What is the difference between buying a bank foreclosed property vs. a tax foreclosed property? Is one?

Asked by Kim, New York, NY Sun Dec 28, 2008

better/less expensive than the other? I am looking to own a house in southern Westchester county, NY. Unfortunately, it is so expensive in this area I feel that this is the only way I can afford to buy a home.

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Linda Slocum,…, , Santa Clarita, CA
Sun Dec 28, 2008
The two types of foreclosures, bank foreclosure and tax foreclosure, are generally handled very differently.

With a bank foreclosure (REO), the bank has taken back ownership of the home and will typically verify that the home has clear title (no liens or encumbrances) before selling the home to a new buyer. Banks will usually hire a local Realtor to manage the property and list it for sale on the local MLS service. Once the home is listed on the MLS, you should be able to have access to the house for a visual inspection. There will likely be some delay between the actual foreclosure date and the date that the property appears on the MLS, since the bank will need to have appraisals and BPO's (broker price opinions) in hand before determining price, make sure they have clear title, and they may need to evict the current occupants. REO's can be in various states of disrepair, with some being virtually move-in ready and others being completely trashed. Sometimes the bank will address these repair issues, but most of the time these homes are sold "as-is" with the buyer being responsible for all repairs.

With a tax sale, the first thing to verify is whether the tax sale passes full ownership to the new buyer, or if it is a sale giving you the right to earn interest on the unpaid taxes. You'll also need to verify whether there is a waiting period before you are sure you have ownership, and understand what happens if the current owner disputes the tax sale. Typically tax sale properties do not pass to the new owner free of all liens and encumbrances, so check for delinquent HOA fees and other items that could become your responsibility if you take ownership of the property. Also, tax sale properties are not "for sale" like a regular MLS listing, so you'll not be able to go inside and check it out, and you're not allowed to disturb the current occupants. Assume the worst with these homes, and expect that you'll need to replace cabinets, flooring, sinks, toilets and appliances at a minimum.

Remember that the list price of homes being sold as foreclosures is just a starting point. Quite likely they'll get bid up closer to the current market value for your area, unless there are some circumstances that make that home less desireable than the rest of the neighborhood. Tax sales are typically done in an auction environment, with people bidding against each other, investors against regular homebuyers. Bank owned (REO) homes with multiple offers will turn into a bidding war as well, but you generally won't have everyone in the same room as in an auction - you'll be submitting "best and final" offers instead.

Finally, you'll need to determine how you can finance your home purchase. With a bank owned (REO) home, you can usually obtain standard financing through a local lender and take up to 30-45 days to complete your financing and transfer ownership. With a tax sale, you won't always have the luxury of time, and you won't always be able to get traditional financing. Tax sales will either want a percent of the purchase price up front and the balance within a designated timeframe, or they'll want the full price up front. Since they typically don't guarantee clear title, it may not be possible to obtain standard bank financing on a tax sale.

All things considered, there are generally fewer risks in purchasing a bank owned (REO) home than buying a home at a tax sale. The REO should provide clear title, allow time for conventional financing, and allow for physical inspections before you're required to complete your purchase.

Good luck!
1 vote
St. Lawrence…, Agent, Stamford, CT
Sun Dec 28, 2008
Hi Kim,

Christopher gave you a great answer, but I would add to it that with Tax Foreclosures, you often times end up with an occupied house. As he said, both will have encumbrances on the title that you want to be careful of. Make sure you are working with a Buyers Agent that can represent your interests and work with an attorney that is very familiar with these deals. They are not typical real estate transactions and therefore should not be handled by a "typical" real estate attorney. Experience counts here on both the agents and the attorneys part.

Now, you said something that concerned me: "it is so expensive in this area I feel that this is the only way I can afford to buy a home." That is very dangerous. Let me explain. Buying a home is only one part of the financial equation. There are taxes (which can take up 40% or more of the mortgage payment) heating and cooling, maintenance and utilities (phone, cable, in addition to gas and electric) that must be considered.

If you made $100k per year and I GAVE you a Million Dollar 5000 sq. ft. home, chances are you would be bankrupt in a short time simply do to taxes, upkeep and cost of heating and cooling.

See, unlike the mortgage payment, upkeep, utilities and taxes are costs that only go up. Very few people have wages that keep up with current skyrocketing tax and utility costs.

Make sure you are very analytical in your pre home buying decision. Figure out what you can afford comfortable while keeping 6-8 months expenses in your savings in case of bad times. If you find you can afford a $500k home and you pick one up for $400k, GREAT, but don't buy a $600k home for $500k because it will cost more on those liquid (non fixed) expenses.

Good Luck.
1 vote
Christopher…, Agent, Tarrytown, NY
Sun Dec 28, 2008
Hi Kim, this is a great question. The two are very similar. A tax foreclosure is usually enforced by cities and villages and is called a tax sale. The municipality will go to the courts and start the foreclosure process. The lienholder will then take over the property and sell it off to pay the remaining debt. A bank foreclosure is a property that has been directly taken over by the bank. There are many things you should know about buying a foreclosed property such as the buyter can usually do an inspection but the property is almost always sold as is. So if yo find anything major you can either walk away or take it as is. Another is at times some liens or judgements will pass on the the new owner. Please feel free to contact me if you would like to discuss this further. An educated decision is usually a wise decision

Sincerely,

Christopher Pagli
Associate Broker
Legends Realty Group
914.406.9023
1 vote
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