STAGES OF AN AMERICAN FORECLOSURE: A Canadian Perspective

 

1. Short sale/pre-foreclosure:

The owner is issued a warning, because they are late on payments. If the owner can sell the property-it is called “short sale” and their credit score is not affected.  Websites like www.realtytrac.com advertise short sale homes or you will see them in the local papers.  If you have the guts to approach an owner in this phase, take him out for a nice coffee, and tell him you are interested in buying his home and NOT kicking his family out, which he knows will happen anyhow if he can’t repay his default.  This way he can rent it (and you can do an inspection, unlike in the Bank Auction phase below).  Obviously approaching someone going into foreclosure is a feat for the brave, and if he doesn’t throw his coffee at you, you may be able to work out a deal. This will be something to consider if you want to go into an investment to rent the home anyhow…and remember, the bank still needs to approve the short sale, which can be months in the making.  Plus, tax on rent is 30% gross rent income, and 15% of your monthly rental income will automatically be withheld…so beware…your monthly CASHFLOW is affected!!

2. Bank Auction (approx. 30% savings from market value):

if it doesn’t sell in short sale time, it goes here: done at the county courthouse or outside the home itself.  Buyers pay cash or cashiers cheque from US Bank.

a)    There could be multiple mortgage/liens on the property (DO A TITLE SEARCH!!!)

b)    The bank sets a starting bid, which is considered the 1st bid.  This way if the home has no other bids thereafter, it is sold back to the bank and goes on to the next phase (REO).  For those who are savvy in foreclosure investments know this can be a lucrative investment, HOWEVER…bidding on a home in this phase has its down side. Not only can the home be in bad shape, but the laws surrounding who can renovate that home can complicate your plans.

**Remember…homes in this phase are “AS IS WHERE IS (get title insurance!!), and you are not allowed to do an inspection before you purchase so before you bid…think…think…think…then think again!

3. REO:  Once the home is here, the bank has 2 choices…

a)    Chances are the homes that are sitting in this phase are NOT going to be any lower priced than those on the local market…but there are exceptions. The nice thing here though, is the bank will clean up the title, maybe fix the home & put it on the MLS.

b)    Send it to an auction house (NOTE): this auction is different than a bank auction, because the house has a clean title & potential buyers are allowed to see inside the house, do an inspection (etc).  Often, you will notice there are open houses in this phase.

c)    Mortgage can be arranged, and Canadians should work with a Canadian Bank in the US or things can get really complicated.

TIPS:

*Study the laws of the state you are purchasing in!!! They are not all the same.  I advise people to hire a cross-border tax advisor.

* Have a plan.  Know the purpose of your investment.

-JUST A SECOND HOME: only property taxes to worry about. The catch is, when you sell, capital gains tax is hefty & maximum US tax rate (after 12 months ownership) is…yikes…15%!  There are rules around lowering this, but this is a whole other blog, so consult your accountant…

-RENTING IT OUT: US taxes are 30% on gross rent income. You need to hire a property manager if you are not American to renovate & manage the rental. So much as driving a nail into a wall can cause you considerable trouble so account for this before you purchase. In addition 15% of the monthly income will be withheld for year-end tax purposes, so your cash flow WILL BE AFFECTED!!!

*Get your title insurance policy & have your Canadian tax advisor review it. If you need a referral to local cross-border accountants, just holler!!

* GO SEE PROPERTIES IN PERSON!!!!!!!!!!!!!! The Internet picture is not the whole story.  If the entire street has been riddled in foreclosure homes & they are vacant, you have issues: (property value, condition of the home, squatters etc). No research in the world can compare to actually being able to see the property in person & touch brick & mortar with your own 2 hands.  Trust NO ONE except you! Be prepared to take a plane trip.  On the bright side…what Canadian doesn’t want to do THAT in mid-winter right?