I'm approached by many first time home buyers on a weekly basis. The first thing they always ask me is to find them a foreclosed property at a great price. This blog entry will cover the initial points I try to cover when I initially consult with a new first time homebuyer interested in a foreclosure. I'm always up-to-date with the ins and outs of the foreclosure industry because I list and sell foreclosed homes for a few major banks all over the Chicagoland area. Despite taking listings from banks wherever I can get them I prefer to help buyers in my local market which is Orland Park, Tinley Park, Orland Hills, Homer Glen, Lockport, Mokena, and Frankfort.
How does the buying process for a foreclosure work?
The buying process is basically the same as purchasing a property through a traditional sale with a few minor differences. Since I'm writing this for a first time homebuyer I'll briefly cover the process.
1. A standard real estate contract is written minus disclosures, a seller supplied survey, and a seller supplied termite inspection where it is then submitted to the listing agent along with proof of funds (for cash deals) or a loan preapproval. The listing agent then submits the contract to the bank for review. Most of the time, the bank doesn't even want to see the actual contract and just wants the fine points like purchase price, amount of earnest money, closing date, any concessions being asked for (like closing costs, personal property, etc), and any contingencies.
2. Now the offer is in the hands of the asset manager. An asset manager is the person who works for the bank in charge of managing and selling properties who acts as the seller. They are usually in charge of managing many properties all over the country so it's rare to get an immediate response from an offer. When the asset manager receives an offer they will decide if they want to accept, reject, or counter the offer. Sometimes it can take up to a week (but usually 2-3 days) for an asset manager to respond to an offer simply because they are so over burdened with work. Another thing to remember when waiting for the asset manager to make a decision about a contract is that most banks nowadays don't even bother entertaining any offers (even full price or over full price) until the property has been on the market for 10-15 days. This makes sure that all interested buyers have had a chance to look at the property.
3. If your offer is accepted, the bank will then send over addendums to the contract which is legal paperwork written up by the bank's lawyers that explain every detail about the deal. Addendums should always be reviewed by an attorney before signed especially if you don't agree with something because banks will only allow attorneys to make modifications to addendums. Just about all addendums are standard addendums that would accompany any deal whether it's a vacant land deal, condo deal, multi-unit building deal, or single family home deal. Once the addendums and the original contract are signed by both parties is when the property is officially under contract. The initial acceptance is more of a verbal acceptance until you get the signed contract and addendums back from the asset manager.
4. Now that the deal is under contract you will now have to get your finances in order in time for the closing date that both parties agreed on. If you are getting a loan it's time to sit down with your lender to get the ball rolling. Also, it's now time to perform any inspections you want done on the property. Most of the properties will be winterized so you may have to hire a plumber to dewinterize the property if the bank won't do it for you. If you have a home inspector inspect the property, then most likely the inspection is for your own peace of mind because all foreclosure real estate deals are AS-IS deals and the banks don't want to invest any of their money to fix the property up unless they agree to it in the initial contract.
5. Now that all the inspections are done and your loan is approved it's now time to close. In Chicago most asset managers are located out of state in California or Arizona (unless you're dealing with a local bank) so you may show up at closing and find nobody sitting on the other side of the table. You and your attorney will go over all the paperwork and sign everything that requires signing. Once everything is signed and all the money is in order the paperwork will be sent either electronically or overnighted to the asset manager or their attorney for final signatures. It's not uncommon to wait up to 24 hours for final signatures when closing on a bank owned property. Congrats you just bought a foreclosure!
Are listing prices negotiable?
