This post is geared towards the first time Buyer that wants to capitalize on the rock bottom pricing in the current housing market and oversupply of inventory.
First and foremost, I would like to congratulate you on your decision! You see, I wholeheartedly believe that now really and truly is a great time to buy! I don't say this as a marketing ploy designed to drum up business. I think first time Buyers today are in a position of envy as they have the opportunity to capitalize on very low interest rates, extensive inventory and great pricing.
On the flip side, I want to caution all first time Buyers that buying a distressed property does come with some inherent drawbacks that you need to make yourself aware of BEFORE starting your property search. If more Buyer would take heed of the following information, I think there would be a lot less confusion, frustration and headache for all parties concerned.
1) The property is probably going to require some rehab. I am constantly amazed at the number of Buyers that request showings and then appear to go into complete SHOCK as they tour the property and discover that repairs are required...Well, OF COURSE, the property requires repairs!!! Hello!!! It is a FORECLOSURE! A foreclosure means that the previous owner usually had some type of financial difficulty which prevented them from paying the mortgage. If they are not paying the mortgage, then they are probably not as concerned about replacing the old windows or getting the tuckpointing done or replacing the carpet... I would say probably 8 or 9 out of 10 foreclosures are going to have some "deferred maintenance" issues. Buyers, please don't expect to buy a foreclosed home in move in condition home at a huge discount. Of course anything is possible and I have seen it happen. But, this should not be your expectation going into the transaction. Expect to have to put some money towards getting the property in livable condition. Oh, as an FYI, make sure you get yourself approved for a conventional loan as well as a some type of rehab loan like the 203k. Talk to your loan officer for more details.
2) There is going to be COMPETITION!!! Yes, you read it correctly. In spite of what you hear and see on the news, homes that are PRICED WELL for the condition and reside in a DESIRABLE location are selling like hotcakes! If you are a first time Buyer and you find yourself in this situation, you need to make sure that the offer you submit is competitive enough to compete with other first time Buyers and CASH investors! Please don't make the mistake of thinking that you will submit a low offer and "see what happens" and then submit your highest and best offer after your first offer is rejected. You are just going to find yourself frustrated and unhappy. You are NOT entitled to a counteroffer. For more information, check out my post here: http://southchicagoshortsales.com/post/1475015/are-buyer-s-agents-entitled-to-the-opportunity-to-counter-
3) The Bank can and will pass on some of their closing costs to you. In the good ole days, there were Buyer costs and Seller costs and it was understood by both sides which expenses were required to be paid. In the current market, A LOT of lenders are passing on some of the customary seller closing costs to the Buyer. The biggest example I see of this relates to transfer stamps. Buyers, if you have your sights set on a foreclosed property, you should know that some of these banks are not going to pay transfer stamps, title insurance fees and some other costs that sellers are typically "supposed" to pay. These fees HAVE to be paid in order to close...so guess who will be paying them??? That's right...the Buyer must pay these fees. That is, if the Buyer wants to close the deal. Now some of you may be wondering if this is fair...and the answer is probably not. But, it is being done all day, every day and if you want to purchase a foreclosure, this is one of the drawbacks. On the other hand, some people may not think it "fair" that Buyers today can get so much more for their money than Buyers 3-4 years ago...
4) The Bank may require you to be pre-approved through their in-house lender. Yes, it is annoying: both from the perspective of the Buyer and the Realtor working with the Buyer. But, once again, if you want to play ball, this is just one of the steps. The reason some lenders require this step is to make sure that the Buyer has a legitimate pre-approval and, can, in fact get a loan. I have seen more than a few bogus pre-approval letters floating around. By requiring an in-house pre-approval, banks make sure they don't pull the property off the market for a Buyer that is not even eligible for a loan. So, yes this step sucks. But, it is a necessary evil.
5) The Bank may not allow any CONTINGENCIES. As the market becomes more and more flooded in certain areas, I have started to see this a lot more. The typical contract usually allows for a home inspection and attorney review contingency period. These usually run concurrently and the time frame is generally 3-7 business days. So, if for example, the Buyer gets the home inspection completed and major issues are found, the Buyer can usually cancel the contract as long as it is within the timeframe stipulated on the contract.
NONE OF THIS APPLIES FOR FORECLOSED PROPERTIES, DEPENDING UPON THE BANK.
Once an offer is submitted, the Buyer has essentially agreed that he/she is waiving the home inspection contingency and the attorney review contingency. By signing the contract, the Buyer has agreed that he/she has done ALL of their due diligence upfront. The only way a Buyer will be able to CANCEL the contract is by an Act of God or death! (Okay, that was an exaggeration - but you get the idea) And, did I mention that the earnest money deposit may be NONREFUNDABLE! Again, this doesn't apply to ALL foreclosed properties but more and more banks are following this trend. So, before you make an offer, you better be sure to do your due diligence and work with an experienced professional.
I hope this helps! Buyers: this information is not intended to discourage anyone from buying a foreclosure. Rather, it is intended to empower and inform!
GOOD LUCK!!!
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