Many people are wondering if 2021 will bring a wave of foreclosures in Southern California after the economic downturn caused by the Coronavirus. Under the CARES (Coronavirus Relief and Economic Security) Act, homeowners were provided foreclosure and eviction protections in 2020, which was federally extended through July 31, 2021. In California, Gov. Gavin Newsom signed a new law extending the state’s eviction moratorium through Sept. 30, 2021.
Put in place last March, direct mortgage servicers were required to halt all new foreclosures and suspend any that are in progress for FHA properties. It also stopped evictions from these properties. But what happens now that these forbearance protections run out? Many fear that we will see a repeat of 2008 with a market crash and a huge wave of foreclosures. However, that’s not what we see in store for California.
Because of the moratorium on home foreclosures, distressed sales have dipped to their lowest levels ever, making up less than half a percent of the listing inventory and demand in Southern California. Obviously, there will be more more foreclosures now that these protections have ended, however, a crushing wave isn’t coming because this time around U.S. homeowners are more financially stable and have more equity in their homes.
What is a foreclosure?
A foreclosure is when the bank initiates to take back a property because the homeowners have stopped making their mortgage payments. Once the borrower has missed three consecutive payments the bank can legally foreclose on the property.
The lender initiates a foreclosure and the bank, not the former owner, sells the home. Typically in California, if the homeowner and lender haven’t worked out a repayment plan for the outstanding loan to avoid a foreclosure, the lender can record a notice of default in the county at least 30 days after contacting the owner for the foreclosure avoidance assessment. The lender will send a copy of the notice by certified mail within 10 business days of recording. Homeowners can authorize a lawyer, HUD housing counseling agency, or other advisor to communicate with their lender about ways to avoid foreclosure.
At a foreclosure sale you buy in cash, as is. That means you don’t get to see the property’s interior. If the plumbing is ruined, the walls are cracked and there’s mold, then it’s your problem. As the new buyer you are responsible for all cosmetic and any legal issues that come with the property.
Benefits of buying a foreclosed home
- Typically faster than a short sale. A short sale is not approved by the bank and may not be even after you make an offer. A foreclosure on the other hand is already in the banks hands.
- Typically cheaper than a short sale. A foreclosure is generally the lowest possible price you will get for a home.
There can be a lot of paperwork and hassle associated with a distressed home sale however you could walk away with an amazing deal on a new home. When buying a foreclosure, it’s important to work with an experienced real estate agent who understands the foreclosure process because there are several legal pitfalls to look out for, including liens on the property that could raise questions of ownership and open you up to litigation issues. Checking for accuracy on foreclosure auctions is important as well because things can chance quickly.
What is a Short Sale?
Short sales or preforeclosures happens when the owner of a property puts their home up for sale and does not have the money to close the transaction and needs an approval from the lender. Typically with short sales the homeowner owes more on the home than it’s worth and they are in danger of being foreclosed on by the bank.
It’s called a short sale because the lender is shorted the full amount of the loan balance. If the bank accepts the short sale they agree to take less than what is owed on the loan and forgive the rest of what the current borrower owes on the house (if the real estate agent negotiates this into the contract and is agreed upon by both parties). The homeowner initiates a short sale and the owner, not the bank, sells the home.
Short sales are notorious for taking a long time to close, if they ever do. The sellers must qualify for the short sale which can be a lengthy process, and that’s just the beginning. All the lenders that hold a lien on the property have to agree to the sale as well. If the first mortgage has been re-sold by the original lender, it may now be owned by multiple banks. Also if there is a second mortgage on the house, the lender(s) in the second mortgage also may be lienholders.
Getting all lenders to approve a short sale takes time and could even prevent the deal from closing if a lender does not agree or if the seller can no longer make mortgage payments during the long wait and foreclosure ensues.
Benefits of buying a short sale home
- Typically short sales are in better condition because they have been occupied. Foreclosed, unoccupied properties can quickly fall into disrepair.
- You can buy with a loan. Typically foreclosures are done as bank auctions and require a full cash payment upfront. Short sales on the other hand can more likely be obtained with a mortgage loan.
- The current owner goes freely – no messy eviction. In a foreclosure if former owner has not vacated the property you will have to pay the local police to evict them and you have no control over the state in which they leave the house.
Why It Takes So Long To Buy a Short-Sale?
Banks prefer short sales to the alternative, foreclosures. Because foreclosures are expensive, banks will usually settle for a short sale to get the most money back on their investment. For the home seller, a short sale is a renegotiation of their debt to one or more lenders. It’s a complex process with many requirements. The short-sale package every lender requires from the seller must have every line filled out signed, dated, and initialed, every paper must be present and all documents must be up to date.
Additional lenders = additional time
With every additional lender on the home, the process becomes more complicated. Each lender has to approve how much they will be receiving from the sale of the home, and lenders’ approval only lasts 30 days. If a secondary lender approves the short sale outside of that window of time, the primary lender must be re-applied to.