I'm sure you've heard this before but I'll say it again. Everything is negotiable! When it comes to negotiating a bank owned home there is a simple way to approach it. When a property is new on the market the price will not be negotiable until at least a week if not two weeks on the market. Based on the number of contracts the property receives and how far below list price they are will be the deciding factor if they will entertain under list price offers. If after 30 days on the market no contracts at list price or close to list price are received then the bank will lower the price. Usually the price drop will be around $5,000-$10,000 but sometimes, for higher priced properties, the price drop can be even more. Once the first price drop happens is when you are given a key piece of information, which is the amount of money the asset manager is allowed to negotiate on a deal. If the price drop was $5K then $5K is the max amount of money off of list price that the asset manager can accept. An example would be a house with an initial list price of $199,900. The house is 30 days on the market and doesn't have a contract on it so the asset manager gives the OK to the listing agent to drop the price by $10,000. The new list price is now $189,900 so the lowest the asset manager will take on this property would be $179,900. If you think $179,900 is still too high then just wait 30 days. If after 30 more days the property is still not under contract then property will be dropped another $10K to $179,900. At $179,900 the lowest price the asset manager would accept is $169,900. This will keep happening until a contract comes in within $10K of the list price. What I've seen happen a few times is the price gets so low that when contracts start coming in the price gets bid back up to the last list price. So theoretically the buyer would have received a better deal if they put their contract in before the last price drop. Usually the reason it gets bid higher than list price is because a silent bidding war was started when the asset manager requested everyone's final and best offers. Since the property received more than 1 contract, most likely full price offers, the asset manager requested everyone's final & best offer, which is basically a silent auction where everyone gets 1 bid that is supposed to be the highest and best that each buyer can do. Most often the buyer who gets the property in a final & best situation is the buyer who actually submits their final & best offer instead of still trying and hoping that they will get the deal of the year. In a final and best situation I always tell my buyers to pretend they didn't get the property, it just closed and I'm about to tell them what it sold for. If I told them it sold for $100,000 would they have any regrets? If yes, then if I told them it sold for $105,000 would they be kicking themselves? If yes, then I keep upping the amount until I hear them say they wouldn't regret it. I've noticed that most buyers lose an average of 2 properties before they finally get a hang of what I'm saying. I can't stress it enough, always submit your true highest and best offer so you have no regrets, I hear the phrase "it just wasn't meant to be" way too often as a coping mechanism when a buyer loses a property they wanted.
I'm preapproved for a loan why can't I buy this property?
When we first take over a foreclosed property and are doing our Brokers Price Opinion (BPO) as well as getting repair bids from contractors, one of the things we recommend to the bank is if the property can be financed or if we are going to have to find a cash buyer. A property that is move-in condition, whether it needs updating or not, is a property that can be financed and a property that can be financed will always fetch a higher price than a distressed property where no bank will finance a standard conventional, FHA, or VA loan. The reason is simple; more buyers have the ability to get a loan than pay cash for such a large purchase. When someone pays cash for a property they are taking a big risk since so much money is invested into a property that usually needs major repairs. Now you may be thinking about rehab loans. Rehab loans were very big in the foreclosure industry about 2-3 years ago but since problems usually arise and the loan never gets approved, asset managers now try to stay away from them unless they are the only kinds of offers coming in. You might see a steal hit the market in your area and the reason it's such a steal is because the property is being marketed towards a cash buyer. If you wanted to try and purchase the property with a rehab loan then your offer better be well above full price to even get the asset manager to look twice at your offer. Finally, in regards to condos or condo style townhomes (which look like a townhome but are legally a condo), an FHA or VA loan can't purchase any condo that isn't FHA approved. You'll sometimes find a condo listed at a great price and wonder why it's still on the market? In this economy, the difference between getting a conventional loan and an FHA or VA loan can be the difference of an extra 15%-20% down payment. An FHA loan requires a 3.5% down payment and a VA can require 0% down. Now a conventional loan, which is the type of loan you would need when a condo isn't FHA approved, can require 15%-20% down based on your credit score. On a $100K condo it can be the difference of having to come up with a $3,500 down payment with an FHA loan or a $15,000 down payment with a conventional. On occasion, the bank will invest money into a property to make it so it can be financed but it will definitely reflect in the list price when that happens.
