(cross posted at our column in The Beach Reporter on-line Real Estate News)
These days, many clients come to us to find deals in the distressed property market, including short sales, homes with notices of default, homes scheduled for foreclosure, and finally, bank owned properties known as REO’s.
Negotiating on these properties requires that you understand what stage of the process the home is in, so let’s start with a few definitions and the differences in negotiations for each.
A “short sale” is when the current owner owes more than the home is currently worth and needs to have the bank accept a sale at an amount that is “short” of the amount owed. These homes may or may not also be somewhere along the foreclosure process. In these sales, the bank MUST agree to accept the reduced amount or the sale cannot proceed unless the seller is willing to contribute cash to the process. Generally, the seller must prove hardship to the bank, such as why they need to sell, why they can’t just keep paying the mortgage, etc.
There is a LOT of paperwork in the Short Sale involved for the Seller, and these sales can often stall because the Seller, who naturally is in somewhat a state of denial, drags their feet on this paperwork. The bank must also obtain Broker Price Opinions (BPO’s) on the property from several real estate firms in order to satisfy their shareholders that they did the best they could to collect the monies owed, which also takes time. Further, the banks do not even begin the process of approving a price until at least one bonafide offer (and possibly dozens of offers) is/are submitted, and then they typically take 4 to 6 weeks to analyze the offers, only perhaps to decide that the offers (and the asking price) was nowhere near high enough. In order to provide an offer attractive to the bank, it is important to make the best possible offer, including limiting contingencies and having the most possible down payment. Short sales can be VERY frustrating for everyone involved as there is typically a LOT of competition — we have heard of several cases where there were over 20 offers and the final price was over $100,000 over the asking price.
A home that has a Notice of Default, or NOD, is at least 90 days late with the mortgage payments and the bank has begun the process of foreclosure, but the seller can still bring the note current and “cure” the default. When buying a home that is in this stage, it is important to remember that not only does it have all the problems of the short sale, but additionally there is now a 90 day clock ticking on the home. If the home is not sold before the 90 day foreclosure period is over, and if the bank’s bureaucracy does not allow an extension, you can be very close to buying the property and then lose it to another pile of bureaucratic nonsense.
Once the home is officially “in foreclosure” the home is scheduled for sale at an auction at the courthouse. Although it is possible to get a really good deal on these, it is important to realize that if you bid and win, you MUST buy the home or lose the required 10 percent deposit (which must be brought in Cashier’s checks to the auction.) There is NO right of inspection, no investigations possible once you’ve bid. You had better have your financing lined up or be prepared to pay all cash … and perhaps get a few rude surprises when you take possession and find problems. As Realtors, we feel that this process is so risky that we will not represent people at auction proceedings.
Finally, often the home will not sell at the foreclosure auction and the bank effectively “sells” it to itself or to another bank. The property is now known as an REO, which stands for Real Estate Owned. At this point, the bank generally analyzes the price, hires a real estate agent who specializes in representing the bank, and tries to sell the home as quickly as possible. You can often get the best deals on these, as the bank’s loss mitigation department has already done the analysis and figured out the price they will accept, and the bank is now carrying the cost of the home such as utilities and taxes, so they are very motivated to get it “off their books.” It is very important to have your own Realtor represent you on these purchases, as the homes can sometimes have been “stripped” of appliances, plumbing fixtures, and even the copper wiring in the walls; you need to have someone who cares about your interests and isn’t just working on the bank’s behalf.
Each distressed property sale is different — some are priced so agressively the competition will be fierce, some are not really very good deals, and some will not qualify for the low cost FHA financing that most people want. Be sure you don’t attempt to wade through the shark infested waters yourself — get a Realtor involved.
Finally, don’t limit yourself to only these properties — because distressed properties have affected average pricing, many ordinary properties are out there that are very good buys — and they won’t have the bureaucracy, delays, and hassles that characterize distressed property sales. Let your Realtor (hopefully us) know what kind of home you need, not what legal status the property is in – and then let us do our jobs for you!