Has it been approved?
Just because a home is listed as a short sale doesn’t always mean that the seller has had that short sale status approved by her lender or lenders. Because a seller can list the house as a short sale before the bank approves or denies the request, it’s possible that it will be denied. If you put an offer on the home and short sale request is denied, thats it. There is no longer a home on the market to bid on. The entire process is made more complicated if there has been a foreclosure Notice of Sale filed as well. The home could go from short sale to foreclosure before your offer has time to be approved by the lender.
Nothing in real estate is as complicated or takes as long as buying a foreclosure home. It could take months or even an entire year for your offer to close on the short sale. A great short-sale real estate agent can make the difference between closing on the home you want and missing it by a few days, hours, or dollars.
Part of the reason short sales take so long is that banks can take two to three months to respond to your offer on the home. And this response could be a counter offer rather than accepting or declining the offer.
One of the dangers of buying a short sale is that the home is sold as is. The bank is not going to make any repairs and the seller has no incentive to. They will not be receiving any money from the transaction.
If your offer is accepted, it is even more important than when buying a home in the normal way to have the home thoroughly inspected. Read up more on why professionally inspecting a home you’re buying is of the utmost importance with our article 5 Reasons Home Buyers Shouldn’t Waive The Home Inspection.
How does the foreclosure process work in California?
Day 1 of the California foreclosure timeline is a missed payment. When the home loan is officially in default, the bank must file a Notice of Default with the court, and your servicer must wait 120 days before making a first official notice. After you’ve received a Notice of Default, you have 3 months (day 180) in which to attempt to get your loan current.
At day 200, at least 20 days after receiving a Notice of Trustee Sale, the bank can set a date for the public auction. It’s possible the sale can be postponed by the courts or the bank for up to a year, after which point they have to send a new Notice of Trustee Sale in order to send the house to auction where it’s sold to the highest bidder.
Following a foreclosure sale, the new owner must serve the previous owner with a 3-day notice to move out. Technically, if the former owner doesn’t vacate the property the new owner isn’t legally allowed to remove them, but they can start the formal eviction process through the courts to gain full possession of the home.
In California, the most common type of foreclosure is non-judicial, but the law does allow for judicial foreclosures as well. Judicial foreclosures are rare in California because they allow for “right of redemption” for delinquent homeowners, whereas non-judicial foreclosures do not have this borrower-friendly option. Right of redemption allows the previous owner to buy the home back from the successful bidder at the auction for 1 year after the sale, making this process longer and more costly than a nonjudicial foreclosure.
Overall, California is considered a consumer-friendly state due to an extensive set of rules that govern the foreclosure process.
What is the foreclosure rate in California?
According to the latest data from sofibank.com of California’s 14,175,976 housing units, 1,405 went into foreclosure, making the state’s foreclosure rate one in every 10,090 households. Nationally, foreclosure activity has increased 9% in the first quarter of 2021, and California was among the top states that saw the greatest quarterly increase in foreclosure starts, up 36%. While these numbers seem high, it’s simply because we’ve come off a foreclosure moretorum that the number are jumping once again.
Are foreclosures increasing in California? Will there be a housing crash in 2021?
No, there should not be a market crash in 2021. Everyone is worried that history will repeat itself (AKA 2008), but If you look back at the last five economic recessions, only two have resulted in declines in real estate values. The bubble created by the Great Recession was fueled by subprime lending practices, which meant homeowners were qualifying for home loans they couldn’t afford. Despite the pandemic, today’s real estate market is healthy with market conditions of low supply and high demand keeping home values strong.
Tight lending qualifications continue to keep the housing market strong, and we’ve already seen a V-shaped recovery. Approximately 7.5% of all active mortgages are in active forbearance according to a report from Steven Thomas, and of those that are past due, 77% of homeowners have at least 20% equity in their homes, and 90% have at least 10% equity.
Therefore, upon exiting forbearance, these homeowners will be in a strong position to pay back the missed payments. And if they are still experiencing financial hardship and are forced to sell, most will have enough equity to allow a traditional sale and avoid foreclosure or a short sale altogether.
According to the latest numbers from the National Association of REALTORS®, roughly 15.3% of homeowners have already exited their forbearance period without a workout plan—approximately 400,000 homes. However, NAR researcher Gay Cororaton, puts this into perspective with the current housing shortage.
“If all these 400,000 homes go into foreclosure and get listed, that will add about 24 days of supply to the housing market given the current monthly sales pace of 483,333 existing homes. If only one-third of these homes end up on the market, that’s 133,200 homes, which will add just 8 days of additional supply. If two-thirds of these homes end up on the market, that’s about 268,000 homes, which will add 17 days of supply.
“Given that only 1 in 10 borrowers are opting to list their homes, the more likely scenario is that one-third or even less of the 400,000 that exited forbearance could end up as listed homes, adding some relief to the tight supply—not a glut that could depress prices.”