I want all back taxes paid, back assessments paid, and a clean title.
In a standard bank owned foreclosure sale the bank will sell the property with all taxes paid up until the day of closing, all Home Owner Association (HOA) fees paid up till the day of closing, and will provide a title clear of all liens. When we take over a property that has an HOA it is Illinois state law that we must pay any unpaid HOA fees up to 6 months in arrears from the day we take possession of the property if the fees are behind. I see some banks trying to put that cost onto the buyer and tell the buyer that it's Illinois law that they must be paid. They're right in saying it's the law that it must be paid but they are wrong in saying that the buyer must pay them because, like many things in real estate, it is usually customary that the seller takes care of that fee. If they want to make the buyer pay back HOA fees then they might as well ask the buyer to pay back taxes as well. You'll know when you're looking at a property where the bank is trying to put that cost onto you because normally the listing agent will have a note in the MLS listing stating, "buyer may be responsible for up to 6 months past due HOA fees". Like everything in a real estate deal it is negotiable based on how much you are offering the bank for the property. It's a numbers game and in the end all the bank is looking at is the net amount of money they will pocket at closing. This is also true if you are requesting closing costs to be paid by the bank. If you request 5% of a $100K deal to be paid by the seller in closing costs then the bank will minus $5,000 from your offer to figure out the net they will profit from the deal before accepting. Getting a clear title is usually not a problem. If you have an attorney helping you with the deal then the attorney will make sure the title is clear before you close. If you don't have an attorney then your Realtor and closing officer at the title company will make sure the title is clear. It also never hurts to tell your Realtor to simply write somewhere in the contract "title to be free and clear of all liens and encumbrances".
Buying a foreclosed home can be a fun and enjoyable experience as long as you are receiving the right advice from someone who knows the business. One thing to remember is not to get stuck on only looking at foreclosures. Although the majority of home prices are well above foreclosure prices you still may be able to find a well-priced non-foreclosure since not everyone is underwater. It usually takes some time on the market but private sellers eventually realize what price they have to be at in order to move their house. Buying a home that has been taken care of where you know the history and get disclosures at a reasonable price is always a great way to go. Yes, you may move in and find a foreclosure hit the market a few houses down the street which is priced $10,000 less than what you just paid but that house will probably require a large post-closing investment to update or even to just make livable. Estate sales are also good properties to keep an eye on because most of the time the property has lots of equity in it and the current sellers (who probably inherited the property) just want the cash out of the property instead of spending their own cash on taxes and upkeep of the property. Estate sales most often are move in condition which is good to get your loan approved but most buyers would probably prefer to update the entire house after purchasing. Remember that all bank owned foreclosures need some kind of post-closing investment so you must have the available funds to purchase flooring, repair holes, paint, purchase appliances, etc.
If you live in the Chicagoland area and would like me to set up a free MLS search for you then give me a call. As a technically savvy Realtor I can tell you that there is no easy way using our local MLS, which is the Multiple Listing Service of Northern Illinois (MLSNI), to simply search for all foreclosures in a given area. With so many properties on the market many Realtors don't understand how to just pull bank owned properties from an MLS search because doing so requires a specific "Boolean Expression" that I have developed over time. A Boolean Expression is a way to search through many documents or listings automatically by looking for key words. I have developed a specific set of key words that only appear in the remarks of bank owned properties because banks request that their listing agents post certain key words in the remarks section of the MLS. You might have noticed this if you have looked through properties on Realtor.com. Your average bank owned properties will have a remark that looks something like this "SOLD AS IS! EARNEST MONEY CERTIFIED FUNDS ONLY! NO SURVEY OR TERMITE PROVIDED BY THE SELLER. PRESENT DETAILED PROOF OF FUNDS WITH OFFER. NO DISCLOSURES." Feel free to contact me if you have any questions about this blog post even if you don't live in the Chicagoland area.