Q: Can someone who has been foreclosed on buy the same home back? I bought a home at the county courthouse foreclosure auction. When I went to visit the home afterward, I found the previous owners still living in it! I spoke to them and they don’t want to leave. They mention wanting to buy the house back. Can they? What are my options? I do want to flip the house. –Raul, Dade County, Fla.
A: While many people think about these sorts of hidden complications and significant "surprises" when they envision buying a foreclosure, the reality is that most foreclosed homes are bought as REOs (bank-owned properties) — after the county courthouse foreclosure auction is held, with no takers, and ownership of the property reverts to the former owner’s bank.
By the time these REOs make it to the market, the bank has gotten the former owners and, in most cases, tenants out, and has emptied the place of their belongings. With a bank-owned property, the bank/owner also handles any other loans and liens, back property taxes and homeowners association dues, and various and sundry other weirdness like outstanding city garbage bills — so the new owner doesn’t have to.
But when you buy a home on the steps of the county courthouse, you take the home subject to all these things — meaning they become your responsibility. (This high, high risk goes hand in hand with the low, low prices at which homes can sell during county auctions.)
So, what’s a new, would-be flipper to do? You have several options. First, you could evict them. You own it and they are not even tenants (who might have certain federal and local protections) in a foreclosed property. In virtually every city in America, you have the right to put out foreclosed former owners.
However, unless you can use your powers of verbal persuasion to get them to leave, it is likely to cost you a little chunk of change to get them out. You can offer them some cash to move out, or you can go to court and get an eviction order, which the county sheriff will enforce. Both of these options will cost you, but neither should be prohibitively expensive when you compare them with the proceeds you are looking to realize by reselling the house.
Second, there’s certainly no law against the former owners purchasing the home back from you. However, the logistics involved make this option a bit tricky. If they just had this foreclosure on their credit report, the chances are between slim and none that they’ll be able to turn around and obtain a new mortgage loan to buy it back from you.
However, I can certainly envision more creative circumstances under which this repurchase scenario might work, if you’re inclined to go that way. Perhaps not every adult in the house was on the foreclosed mortgage, and someone might actually be able to qualify for a new mortgage to buy the home from you.
Perhaps they know someone — a relative or friend — who is interested in taking the mortgage to buy the home for them to live in, for whatever reason (stranger things have certainly happened).
Finally, and this may sound bizarre, they might have the cash to buy the place from you. In areas where housing values are really low, it is not unheard of for a homeowner to stop making payments because they owe so much more than the home is worth.
That means they may have some cash stockpiled, and if the value of the home you hoped to sell it for is within the same range as their savings account, it’s possible they could just buy it from you outright.
Would this be unethical on their part, having stopped payments with this level of strategy in mind? Yes. But would it be unethical for you, who just met these people and didn’t participate in the strategic default this scenario assumes, to resell it to them? No.
So, there are some scenarios under which the former owners buying the home back from you make sense, but they are fairly creative scenarios with some relatively unlikely prerequisites. And there’s no reason you shouldn’t sell it to them — it would save you from having to evict, repair and re-market the property.
As such, if you are interested in selling it to them, you should move forward to ascertain whether there’s any chance whatsoever of them being able to buy it, and you should take these steps immediately. You should decide what you want to sell it for, recognizing that if someone will be financing the purchase with a mortgage, the home will have to appraise at that price.
Then, if you’re inclined to do so, you should give them a very short time frame in which they must provide you with a purchase offer and either a mortgage preapproval (not prequalification) letter from a reputable lender or proof that they have the cash to close the deal. If they can’t move forward on repurchasing the place immediately, you need to evict them or take another course of action.
In terms of the other courses of action available to you, you do have two other options. You can rent the place to them, which doesn’t sound up your alley, given that you had planned to flip the home.
Or you can rent the place to them on a lease-option agreement, whereby they will have the right to buy the home back over a period of time — anywhere from one to three years or longer, depending on what you negotiate.
If you think you might want to go this latter route for whatever reason, talk with a real estate broker and a real estate attorney in your area to ensure that you have a robust agreement and protections of your rights and your property in place.
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." Tara is also the Consumer Ambassador and Educator for real estate listings search site Trulia.com. Ask her a real estate question online or visit her website, www.rethinkrealestate.com.
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