, the question has never crossed their mind. Well, it should.
Why? Because foreclosure and short-sale properties are sold "AS IS". This means that the seller (bank) is unwilling to make any repairs on the property and "what you see is what you get" (click here for more information on what "AS IS" means).
But FHA financing includes an FHA appraisal/inspection which is different from a traditional appraisal. A traditional appraisal is a valuation of the home in it's current state as compared to similar homes that have recently sold. The person doing the appraisal is an appraiser in the traditioanl sense.
An FHA appraiser is someone who has been certified by the FHA to do appraisals on properties where the buyer is going with FHA financing. Unlike a traditional appraisal, an FHA appraisal is also an inspection of the property and provides an "inspection report" as part of the appraisal. The FHA appraiser will go through the property looking for defects that he/she may decide must be fixed or remedied in order for the property to meet FHA standards.
In other words, if the buyer or seller don't remedy the defects the FHA appraiser cited, the financing will not be approved.
This presents a potential problem for both the buyer and the seller. Should the FHA appraiser say that things need to get fixed in order for the financing to go through, the seller may be forced to fix those items in order for the sale to go through. But even though the bank wants to get the property off of their books, fixing anything whatsoever goes against the very basis of "as is".
But that's IF the seller accepts the buyer's FHA-financed offer in the first place.
Banks don't like to see FHA financing on offers due to the issue I described above. Many banks will reject offers with FHA financing. Some will counter with having the buyer use conventional financing. A few banks may accept FHA financing, but don't expect it. Even if the bank accepts an FHA-financed offer, they may try to limit the dollar amount of the repairs they will make.
If the bank agrees to your FHA-financed offer without a limit to the amount of repairs, you may want to go buy a lotto ticket.
I'm not saying that getting an FHA-financed offer accepted is not possible. I'm saying that the chances of doing so are much smaller than had you gone with conventional financing. And there's no blanket policy - the same bank may reject FHA financing today and accept it tomorrow. Each and every property should be handled on a case-by-case basis.
Foreclosure and short-sale properties are all sold "AS IS". But what does "AS IS" really mean?
"AS IS" means that what you see is what you get. Ninety-nine percent of the time, the seller (bank) will not make any repairs to the property (the one percent is FHA financing-post on that coming soon). It also means that the extent of the seller's obligation with respect to title will be to provide insurable title to the purchaser.
Here's an excerpt from an "AS IS" clause from Freddie Mac:
"Purchaser understands that the seller obtained the property by foreclosure, deed in lieu or foreclosure, forfeiture or similar process and consequently, seller has little or no direct knowledge regarding the condition of the property. Purchaser accepts the Property in "AS IS" condition at the date of the Contract of Sale, including, without limitation, any defects or environmental conditions affecting the Property, known or unknown.
Purchaser acknowledges that neither the seller nor its agents have made any warranties, implied or expressed, relating to the condition of the Property."
Here's an excerpt from an "AS IS" clause from IndyMac Bank:
"Buyer acknowledges and understands that the Property is being purchased and sold as-is, where-is and with all faults. Buyer further acknolwedges and understands that the Property was acquired by Seller through a foreclosure or other similar action and therefore, Seller is not an owner-occupant and Seller's information concerning the Property and its condition is extremely limited. Accordingly, Buyer acknowledges and understands that, except as otherwise disclosed in writing to Buyer, Seller is unaware of any latent defects in the Property or any appurtenant systems including, without limitation, plumbing, heating, air conditioning and electrical systems, fixtures, appliances, roof, sewers, septic, soil conditions, foundation, structural integrity, environmental condition, pool or related equipment. Seller makes no representations or warranties as to (i) the condition of the Property or any of the Property's systems or improvements, or (ii) the serviceability or fitness for a particular use of the Property or any component of the Property."
As you can see, "AS IS" clauses are also a huge C.Y.A. for the banks. As a buyer, you must understand that the property is sold "AS IS" and that you'll need cash and/or sweat equity of your own to fix it up.
For those of you that have the cash and/or sweat equity to perform the repairs, there are some great bank-owned deals out there, especially from Fannie Mae and Freddie Mac. For those who don't have the cash or sweat equity to invest in a foreclosure property, don't worry…there are great deals on foreclosures that require very little work, as well as on traditional resales.
NOTE: This is not meant as legal advice nor should it be taken as such. For guidance on any and all "AS IS" clauses and contracts in general, contact an attorney.