Over the years I’ve learned the difference between great deals and deals that may not be so great. Foreclosures that appear to be good deals can actually be nightmares waiting to happen. Investors and brokers have to stop and consider more than potential deferred maintenance to the property.

Here is the most important financial consideration to keep in mind when you or your clients are making an offer on a foreclosed property:

Unless the property goes through a foreclosure auction and becomes a bank-owned property (REO), unpaid liens, including mortgage debt, taxes, construction loans, home equity lines of credit and possibly a second or third mortgage and associated fees can be transferred to the new owner.  

And here is the second most important financial consideration:

Neighborhoods with a high concentration of foreclosures will offer investors good prices, but those neighborhoods are the most likely to suffer further depreciation. Investors will be tempted to buy foreclosures in these areas, because they offer the steepest discounts — but they also carry the most risk. Look for foreclosures in well-established neighborhoods with good schools and easy access to transportation.

Federal Reserve Chairman Ben Bernanke has been reported as saying that in many cases mortgage lenders would be better off modifying the terms of a loan than foreclosing on it.

That makes sense if homeowners are showing good faith efforts to pay on their mortgage and maintain their property.

But the huge number of delinquent loans overwhelming loan servicing companies and securities investment rules may be two reasons that homeowners are denied the opportunity to stay in their homes with modified mortgage loans.

Several media sources have quoted Christoper Whalen, co-founder of Institutional Risk Analytics, as predicting that the Citicorp bailout is not like all the others because Citicorp is too big and there’s no ready buyer for its assets.

Whalen says, “This bailout is more like a resolution. That means that the government essentially has to take control of Citicorp and become more and more involved with its operations until the bank ultimately is nationalized.”

His logic is clear: “no government organization wants to run Citi, nor do they have the ability to do so, so they keep the bank open and put money in.”

In other words, it looks to the stock market and to the public as though ”things will be fine,” but the more money the government is required to inject, and the more people the goverment appoints to oversee operations, the more ownership it assumes.

Whalen insists that the process has begun and it’s only a matter of time before Citicorp becomes nationalized.

Real estate brokers, agents and attorneys have raised concerns lately that short sale sellers may not be aware of the consequences of the paperwork they are signing.

In some cases homeowners may not be “off the hook” for the original mortgage if the debt is not cancelled properly. Look for a separate document stating that the debt is cancelled.

In other cases the mortgage companies are intentionally requiring homeowners to repay the balance of the loan by not cancelling their debt, putting them in a worse position than when they occupied the home and were unable to pay.

Home mortgages averaging $200,000 are at the center of a lawsuit filed Monday 12/1 by bond investors in 374 investment trusts holding Countrywide Financial bonds.

The bond investors are unwilling to voluntarily lose value on their investments as Countrywide, now owned by Bank of America, sets about to modify approximately 400,000 home loans to settle allegations of predatory lending.  

The attorney generals of fifteen states are expecting Countrywide to lower mortage payments for all those homeowners, and now the investors holding the “bag” want the New York Supreme Court to provide assurance that Countrywide will be required to purchase any loan on which it agrees to lower payments. 

Whew! I’m wondering where the buck will stop on this one…