Sorry to have to inform you that it’s a very common misconception that foreclosures are the best deals. Another source of confusion is over just what a foreclosure is. Many people believe that all foreclosures are listed with real estate agents. Not so; they are listed with a Foreclosure Commissioner, usually an attorney. Briefly, when a bank forecloses on the property of one of their borrowers, you can only buy it at a foreclosure auction. But if the bank buys it back at the auction, they will list it with a real estate agent and it is now called an REO, “Real Estate Owned” property. Technically, it is no longer a foreclosure. The following is a brief description of the process.

When a borrower is in default on their mortgage a lender will initiate either a Judicial or a Non-judicial Foreclosure Action. Without going into too much detail, notices are sent to the borrower informing them that they have a certain amount of time to pay up their missed payments or the bank will confiscate the property. At some point the owners are evicted and the bank lists the property with a Foreclosure Commissioner. The commissioner advertises the proper as available for showings on certain dates under “Announcements” in the classified section of three local newspapers. Here on the Big Island there is theĀ Kailua-Kona paper. And theĀ Hilo paper. In the Announcements section, foreclosures will be listed under “Legal Notices”. There will be other legal notices and there won’t be foreclosures listed every day. So you have to look every day or you might miss one. When you find notices of foreclosure there is a procedure you must follow. First, you can go look at the property on certain advertised dates when the commissioner will be there. Next (and this is specific for Kailua-Kona, Hawaii), you must meet at high noon by the flag pole in front of Hale Halawai (downtown Kailua-Kona on the oceanfront across from the municipal parking lot) on a date specified by the commissioner. I was once exactly one minute late and the bank had already bought the property back and every one had left. I found out by phoning the commissioner. Anyway, lets say you get to the flagpole on time and out-bid the bank. You must immediately pay the commissioner 10% of the sale price in cash or cashier’s check. Next step is the court confirmation (usually about a month after the auction). You have to show up in court on the appointed date with the remainder of the sale price in cash or cashier’s check. One glitch is that people who did not know about the original auction date can re-open the bidding. If that happens, then you must be prepared to bid-up or give up. If you are successful at this point you get a Commissioner’s Deed. This is not a warranty deed and there is no title insurance. So, if the previous owner has clouded the title, you will not know about it. You can, however, contact a Title Company and pay for your own title search in advance of the confirmation hearing if you so choose. If you are successfully confirmed by the judge at the hearing, and your search determined that the title was clear, you can buy your own title insurance when you take possession of the property.

Now, there is no one place were all legitimate foreclosures are listed. There are many different banks, and any one bank’s foreclosed holdings are not listed on a list with those of all the other banks. Nor does each individual bank list it’s foreclosures at a website, only in the newspaper as mentioned above. There are websites offering lists of foreclosures, but they are scams. On their homepage they show the properties listed for what the owners paid years before; sometimes ten or twenty years ago. This is the hook. In order to actually see the sale information, and find out where the properties are located, you have to pay a fee. A client sent me one of these and there was not enough information on the website homepage for me to find it in MLS. So my client paid the fee and got the Taxkey number. On the website’s homepage the property was listed as for sale for $166,000. But this was the price the owner had paid for the property in 1995!! Once I got the Taxkey number I looked it up on MLS. The bank had bought the property back and listed it with a local real estate agent for over $500,000, the going rate for any home in that neighborhood. So, unfortunately, my client had wasted their money. Don’t waste your money at websites offering lists of foreclosed properties! It’s a scam!!

Now, if no one shows up at the foreclosure auction but the bank, or the bank outbids all others who do show up. The bank ends up buying the property themselves. At this time they usually list the property with a Realtor at fair market value just like any other property. Sometimes, if there are already a lot of foreclosures on the market, they will wait until a few of those already on the market sell before listing the newly foreclosed property. But eventually they will come on the market listed with a real estate agent as an REO, Real Estate Owned property. Lately, since the middle of 2008, the banks have been listing these REOs very low and taking bids even lower than the asking price. Occasionally there is a bidding war, because the price was so low, and it’s bid up to over the asking price. Still, it’s always a good idea to compare prices of all the properties in the price range, neighborhood or condo complex you are interested in. Occasionally a seller who purchased their property ten or twenty years ago will be undercutting even the banks. When foreclosed properties come up on the UPdate (Big Island Real Estate UPdates) they have already been bought back by the bank and are listed just like any other property with a Realtor. Somewhere in the remarks box the listing agent will call the property an “REO” (Real Estate Owned). Or it may say “bank owned” or “bank foreclosed”. However, if it’s listed with a Realtor, the foreclosure process is already complete, bidding is over and the judge has given his final approval, the Bank now owns the property and it is being listed just like any other property. So if you are interested in a specific type of property, or a specific price range, it doesn’t matter if the property is now bank owned. All that matters is whether it’s the type of property you want at the price you want. It may not be bank owned and still be a better deal.