Are house prices going up or down in California?
A rise in Southern California house prices is one of our predictions for 2021, however, they’re not expected to rise as quickly as they have in 2020. For example, home sold prices according to data from CRMLS rose 4.1% year-over-year from 2018 to 2019, however from 2019 to 2020, sold prices rose 14.6% year-over-year! Housing prices are expected to normalize in 2021 as more sellers are encouraged to put their homes on the market and buyers continue to take advantage of historically low rates. According to realtor.com’s predictions, home sale prices are expected to go up 5.7% next year.
With home values on the rise, homeowners who are vulnerable to becoming a distressed sale will see their equity positions increase in time. Some will not be able to avoid a foreclosure, but that will cause more of a ripple in the Southern California housing market than a crushing wave.
While we will see more distressed homes in 2021 once the mortgage forbearance period ends, it will pale in comparison to the Great Recession. This economic recession will not cause declines in real estate values, which means buyers who’re hoping to purchase a foreclosure and secure a real estate deal may be disappointed. If you are ready to buy a home now, there’s no reason to wait.
How to Buy a Foreclosure in 5 Steps
Home buyers interested in purchasing a foreclosure must prepare themselves for a difficult journey for this type of affordable housing. Unlike traditional home buying, foreclosures are often fraught with issues the new homeowner must resolve.
Even though you will be getting a deal on a home by buying a foreclosure, the home and the process are more volatile and prone to complications. Be prepared to write many offers before finding the right home. If you are ready to buy a foreclosure, the following 5 steps will help you be better prepared to buy a foreclosed home.
Step One: Pre-approval
Getting pre-approved by a lender is even more important for buying a foreclosure than in traditional home buying. Because homes are foreclosed upon when the owner can no longer make the monthly mortgage payment, the bank or person selling it want to ensure that you, the new owner, will be able to afford the monthly payments. The lender that pre-approves you for a loan will provide the seller with that security. Keep in mind that if you a buy a foreclosure from a bank, they are not required, and probably don’t want, to finance your purchase of their listing.
Step Two: Foreclosed Homes Search
Searching for a foreclosed house for sale can have a huge pay off – if you’re patient. Have your First Team buyer’s agent search the MLS and other online portals for foreclosures. When you notice one listing agent’s name coming up repeatedly, have your agent contact the listing agent about other foreclosure listings she may have. This gives you an opportunity to get access to foreclosure properties before they hit the MLS. Great deals on the MLS go quick, so once it shows up your window of opportunity is small.
Step Three: Submitting Offers
Be prepared to write a lot of offers before having one accepted. Buying a foreclosure is a competitive business. House flippers and contractors buy these homes, fix them up and resell them, and they often pay all cash. When bidding on foreclosures, check how long they’ve been on the market. If a property has been sitting for a long time relative to the comparables, it is probably safe to offer a low bid. But, if the home just hit the market and you’re ready to own it, make an offer of the highest amount you’re willing to spend up to the listing price. It is frustrating to miss out on the home you want because you were trying to save 5,000 dollars. Be prepared to be patient as you face many rejections until one of your offers is finally accepted.
Step Four: Securing Your Investment
Before you exchange money for the foreclosed property, it’s extremely important you have inspections done and secure title insurance. Oftentimes, foreclosures have major damage to the house, the foundation or the land. These problem contribute to the low cost of foreclosures but could leave you with repair bills outside your budget. Paying for an inspection before closing escrow, or finalizing the purchase, will help prevent you from buying a project you’re not prepared for. If there is damage beyond your ability to fix, walk away. There will be others.
Once you find the perfect house, title insurance will help protect your ownership of the home. Aside from physical damage to the home, foreclosures can come with a lot of legal baggage, such as the home was collateral for the previous owner’s debt or was unlawfully foreclosed upon. Title insurance protects your ownership as a good-faith buyer. While this insurance is important for all real estate purchases, it is especially important for foreclosure purchases where liens, or claims on the property, surface post-purchase.
Step Five: Ownership
Now that you own the house, you will have repairs to attend to. If you did the proper inspections, you should know exactly what problems face you. Now comes the time to turn your bargain real estate into a home your neighbors will envy. Those home buyers that bought a foreclosure from anywhere besides a bank may have to evict a past owner, renters, or even squatters. Make sure you enlist the help of your agent or an attorney. Due to the circumstances surrounding foreclosure, the people you have to evict may not be cooperative, and, in some cases, are dangerous. Even if the home is empty, be cautious when entering, disgruntled and displaced past owners could have purposely damaged and vandalized the home or made it somehow unsafe.
Finding the property you want and closing escrow is an exhilarating feeling. The search is over; you got a great bargain for a great home. As you now know, buying a foreclosure is not for the faint of heart. The circumstances that put the property on the market leave it in a condition that is going to cost you time and money to restore the home to its past glory. For patient home buyers, finding a bargain on a dream home makes dealing with the tangle of buying a foreclosure worth it.