Purchasing a New Jersey Home from a Bankrupt Seller

In today’s housing market, there are still a significant number of homeowners who are in danger of foreclosure. These homeowners usually owe more than their home is currently worth, so they are said to be “upside down” or “underwater.” If they are unable to refinance, and cannot keep up with their payments, they will be foreclosed upon, and are likely to declare bankruptcy at that point.

Should you pursue a short sale on a home that is awaiting foreclosure?

If you already own a home, are pre-approved financially, have plenty of available cash, and at least several months to spend devoted to the complicated process that is a short sale on a foreclosed home, only to have the seller declare bankruptcy and possibly even cancel the whole thing, then yes, a foreclosure might be the right gamble for you.

Beware, though, because as stated, it is highly likely that the seller will declare bankruptcy before the sale is completed, greatly reducing the likelihood that a short sale will close. Short sales rarely yield substantial profits for the seller, so the seller was likely pursuing a short sale in order to reduce the damage to their credit that would result from a foreclosure. However, if they’ve decided to go ahead and file for bankruptcy, the negative effect it will have on their credit is likely to overshadow any benefit from the short sale.

If they were to continue with the short sale despite having filed for bankruptcy, the seller could actually be negatively affected. Their filing for bankruptcy places their belongings, including their house, into a bankruptcy estate, so they don’t have the power to close a short sale easily. If the owner is determined to complete the short sale–normally against the recommendation of their bankruptcy attorney–they will need to pay said attorney an extra fee to pursue permission from the court.

If they obtain permission to close on the short sale, the owner will need to move out of the home much more quickly than if they were to wait out their bankruptcy proceedings. The only potential benefit to the owner comes from the peace of mind that may result from having avoided foreclosure.

With all these complications, it may seem like it’s not worth it to pursue short sales in foreclosure situations at all. However, there are a number of benefits that might be quite appealing: competitive pricing, smaller down payment and closing cost, and a shorter escrow period, to name a few major advantages.

So, if you are going to attempt to purchase a house that has been foreclosed upon, or a house that is in bankruptcy court, don’t go it alone. You will need the expertise and guidance of an experienced bankruptcy attorney. Your real estate agent will be happy to help you find advantageous listings, but consult with a bankruptcy attorney to have help navigating the complicated process to follow. A real estate agent is NOT an attorney, and can in no way fill that role.

Never skip inspections! They may be even more necessary in a short sale situation, but never less so. A 2011 survey conducted by Harris Interactive reported that 72 percent of U.S. homeowners agree the home inspection they had before they purchased their current home helped them avoid potential problems; 64 percent of respondents reported that their home inspection saved them money.

While it is a bit of a gamble to invest in an inspection when you don’t yet have signed contracts, it’s a much bigger gamble to sign papers on a home you haven’t had inspected. If a homeowner didn’t have the money to pay their mortgage, it’s unlikely that they’ve been able to keep up with regular maintenance. If you can’t arrange an inspection, and you don’t have hundreds of thousands of dollars to spend on potential repairs, don’t close the deal on a property, no matter how enticing the price tag.

The takeaway: if you have the time and money to spend on a home that may never be yours, and you find a house that is listed at a price that might make it all well worth the hassle, then take your attorney with you–and buckle up for a wild ride!

Image: “Mortgage Rates” by Mark Moz – licensed under CC by 2.0

 

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