Deal Or No Deal? Foreclosures and Short Sales

By
Real Estate Agent with Five Star Real Estate

 This old HouseI recently showed several homes to a first time buyer. Her list consisted of 11 homes in the Grand Rapids MI area. Let me rephrase that; 11 "almost" homes.  We had approximately 2.5 hours to do this with only half of that time involving daylight. Lucky for the both of us I had my trusty flashlight.

When I began working with this client, she made it pretty clear that she wanted to only see foreclosures or short sales. Someone told her that these types of homes would give her the best deal. I have my own feelings about that but agreed to show her the homes on her list.

 As we toured these homes what we found was most of the homes were in such rough shape it was hard to get a feel for how much it would cost to renovate, repair or replace. As an offer was contemplated would this turn out to be a good deal or not a very good deal at all for my client? I knew the best way to at least get an idea of the costs. I thankfully knew of a great contractor who owed me a favor or two. Okay, truth be told, that contractor was my husband and it was time to cash in on a favor. I wanted my "buyer to beware."

I agree there are deals to be had when it comes to short sales or foreclosures but I feel it is very important that I help my buyer to way out the pros and all of the cons that are involved with these types of homes.

I certainly don't want to talk clients into or out of properties that they seem to have a heart set on but I want to be sure thay are not going to be sorry. I have come up with a list of things things I like to discuss with my clients in regards to these types of properties.

1. With foreclosures and most short sales the seller makes no claims about the property condition; past or present.

2.Though you can have inspections on the property; once negotiated, are you willing to accept the property "as is" at the closing table and thereafter

3. When submitting a short sale offer, be prepared to wait a long time before getting a response. Other offers can (and more than likely), will be submitted during this waiting period. It can take from 3 wks to 3 months for some banks to respond.

4 In the case of foreclosed properties it can take 48 hrs to 5 business days to get an acceptance or counter offer from the bank.

5. Some banks will not pay contributions for buyers closing costs or prepaid amounts. Those that do typically are limited to 3% at fair market value.

6. There will be additional paper work that the banks will need you to sign if the offer is accepted. These we will review together for your protection.

4. Do you have enough financial reserve for what it will take to do the renovations, repairs or replacements? Consider also the "unknowns" upon renovating.

These are things I like to discuss with my clients looking for these types of properties. Maybe you have other things I should know about from your experiences to add to my list.

I don't want to alarm my clients, nor turn them off from a sale. I do want them to be educated in regards to these types of transactions so they are fully aware of the process and what can be expected along they way.

I welcome your comments or suggestions.

Make it a GREAT DAY!

Sue Prins

Five Star Real Estate  Sales Professional

Grand Rapids MI

"IT'S ALL ABOUT YOU!"

www.sueprins.com

 

 

 

Comments (21)

Patrick Johnson
Windermere - Bellingham, WA
Sue, I have responded to other posts about short sales by saying RUN!!! Jonelle is absolutely correct in saying they are not worth it and it is incumbent on us to explain the pit falls and positives of trying to purchase short sale homes. Are they willing to wait MONTHS to get answers from the lender? Sometimes you do get "good" deals on short sales, but as a blog posted yesterday on AR said, only .4% of short sales are successful. That is alot of time and patience for you and your buyer to put forth!
Mar 20, 2008 04:53 AM
Jeremy Butts
Real Estate Entrepreneur - Louisville, KY
Investor

Sue - I often buy foreclosures and short sales in my area. I think you've made a good list for your buyers. If it's before the auction, the seller should still disclose the condition to the best of their ability. As for finances for the repairs, you could recommend hard money lenders or the HUD's 203 (k) Rehab Program, who will loan more than the purchase price if repairs are needed.

Jonelle - I would suggest making lower offers and being firm. If it's a short sale deal, make sure it is being handled by the lender's loss mitigation department. Banks do not want houses in poor condition sitting vacant for months and months. FYI: Houses in foreclosure with a second mortgage have potential for DEEP discounts! The second lien holder is vulnerable to a huge loss and more likely to discount.

Mar 20, 2008 04:54 AM
Edward Wadsworth
Better Homes Garden Real Estate Metro Brokers - Newnan, GA
Free list of Bank Owned Homes

Sue,

Short-sale is a different kind of sale, and is not for every kind of buyer. If a buyer needs a move-in ready house, we try to show them non-foreclosure properties as well!

