Foreclosure Information For Buyer's

In today's market there are two main types of distressed sales, foreclosed properties (aka REO or bank owned) & short sales. Foreclosed properties are properties in which a lender has taken back and currently holds the ownership to the property. Short sales are properties in which the current owner still holds ownership to the home but generally owes more on the mortgage than the current market value is worth. Therefore the current owners need to ''short sale'' and the lender has to agree to take less than the current payoff to settle the loan and be able to transfer ownership into the new Buyer's name.

When searching for distressed sale properties you will find two types of ''short sale'' listings, Non-approved & pre-approved. The non-approved short sales mean that the lender has not agreed on a price that they will accept that is lower than the current payoff. In this event, the listing agent generally has a price that is not truly accurate as their is no real basis for the price other than what they believe that the bank might accept or what they feel is the current market value. The lenders thus far have been very slow to respond to these transactions, which can leave a Buyer waiting for weeks if not months before they  find out the banks reply to their offer. This can be very frustrating as you can imagine waiting for weeks only to get a negative reply from the bank. The pre-approved short are generally a shorter time frame to complete but still come with hurdles. In this situation, the lender has agreed upfront on a price that they are willing to accept and generally that is the listing or asking price, however most Buyer's try to negotiate a lower price and often the bank turns it down and the process starts all over.

Foreclosed & Short Sale properties can generally be a good value, but you need to evaluate all the items before deciding if it is right for you. I have listed just a few pro's & con's of each type of sale to better acquaint you with the process.

Advantages to Buying A Foreclosed Property
1. Typically a good value that is generally sold below the appraised value. 
2. Many great financing terms can be available, depending on the Seller:
 * Currently, HUD homes offer $100. down for owner occupant Buyer's.
 * Homepath financing (available only on select Fannie Mae properties) offer 3% down payments, no appraisal fee & no mortgage insurance.
 * Some offer items such as free appraisal, attorney fees, title fees & title policy.
3. Some properties, especially those owned by local community banks, may be eager to sell their foreclosed properties and sometimes offer to finance the
foreclosed property to the buyer at a low market rate, smaller down payment, or no mortgage insurance with less than the typical 20% down payment.
4. Homes that are owned by Fannie Mae & Freddic Mac (government sponsored) are very pro-buyer and have advantages that will benefit the owner occupant buyer.
5. No eviction is necessary as the banks have already repossessed the properties.

Disadvantages to Buying A Foreclosed Property
1. Homes are sold in AS-IS condition
2. Homes are typically in need of repair and have been neglected for some time.
3. Occasionally, mold & water issues have occurred as the homes have been neglected for some time as sometimes the problem may not be obvious.
4. There will be no Seller's disclosure report, so there can be many unknown issues.
5. Sometimes the properties are in a condition that will not qualify for FHA or VA financing.

Advantages to Buying A Property That Is Being ''Short Sold''
1. Typically a good value that is generally sold below the appraised value.
2. Generally the home is in better condition as the homeowners will more frequently still occupy the property.
3. Banks are very motivated as they prefer to sell short as opposed to take it onto their books and pay the expenses involved with the foreclosure process.

Disadvantages to Buying A ''Short Sale'' Property
1. There is a great deal of uncertainty on the timing of any bank acceptance and resulting closing date.
2. Potential for numerous offer competition as the timeframe for response from the lender's is generally lengthy.
3. Seller's not qualifying for a short sale, which only is known well after the offer has been made. Most lenders want to ensure that the Seller's have gone through events which qualify them for approval for the ''short sale'' as opposed to just any Seller being approved.
4. If the properties has a second lien holder, which is pretty common in our market, these second mortgage lien holders have not wanted to take a reduction in the payoff.

So you have reviewed the pro's & con's relating to the foreclosure & short sale properties and want to move forward. Below I have put a very general sequence of events so that you will have an understanding of how the process works.

Typical Process For Buying A Foreclosure

1. Obtaining a pre-qualification /approval letter from loan provider; in cash deals, proof of funds will be needed (most sellers will not look at on offer without this)
2. reviewing any required Seller addendums prior to submitting an offer; more times than not the bank addendums will come only after verbally agreeing to terms.
3. making an offer on standard GAR contract
4. verbally agreeing on the main terms to the deal
5. getting final bank addendums and reviewing before final acceptance
6. getting the utilities turned on and home de-winterized
7. doing all inspections (home inspection, termite, radon, survey, etc.) on the property before the end of any due diligence period; this period will vary depending on the Seller, loan servicer or asset manager.
8. Assessing if the repairs needed are within expectations; most banks will not do any repairs or provide any credits or allowances.
9. Reviewing any covenants, restrictions & by-laws for the community to make sure that you accept the rules prior to being committed to purchase.
10. Having the closing attorney to ensure that the title to the property has been properly foreclosed and that title is clear so that it can be transfeered to the Buyer. This is frequently a cause for the closing to be delayed even though it is no fault of the Buyer.
11. Getting the appraisal completed as soon as possible to make sure that there are no required repairs that are mandatory prior to closing. This is another problem area especially when using FHA or VA financing.
12. Working with your lender to make sure your loan file is complete and fully approved.
13. Get your home owners insurance lined up for closing.
14. Get the final settlement numbers prior to closing so that you can review and make any changes prior to closing.
15. Close at the attorney's office and become a homeowner!

The good news is that there are ways to resolve almost all issues that come up and I will be happy to explain on a case by case basis, so please do not hesitate to ask.

 I have provided this information as a general guideline to help Buyer's become more familiar with the overall process. Each situation is unique and will depend on the Buyer & who the Seller is. This is why, in my opinion, working with a Buyer's Agent that is a Realtor is so important as they will help to navigate you through the hurdles that can & do come up.

I hope that you have found this information helpful, but if you have any additional questions or comments than please click here to let me know as I will be happy to assist you!