Home Buyer TIPS On Purchasing A Distressed Property: Pre-Foreclosure, Short Sale, Foreclosure or REO
Did You Know That Foreclosures and Short Sales Can Actually Cost A Buyer More?
So many buyers think the best deals out there are foreclosures and short sales, but they can actually cost MORE!
One important thing for home buyers to keep in mind is that since we are in such a strong buyer’s market now, there are many motivated sellers out there that have great homes priced to compete with the short sales, pre-foreclosures, foreclosures and REO’s and a buyer can usually purchase one of these homes with a less stress, money and risk factors than when buying a distressed property.
Here are just some of the additional costs you may incur with a
bank foreclosure / distressed sale:
Survey: Approximately 150.-300. (Usually a seller cost, except when a bank sale)
No Tax pro-ration: (usually 105% of the last tax bill in this area, banks only will usually give the buyer 100% of the last known tax bill)
Usually no negotiation on repairs, so if you do your inspection and it is not satisfactory to you, you talk with your attorney regarding canceling the contract if it is within the contingency dates, but no one will give you back the 300. or so you may have spend on a home inspection, or any fees that were paid to your lender. You may also be putting out your hard earned dollars for radon, lead paint, or mold inspections if you feel they are important to you.
Not closing on time can also cost you a Per Diem, as banks usually have this in their contract addendums. This is more of a risk now with underwriting and appraisals taking longer and daily changes in the banking industry. The addendums usually have a charge that the buyer will have to pay for each day after the original closing date if they can not close on time for any reason. I have seen this Per Diem charge being anywhere from 25-100 dollars per day.
By the way....*****I love working with buyers***** :-)
Appliances: Banks usually say there is “no bill of sale on personal property”, so what you see when you write an offer may not be what you see before closing. Make sure you have some extra money put aside in case you have to purchase appliances.
Well/Septic Issues: If a property is on a private well or septic, you will also have to pay for your own inspections and this is usually a seller’s expense in this area. Another thing to keep in mind is that if you have an FHA loan, a vacant property that has a private septic system will not work since FHA now requires a copy of the septic test and if vacant, the inspector will usually put something on the report like “property is vacant and a re-test is recommended 30 days after normal use”. If the well test does not come back with the water being safe, the buyer will usually have to correct the situation since it is an “as is” contract.
De-Winterization and re-winterizing the property for inspections and final walk-through. In most cases this is a buyer’s expense. Even if you are not doing a home inspection, the appraiser usually will want the water on when they come by to do the appraisal, especially if it is an FHA mortgage.
No disclosures: Since they have never lived in or in most cases, have never even seen the property, they are exempt from having to do the usual disclosures. Your due diligence is even more important in foreclosures and any distressed sales.
Deferred maintenance: When someone can no longer pay their mortgage, many times they also have not been able to properly keep up with maintaining and updating their home so more repairs are usually necessary than on a home where the seller has been able to afford to keep up with updates and maintenance/repair issues.
Timing: Many times there is a very long wait to get a response on an offer, and it is usually worse with short sales than REO’s, which are properties that have already been foreclosed upon. You could be risking closing on time to be able to take advantage of the first time home buyers credit, which expires at the end of June 2010. Remember, you will have to have an accepted contract by the end of April 2010. I would recommend not waiting until the end of April to have a home under contract if you are a first time buyer or otherwise principal residence buyer who qualifies for the up to 6500. expanded home buyer tax credit. If that contract falls through so will your home buyer’s tax credit of up to 8000 or 6500!
Furthermore, in a short sale situation, in Northern Illinois the trend is becoming that once a seller signs a contract, contingent upon bank approval, the buyer usually needs to move forward with their inspections and mortgage approval right away, even though the bank has not yet made a decision if they will approve the short sale or not. Usually once the bank gives an approval, they do not give the buyer too long to close and most of the time it is not enough time to do this after approval. The other reason for this is that if a seller only sends one offer into the bank (which is usually how it is done because any time a new offer is presented to them they go back to square one and the waiting time starts all over!), the seller really does not want to risk that the buyer cancels the contract after they have waited so long for an answer and the clock is ticking for them when they are facing foreclosure so usually do not want to be tied up with a buyer who will not wait. In the Short Sales and Foreclosures Resource class I just took last week, the consensus seemed to be that buyers and sellers were waiting an average of 3-4 months for the bank to decide if they approve the short sale or not.
These are just some things to keep in mind when considering your options. Foreclosures and distressed sales can be excellent opportunities for the right buyer who is not trying to closely watch their costs, who has a lot of time and patience, who has some money to “gamble” with if contracts are not approved, who does not have to close by a certain date (like to get the first time buyer tax credit!) and the ability not to get too attached to or emotional about the property. Do not get me wrong, there are many great fantastic deals out there to be had right now, but do not make the mistake of thinking that the only good deals are distressed sales. Sometimes, a truly motivated seller with equity in their home can also offer a wonderful buy with less cost, less waiting and less hassles and a property in better condition as well!
***especially for first time buyers, investors and move up buyers. *** Rates are fantastic, too!
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