Mar 20, 2008 05:05 AM
Sue Prins
Five Star Real Estate - Forest Hills, MI
Realtor- Greater Grand Rapids, MI
Hi Jonelle- Thanks for your comment. Yep, most everytime I have worked on a shortsale or foreclosure (on either side of the transaction) it has been a bigger pain than what is was worth. I find that the amount of time I put into these types of sales could have been better invested elsewhere.
Mar 21, 2008 04:36 AM
Sue Prins
Five Star Real Estate - Forest Hills, MI
Realtor- Greater Grand Rapids, MI
Hi Patrick- I did not see the AR post yet on the 4% success rate of short sales. I believe it though. I also think those realtors that have a niche in these types of transactions know alot better than I do how to work it. BUT- I still think they are under the same problem of the endless waiting game. You can not rush these motgage companies for a decision. Thanks for the comment!
Mar 21, 2008 04:40 AM
Esko Kiuru
Bethesda, MD

Sue,

Many buyers have very little experience in purchasing mortgage foreclosures or distressed properties but they've heard somewhere that they can make a killing doing so. Dealing with them isn't nearly as simple and profitable as they are led to believe. They can be, yet it takes a lot of work and knowledge that a professional agent can provide.

Mar 21, 2008 04:47 AM
Sue Prins
Five Star Real Estate - Forest Hills, MI
Realtor- Greater Grand Rapids, MI

Hi Jeremy-Thanks for your comment. I appreciate all of the info. I am curious about what you wrote about the ones that have a 1st and 2nd mtg on them being targets for good deals. I have a short sale listing that we are negotiating a contract with and the mtg company will not accept the offer unless the 2nd is paid off with a promissary note by the seller/owner. They made it crystal clear that if she was unwilling to pay it, they would be content to let it fall into foreclosure. They also said if that were to happen it is likely that the lender from the 2nd would more than likely still go after her for it because it would hold a lien on the property. I had another listing like this and it did not go down this way. The 2nd was negotiated with the first and my seller was not responsible for any of it except a potential 1099 down the road.

The 2nd mortgage that my client has to pay off is 12K. With our offer it will leave the mtg payoff deficient by only 7k. I feel like the bank is not being very flexible. My client is a one income gal who lost her job. She definately shows hardship. And now they are holding her to the 12K which if she does not pay will do some serious damage to her credit (2 foreclosures).  And again, the threat of them going after her for it as well.

You seem to be knowledgeable on this subject. What do you make of this?

Thanks Jeremy

Mar 21, 2008 04:57 AM
Sue Prins
Five Star Real Estate - Forest Hills, MI
Realtor- Greater Grand Rapids, MI
Hi Edward- Could not agree with you more. I would much rather handle a transaction that is not a short sale or foreclosure. Thanks for your comment.
Mar 21, 2008 04:58 AM
Sue Prins
Five Star Real Estate - Forest Hills, MI
Realtor- Greater Grand Rapids, MI

Hi Esko- You know, I have a fair amount of experience with these types of properties but I am finding that the playing field is ever changing. This is in part  due to the banks getting more and more overwhelmed with more cases, not enough staffing and not to mention the financial burden. Not that I feel entirely sorry for them because some of the responsibility for the short sales and foreclosures should be aimed at those who overextended themselves. That is another are of discussion however.

Thanks for commenting!

Mar 21, 2008 05:03 AM
Jeremy Butts
Real Estate Entrepreneur - Louisville, KY
Investor

Hi Sue - I'm curious:

how much is the first mortgage? what is the approximate appraised value of the property? Is it in good condition? the second is not willing to take a promissory note, right? How many payments are behind? this info could make a difference.

Mar 21, 2008 07:13 AM
Anonymous
Anonymous

Hi Jeremy- The first and 2nd are both woth Country Wide. The BPO came in at 104,900 The seller owes 107,000.00 on the 1st and 14,000.00 on the 2nd. The offer is for 100,000.00. The seller is behind about 5 payments. It is NOT in foreclosure yet. No sherrif sale yet. The property is in good condition. No problems. The 2nd wants the seller to sign a promisary for 12K (the other 2K gets added on to the first) and they would concider accepting the offer of 100k taking the 9k loss plus closing costs including commissions.

Does that help?

Thanks Jeremy

Mar 21, 2008 07:30 AM
#12
Jeremy Butts
Real Estate Entrepreneur - Louisville, KY
Investor

SUE - Thank you for the info. Let me start by disclosing: The following info, throughout this entire post, is my OPINION only, based on my personal experience as an investor who buys houses for personal investment, and may not apply to everybody and every situation, etc. etc... I am not an attorney. You probably shouldn't believe anything i'm about to say!

there's a good chance that you are dealing with the first level of negotiators for the bank. The people who are going to give the best deal are in the loss mitigation department and don't typically get involved until after the NOD or lis pendens has been filed.

