Q: I’m a single parent and have been leasing a townhouse in California’s Contra Costa County for more than two years. Suddenly the owner has gone into foreclosure and will be going to trustee sale at the end of the month. Is it possible to obtain a purchase contract with this foreclosing bank in return for my monthly rental payments as monthly mortgage without having to qualify for a mortgage and the whole 9 yards? I really like the place and hope to avoid moving because I’ve been through this two times before with other landlords.
A: Most people think that the foreclosure crisis is all about homeowners losing their homes to banks. But the New York Times recently estimated that more than 70,000 tenants who have been faithfully paying their rent have been evicted from their homes when their landlords lost the property through foreclosure. Many banks have a policy of immediately evicting any tenants as soon as they obtain ownership of a property through foreclosure, as it sounds like you are painfully aware from past experience.
I appreciate your effort to find a silver lining to the nasty cloud of facing your third eviction due to foreclosures arising from no fault of your own. In the end, whether or not you are able to purchase that particular home, you have learned firsthand one of the undersung advantages of homeownership — you cannot simply be evicted, even when you’ve been paying your mortgage on time. In fact, it usually takes about six months of nonpayment on a mortgage before a homeowner experiences foreclosure. Contrast this with you getting evicted even though you’re paid up on your rent, and you see one compelling reason to own your home.
Now, as the tenant, you are well-positioned to make an offer to buy a home. If you buy the property, it will almost undoubtedly save the bank that now owns the place thousands of dollars in real estate commissions and eviction fees. It is virtually impossible, though, for you to purchase the property without qualifying for a mortgage — either a mortgage through the same bank that owns the property, or through a lender of your own choosing.
The mortgage banking division of the institution that owns your home is an entirely separate entity from the asset management or loss mitigation division that is responsible for handling the property as a piece of real estate owned by the bank (REO). The asset management division would be happy to offload the property, but only if they are able to record the market value of the property as income to offset the sale of the property. For that to happen, someone has to pay for the property — not just sign an IOU for it or start a 30-year payment plan for it. That is, the bank would rather sell it to someone on the open market who can just pay them for the place than to take monthly payments from you and still have to deal with the place for 30 years. If you buy it, unless you have a spare couple hundred grand lying around, those funds need to come from a mortgage, whether it be a mortgage made by the mortgage banking division of the same institution or a mortgage you obtain from another lender.
Don’t let the fact that you’ll need to qualify for a mortgage stop you. I find a lot of potential buyers today doing what I call "self-disqualification" — you’ve read that mortgages are much harder to get now than they used to be, or you think that you need a 20 percent down payment, so you don’t even bother trying to qualify. Most people are not aware that there are currently very good mortgage options available for people with less-than-perfect credit with down payments as low as 3.5 percent — sometimes even lower, if the buyer qualifies for a government- or employer-funded down-payment assistance program.
In the San Francisco Bay Area, given the landlord-favorable rental market, the relatively low current purchase prices and incredibly low interest rates, I have actually seen tenants reduce their monthly outlay by purchasing the properties they live in. I don’t know the specifics of your situation, but you owe it to yourself and your daughter to at least explore the mortgage options fully before you decide that you cannot buy.
Need-to-Knows and Action Plan
Before you give up, talk with at least two mortgage professionals: one that works as a loan representative for the bank that owns your home (they may offer incentives like free credit reports or appraisals if you work through them to buy a property owned by their institution, and some banks, like Countrywide, require a loan approval by their institution to even look at your purchase offer), and a mortgage broker that you find through referrals from your friends, colleagues or a trusted Realtor. Between the two mortgage pros, you should end up with a realistic picture of whether you qualify for a mortgage, how much purchasing power you have, and what the costs of ownership would be if you bought the home you live in.
Within the months after the trustee sale, you will begin to see notices posted on your door or window, or even have in-person contacts with asset management company staff or, more likely, a listing agent representing the bank who owns the property. Ideally, by that time, you will have a preapproval letter documenting your qualifications for a mortgage up to a certain price. If you live in a complex, your job between now and then is to keep your eye on the sale prices (not list prices) of units similar to yours that sell in your complex, so you can have a grasp on the fair market value of your unit when the time comes to make an offer to purchase it. If push comes to shove, you can certainly hire an appraiser to help with that at that time.
Normally, I would encourage you to have your own Realtor, but be aware that most banks will not pay a commission for a Realtor representing a tenant who lived in the property pre-foreclosure. As such, you could either pay a Realtor yourself (they might be willing to work with you for less than a normal commission because they will not have to drive you around house hunting) or hire a real estate attorney to represent you (which should be less costly than a Realtor’s commission) and attempt to negotiate a closing-cost credit from the bank that covers the costs of your representation.
Once you obtain contact information for either or both the listing agent and/or asset manager in charge of the property, work with your Realtor or attorney to prepare and present an offer to purchase the property at a price that makes sense for your finances and for the current market and market trends. You may have to be diligent — I have seen some banks be very receptive to tenant offers to purchase, and other banks be bizarrely resistant to such offers. But this is the basic process you’ll need to go through to make a college try at making your home truly your home.
Oh — and if you encounter a period of months during which you have no idea who to pay your rent to, save your rent money, rather than using it to pay off credit cards, etc. You may need it for a down payment or even to pay back rent in the event that the foreclosing institution will accept it in lieu of eviction.
As a side note, tenants in properties owned by Fannie Mae and Freddie Mac are no longer going to be subject to immediate eviction. Fannie and Freddie are signing month-to-month leases with tenants on such properties until the homes are resold. Also, many states, counties and cities are beginning to implement eviction controls or prohibitions that might apply in your specific case. For example, last year, you might have been forced out on a three-day notice, but California law now requires foreclosing banks to give tenants at least 60 days’ notice before requiring them to vacate the premises. If you are being forced out or you are unable to purchase the property for whatever reason, contact a local, nonprofit legal aid organization to get educated about what tenants’ rights you may have.
Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.
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