Thinking About Buying a Short Sale or Foreclosure Home – Think Again!

October 18, 2010 — If you have been considering snapping up a great home at a bargain price through a short or foreclosure sale – don’t! The past few weeks have been filled with stories about banks who have stopped foreclosing on properties because of sloppy or incomplete paperwork. Bank of America has stopped foreclosure actions in all 50 states, and JP Morgan has stopped such actions in 41 states.The government is up in arms, bank stocks are being hammered, and many financial experts are worried that no one really understands the depth of the problem or how long it will take to solve. No one seems to have a solid grip on understanding the potential repercussions to buyers, sellers, and lending institutions.

The problem has gained so much attention that there is a growing groundswell to implement a national ban on foreclosures. Consider some recent headlines such as this one from The New York Times: “Avoid Foreclosure Until the Dust Settles“. Or, “50 State Attorneys Generals to Vet Foreclosure Process“.

Today the Obama administration urged legislators and others not to rush into a nation-wide ban on foreclosures. Such a ban could throw a gigantic monkey wrench into an already stumbling real estate market. Shaun Donovan, Secretary of HUD, made the point: “A national, blanket moratorium on all foreclosure sales would do far more harm than good, hurting homeowners and home buyers alike at a time when foreclosed homes make up 25 percent of home sales.” As the markets, politicians, and homeowners try to figure out how this crisis will play out, the central issue appears to be whether the title process for U.S. real estate is so deeply flawed that no one knows who really owns American homes, or if the process only has some minor procedural flaws that can be quickly rectified.

If the former is the case, banks run the risk that defaulting homeowners might be able to remain in their homes, with lenders losing the right to foreclose along with their capital. Such thoughts caused bank stocks to tumble last week (recovering today). More indications seem to point more toward the latter scenario – it is a minor problem that will be cleared up in due time. Sheila Blair, Chairwoman of the FDIC noted on “Newsmakers” that: “If it turns out this is just a process issue, then I don’t anticipate the exposures to be significant.” She urged caution until more details come to light. Or, as Nomura’s Glenn Schorr put it recently, “Sorry, no free houses.” The Times had more to say about the nature of the problem on Tuesday in “Some Sand in the Gears of Securitization“.

Just Say No!
Regardless of how this foreclosure firestorm plays out, the prudent thing for any buyer right now is to just stay out of the market. If you sign a deal to buy a home in foreclosure (or in a short sale) you run the risk of long delays and tying up your investment for unnecessarily long periods. Not to mention the possibility that you might pay for a home and find later on that you don’t have clear title – paying for nothing, or paying and then discovering that you bought the home but still owe on another loan on the home.

Old Nassau, a senior contributor to Topretirements (and whose idea this article was), made these additional points about some of the terrible scenarios that could come from buying a foreclosed home right now:

“You could end your apartment lease, arrive a closing, find out it has been canceled. Now you have nowhere to go.
Apparently, a Florida attorney opened the can of worms: Homeowners’ Robin Hood fights foreclosure giants
Or, google “Tom Ice + Foreclosures”.
I googled “Why title insurance?” and got two informative articles:
“So you bought a foreclosed home. Now what?“:
and Why Title Insurance
According to the articles, the title company will settle with the previous owner. So, if you must buy a foreclosure, get title insurance from a reputable company. But…. Lehman Brothers was a reputable stock brokerage; Arthur Andersen, one of the “Big Five” accounting firms. So, on balance, I would just stay away. I think some new laws are going to be passed protecting threatened inhabitants and unwitting buyers, but not putting in money is guaranteed not to lose money in any legal process. After all, Bernie Madoff clients are still waiting for pennies on the dollar.”
Thanks Old Nassau!

We confess that in the past at Topretirements.com we have written about the potential advantages of purchasing a home through a short sale or foreclosure. With the caveats of course, that you are an experienced real estate buyer, you follow rigorous due diligence, and you rely on a lawyer or trusted advisor in the process. However, with all of the bombs bursting in air at the moment, please forget we said that – until at least the dust settles from this enormous cloud.

Your Turn:
What are your thoughts about foreclosure or short sale buying? Please let us know in the Comments section below.