Creating Hawaii real estate success stories, one home at a time! (808) 593-4444 Ext 102

Brooks T. Bowman, Realtor/Principal Broker
Hawaii Discount Realty - Ph: 808-384-2918
Susan D. Bowman, Realtor/Principal Broker
Condo.com - Ph: 808-384-2917

Buying Foreclosure Properties in Hawaii

Residential Real Estate as well as Commercial Real Estate Buyers anticipate purchasing the optimum property for their money and rightly so.  The most obvious way to profit in Hawaii real estate is a well known investment principle, buy low so that you can sell high.  Due to current national as well as the local market conditions here in Hawaii, it becomes natural for Buyers to consider pre-foreclosure and foreclosure properties.  The term "foreclosure properties" actually encompasses a number of different opportunities.  Unfortunately, these buying opportunities are often hyped by many former Real Estate agents who now consider themselves to be Real Estate Educators or Gurus, selling their "knowledge", seminar or training CD’s as their replacement occupation.  These ones (and there are many) have a tendency to exaggerate the potential profit and downplay or even ignore the cost and large percentage of failures in acquiring a targeted foreclosure or pre-foreclosure property.

The first type of foreclosure property that I will cover is a distress sale.  This situation arises when the homeowner or potential Seller is unable to meet his mortgage obligation and the lender, or mortgage holder, publishes a notice of default.  This situation is often referred to as a "pre-foreclosure."  There are a number of websites willing to sell pre-foreclosure lists, however, these properties may not be listed for sale with a real estate company.  The websites that sell these pre-foreclosure lists make their money whether the information in their list is current or not.  Once a Buyer receives a list of pre-foreclosure properties, then how does he proceed?  Although the homeowner may be experiencing financial distress, there is no guarantee that he is interested in selling his property.  The average Buyer often isn't up to "cold calling" homeowners to see if they are interested in selling their home.  It is fair to assume that such inquiries would not always be welcomed by a homeowner who is feeling the stress of facing the potential of losing their home.  Additionally, would a Buyer want to purchase a pre-foreclosure home without being represented by a knowledgeable real estate broker?  What are the potential pitfalls in a pre-foreclosure?

One of the most glaring pitfalls with regard to a pre-foreclosure is the fact that the existing mortgage may exceed the fair market value of the home resulting in a "short-sale" scenario.  Short sale situations are often so complicated and have such a high failure rate that many realtor boards have drafted extensive short sale addendums so that the parties involved can be made aware of the issues.  If the property purchase price is not enough to cover the payoff of the existing loan, the accrued interest on that loan, any attorney fees associated with the foreclosure process and the usual and customary closing costs such as title insurance costs and escrow fees, then who will pay the shortfall?  If the homeowner has been unable to pay the mortgage payment, it's unlikely that he will deposit money into escrow to cover that shortfall and most often the mortgage holder is asked to take the loss.  Getting the mortgage holder's approval is a long process that can take weeks or even months.  The mortgage holder will want to know the prospective Seller’s complete financial situation and the information that they request from the Seller is very similar to what is required to qualify for a new loan.  An appraisal may also be required by the mortgage holder to verify the fair market value of the home.  I've found that many mortgage holders will approve a short-sale if the Seller is willing to execute an unsecured promissory note and agree to pay all or a portion of the shortage to the lender after the sale.  However, if the existing lender arrives at the opinion that they could get more money out of the property by foreclosing and then selling the property themselves they will have no problem disapproving the short-sale.  So, a Buyer could spend months in escrow only to lose the property because the existing lender will not approve a short-sale thus putting the Buyer back in square one with regard to finding a home.

Another foreclosure property scenario which appeals to Buyers is the "auction".  Just the word auction implies that if you could find a property that nobody else is willing to bid on, then you could name your own price and buy a property for practically nothing.  But, after spending over 30 years in the real estate industry, I've never seen that happen.   Part of the court foreclosure process (referred to as Judicial Foreclosure as opposed to Non-Judicial Foreclosure) is that a Real Estate Commissioner is appointed by the court to advertise and conduct an auction on the court steps.  Most often the existing lender has their representative attend the auction so that they can submit a bid on the lender's behalf ensuring that the property is not sold for less than the payoff of the principal, interest and foreclosure costs that are due.  In the off chance that the lender does allow the property to be auctioned for less than the payoff of the mortgage, the court must still confirm, or approve, the winning auction bid.  Very often this process takes months before the court confirmation hearing is held.  At that hearing the amount of the bid is public knowledge and anyone can outbid the winning bid.  Not good odds of getting a "bargain" in this scenario!  I've seen Buyers spend enormous amounts of time and trouble only to lose out through the foreclosure auction or at the court confirmation.  The few times where I've personally witnessed a Buyer who was able to complete the purchase of a property through the foreclosure process, the price paid ended up to be fair market value and the Buyer did not get the property at a discount.

Another pitfall in acquiring foreclosure properties is the property condition.  In many, many situations where the homeowner loses their home in foreclosure or becomes delinquent in their mortgage payments, they have often been financially struggling for a year or longer.  During that time they have not had the money to properly maintain their home.  Once they realize that the mortgage holder will be foreclosing, some homeowners even strip the property of everything that can be sold at a garage sale or online.  More often than not, foreclosure properties are in poor condition and need repairs.  A Buyer who is contemplating purchasing a home through a foreclosure auction must inspect the home prior to the auction because there can be no contingencies in the sale.  I would never recommend that anyone purchase a home without a professional inspection and the average cost to inspect a single family home costs approximately $400 to $700 or more depending on the size of the home.  Would a potential Buyer spend that amount of money when they don't have any idea whether or not they will win the bid?  The property condition is another high risk consideration with often no reasonable solution.  Additionally, and amazingly so, the law regarding Seller’s Property Disclosure does not apply to financial institutions whom have taken properties back as a result of foreclosure proceedings.  So, the old axiom “Buyer Beware” could not be more appropriate than in the case of purchasing a foreclosure property.  The faint of heart need not apply for this job!!

Something further to consider is that if buying a foreclosure property is such a good deal, then wouldn't realtors be making a killing in buying foreclosure properties?  They are experts in Hawaii real estate and they often have advance notice on pre-foreclosures.  The fact is that even realtors rarely pursue foreclosure properties because we know the success rate in such situations is dismal.  I personally wouldn't waste my time.  The best way to purchase property at a discount is to employ a knowledgeable realtor to watch the market for you, looking for the hidden gems.  Then you need to be ready, willing and able to move on those deals before someone else snatches it up. 

Written by Susan D. Bowman, Realtor and Brooks T. Bowman, Realtor

© 2005 Susan D. Bowman, Realtor/Principal Broker - Condo.com
Hawaii Discount Realty is a real estate broker licensed in Hawaii and located at 91-110 Hanua St., Suite 208, Kapolei, HI  96707 with Brooks T. Bowman as Principal Broker
Condo.com is a real estate broker licensed in Hawaii and located at 91-110 Hanua St., Suite 208, Kapolei, HI  96707 with Susan D. Bowman as Principal Broker
Office Phone:  (808) 593-4444 Ext 102 ● Office Fax:  (808) 593-2090 ● Email:  susan@hihomes4u.com