Continuing the recent trend of guest posts, I’ve invited Ray Caddell, a local real estate broker, to clarify some of the current burgeoning questions about foreclosures, specifically in the Charlottesville market. Ray’s bio probably wouldn’t fit here, but suffice it to say that I respect him enormously, and am thankful for his graciously agreeing to write this post.

I’ve been reading and hearing a lot lately about foreclosures, pre-foreclosures, short sales, and everything in between in our market. It’s a complicated issue, and many realtors and even real estate attorneys are still climbing the learning curve…some more successfully than others.

I’ve also seen and heard on local talk radio members of the general public discussing the issue, and a tremendous amount of confusion exists there as well. The process is convoluted, often excruciatingly slow, and often leads nowhere, at least from a potential buyer’s point of view.

The television and internet advertising boasting huge profits and “buy a house for $300” doesn’t help either, of course. I’ve had some success putting together short sales for my clients and my own portfolio, even more in pre-foreclosure situations, and very little at the foreclosure auction stage. Here’s what those terms mean to me, and why I think things have worked out as they have.

Pre-foreclosure: A property still owned by the seller, but in a situation where payments are in arrears. If some equity still exists in the property (the difference between what is owed and what a buyer is willing to pay), this can be a good deal for all concerned.

Short Sale: A property that does not have enough equity in it to payoff existing obligation(s) and thereby deliver clear title. This is a case where the buyer, seller, and the existing lender(s) must all agree to a sales price, even if it does not fully satisfy the lender(s). Difficult, but not impossible to bring to a successful settlement.

Foreclosure: This is the auction process by which the lender attempts to do 2 things: obtain clear title to the property by wiping out liens and obligations recorded after the instrument, and occasionally accepting a successful bid that pays all or part of what they are owed.

Buying/bidding in: Here is the most misunderstood part of it all. Often the lender will instruct the trustee to make a bid on it’s behalf that is somewhere very near the amount they are owed, in hopes that someone will either bid higher and they will be made whole, or that once they have clear title, they can then resell and hopefully mitigate their loss.

Seems a little short sighted to me if it bears little or no relation to fair market value, but it’s clearly their right.

I have almost never (and in fact I can’t think of a single example locally) where a bank actually “made money” at an auction, or bid to drive the price up as some have alleged. For one thing, any excess profit after paying off the debt and cost of sale belongs to the former owner anyway.

There are a lot of intricate details, accounting issues, and even some IRS issues that go along with this latest paradigm shift in conveying some properties, but 2 things remain pretty constant…The lender very rarely comes out ahead, and therefore the lender very rarely is interested in owning the property. In every case, the lenders would be delighted to break even…they’re not the bad guy in the situation.

We all benefit when we’re working with good information.