There is no question that in today's real estate market every buyer is looking for the best possible deal. Every day I get requests from clients asking about whether a short sale or bank owned property is right for them. It is not something that can easily be answered without understanding the motivation and resources of a buyer. Each type of transaction has both positive and negative sides and often times my clients are best off with a regular purchase. Here are a few keys to navigating the market of short sales/foreclosures and questions a buyer should ask themselves before embarking on this journey.
Questions a buyer must address first:
•1. What is my time frame for moving?
If you need to be in a home by a certain date then I would avoid the short sale market. Before the tax credit was extended a number of first time home buyers nearly found themselves short $8K by having faith that their short sale would close in a timely fashion. Bank sales can usually close quickly, but often times title issues can delay the process a few weeks.
•2. Can I pay cash or do I need to finance the home?
When it comes to bank owned properties cash is king. Banks do not want to risk the details associated with getting a loan to finance their property. This does not mean that it is impossible to purchase a bank owned home with a loan, it just means you will have to be prepared to pay more for it to encourage the bank to accept your offer contingent on financing.
•3. How much money am I willing to put into the home after purchase?
Both bank owned properties and short sales can be in less than perfect condition. Furthermore, they are usually sold in "as is" condition. This means that there will be little or no negotiation of repair items after home inspections. Each house is different, but if you are strapped for cash after your home purchase this may not be the right avenue for you.
•4. Am I willing to compete for the home?
One of the most difficult things to explain to a buyer looking to purchase a bank owned home is that they will most likely have to overbid on the price. Buyers who are looking to get a great deal on a foreclosed property struggle with this concept. However, the banks usually price the property well below market to encourage many buyers. Often times there are bidding wars and property sale prices escalate substantially. I would not look to purchase a bank owned property that is listed at the top of your price range unless it has been on the market for more than 3 weeks.
What are the Advantages/Disadvantages of a Short Sale?
•· If you are willing to wait, you can get a decent price on a short sale. Realize that the bank is looking to minimize the loss, not give the property away though. Your offer must be in line with comparable short sales in the neighborhood. If your market is still declining it may be difficult to get the banks to make these adjustments.
•· These days there is less competition for short sales. When the short sale market was new everyone wanted to purchase one. Now, many buyers have been burned by the lengthy process and uncertainty of the outcome and stay far away from short sales.
•· There are attorneys who will specialize in getting your short sale through....for a fee. I would look to work with agents who are experienced in short sales or insist that the deal be professionally negotiated by an attorney. This will increase your chances of success.
•· If a short sale is approved, but the previous buyer has backed out then you are aware of the price that the bank will take. However, if you try to negotiate further the process starts all over again.
•· There is still a relatively low percentage of short sales that close successfully. In some markets only 10% ever reach the closing table. Know your market and get professional advice.
•· A full offer price means nothing. Even if you offer full list price on the contract there is no guarantee that the bank will not ask for more money. The list prices are determined by the seller/agent and have not been approved by the bank(s) holding the lien(s).
•· Alert!!! If you are planning on buying a short sale condo then check for additional liens such as back condo fees. Many properties have additional delinquencies beyond the mortgage and all liens must be released prior to closing...not just the mortgages
What are the Advantages/Disadvantages of a Foreclosed Property?
•· Banks are not in the business of owning homes. They will price the property below market value to get a quick sale.
•· Different from a short sale, the bank owns the house already and the list price is an accurate assessment of what they will accept for a home.
•· Banks will allow for inspections periods and financing contingencies (as will short sales, but they are more difficult to time). A buyer will have sufficient time to determine whether the condition of the property is acceptable.
•· Banks will often offer discounts on title work for using their attorneys to complete the sale. Do not be late to closing though...they will charge a per Diem fee if you are late to settlement. However, there is no fee for them delaying the process.
•· Bank properties are often in very poor condition and have been vacant for a long time. The foreclosure process takes months and the property has not been lived in during this time. Some items are not even discovered during inspections since the appliances/water pipes/toilets have not been in use. Some bank owned properties will not even qualify for financing due to condition.
•· Be prepared to compete with investors and cash offers. Don't come in too low and when the bank calls for "final and best offer" use this as an opportunity to increase your bid. You must be willing to play the game if you are going to purchase a bank owned home
If your main priority as a buyer is to get a great deal and take advantage of the market, then short sales and bank sales may be the right option for you. However, if you are a nervous first time buyer with limited resources or a buyer looking to move in a certain amount of time then I would seriously think about other options. One of the unique aspects of our market is that everyone (regular sellers included) are competing with these types of properties. Of course, normal sales will still bring higher dollar and this is because buyers have an element of certainty and reassurance when purchasing directly from a home owner.
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