How to Buy Foreclosure Property on Maui - Part I
Maui, like many other parts of the country, saw a significant reduction in economic activity after the Great Recession of 2009. Although the economy is recovering, the housing market is still lagging and prices are much lower than they were before the downturn. Many smart investors are buying on the dip in prices while calculating that the market will recover. This series of blog posts will help you navigate the often confusing area of housing foreclosure and show you how to purchase property that is still within the foreclosure process. Finding properties that are still within the foreclosure process can help diligent investors find lucrative investments at significantly reduced prices.
In Hawaii, a foreclosure can be judicial or non-judicial. A judicial foreclosure has oversight by the court and will go through a court process including a hearing before a judge before the house is sold. There are many statutory requirements for a non-judicial foreclosure and this process is only available in certain situations.
As an investor, you should look for houses that are in judicial foreclosure. There is no central database or clearing center that lists properties that are in foreclosure. Although some websites list “foreclosed” or “REO” properties for sale, these houses are usually owned by banks who have possession of the house after the foreclosure process is complete. Occasionally, the bank will offer the property at a reduced price but usually the price will be close to fair market value.
To take advantage of significantly reduced foreclosure prices, you need to find properties that are still within the judicial foreclosure process and attend the actual auction.
A property enters the judicial foreclosure process when a homeowner defaults on a loan and the lender files a lawsuit asking the court to auction the home to satisfy the debt owed. Legal proceedings typically take a year or more. When the court is ready to auction the property, a foreclosure commissioner is appointed to take possession of the property, conduct an auction and distribute the proceeds of the auction to those who are owed money.
The commissioner will inspect the property, advertise the auction and hold open houses so that potential bidders can see the house and formulate a bidding price. The commissioner will try to obtain the highest feasible price for the property in order to satisfy as much of the debt as possible.
Hawaiian law requires that a Commissioner advertise an auction of a property three times in a newspaper of local circulation, thus giving the owner of the house and the general public notice that the property is to be sold.
When selling a property, a Commissioner must advertise the property in a newspaper of local circulation. The Commissioner must also conduct open houses of the property. The dates and times of the open houses will be listed in the legal advertisement. An open house is your chance as an investor to perform due diligence and investigate how high you should bid on the property.
Due diligence is particularly important when purchasing foreclosure properties because they are sold “AS IS.” This term means that if the house has termites, structural damage or a serious mold problem you have no recourse after you complete the purchase and you should price your bid accordingly.
Typically a Commissioner will hold two open houses of the property, however, some Commissioners will arrange a private viewing for interested bidders. When you have access to the property, take pictures, make notes and if necessary, take an expert with you to examine the premises.
In addition to inspecting the physical condition of the property, you should also investigate the possibility of liens, back-taxes, homeowner’s associations arrearages, property encroachments and problems with the title. A Commissioner may be able to tell you some relevant information but will not be able to give you legal advice about the importance of this information. If you have questions about the legal consequences, you should hire an attorney to guide you through the process.
After you have completed investigating the property and have decided to bid, spend time with a calculator determining your maximum bid. If you are the highest bidder, you will be responsible for all closing costs including the costs of escrow, conveyance and back taxes. You should also consider the cost of repairs and improvements to the property.
Do not bid higher than your predetermined maximum bid. Many potential investors become excited with the thrill of an auction and bid more than they originally intended. Savvy bank representatives will happily prey on your enthusiasm and counter your offer, trying to drive your bid higher.