First consider the current proposal like this: If your seller eventually can not afford to make the payments for the promissory note, then the seller would get another opportunity to settle the debt for a smaller amount or possibly be sued, which would result in a judgement on their credit. One judgement is better than two foreclosures!

Consider this alternate offer part one: I would personally offer the second mortgage holder one thousand dollars under the condition that they proclaim the debt closed/paid and settled permanently. Contrary to what they threatened, there is very little chance that the second mortgage holder will get a dime at an auction sale because it is not likely to sell for enough to cover both mortgages; people buy property at auctions for good deals. The second's only hope would be to pay off the first and hold onto the property as a REO until it eventually sold - how many months or years later? Why would they invest 107K, which they could invest someplace else that is actually earning interest, just to recoup their measly 14K?!? Like I said in my first post: second mortgage holders are vulnerable and usually highly motivated.

part two: I would offer the first mortgage the remaining 99K (actually i would have offered them less to begin with, but now it's too late) only if they proclaim the debt settled and paid. They should be happy because, once again, they are not likely to receive 99K at an auction sale, and if they don't, then it could sit vacant as a REO for a long time. Vacant, non-interest earning/ non-performing assets do not look good to the people on Wall Street buying these loans from the banks. Banks don't want foreclosures!!!!

The people you are currently talking with at the bank probably don't understand this because that is not what they are trained to do. Again, it's the loss mit. dept. that gets this. JUST MY OPINION!

Mar 21, 2008 08:55 AM
Sue Prins
Five Star Real Estate - Forest Hills, MI
Realtor- Greater Grand Rapids, MI
Hi Jeremy- Thanks for your help with this. I will "Take it to the bank" and see what we can work out
Mar 21, 2008 03:00 PM
Palm Coast Homes
100 Plus Realty LLC - Palm Coast, FL
Palm Coast/Flagler County Real Estate, The Ross/Co
Short sales in our area are a nightmare.  I try to stay away from them unless I am dealing with a very sophisticated buyer that has been thoroughly educated on the process and the odds of getting the property based on what is owed on the property and the financial situation of the seller.  Bank Owned properties are much easier and usually a much better value.  Once the bank owns the property, they are more motivated to work with buyers to get rid of it.  If at all possible "Just say NO to Short Sales"
Mar 21, 2008 03:06 PM
Paddy (Patricia) Pizappi
Better Homes and Gardens Rand Realty - Pine Bush, NY
Real Estate Associate Broker Hudson Valley NY

Hi Sue,

Buyer's here are seeing the low low prices advertised to get buyer's in for short sales here lately.  There are so many things that need to be explained to a buyer who is looking at these houses.  The time involved and the fact that the bank may not be willing to accept an offer even above the asking price make them really bad choices for the average home-buyer.  I will keep your list in my buyer materials to use when buyers want to offer on these houses.  Thanks for the post.   

Mar 21, 2008 09:58 PM
Kathy Clulow
RE/MAX All-Stars Realty Inc. Brokerage - Uxbridge, ON
Trusted For Experience - Respected For Results

Sue - You have provide some good insight, and information for your readers to consider.

There are many buyers who have knowledge of what it will take, the patience to wait and the funds to finish or restore there are also those like Jeremy who know the in's and outs of buying at even better prices. The big question in my books is who am I serving in these transactions and am I serving my clients best interests.

Mar 24, 2008 02:44 AM
Sue Prins
Five Star Real Estate - Forest Hills, MI
Realtor- Greater Grand Rapids, MI
Hi Kristy- I know these kinds of sales are often draining for buyers and for me. I certainly do not seek clients who are only looking into purchasing these types of homes. It just seems like with more and more of them becoming available, the buyers are curious about the kind of bargains they might be missing out on. Usually once I explain the "cons" they become more leary.
Mar 25, 2008 12:29 AM
Sue Prins
Five Star Real Estate - Forest Hills, MI
Realtor- Greater Grand Rapids, MI
Oops sorry Kristi with an i not a y. :-(
Mar 25, 2008 12:30 AM
Sue Prins
Five Star Real Estate - Forest Hills, MI
Realtor- Greater Grand Rapids, MI
Hi Paddy- Thanks for the comment. I don't know where you are from but here in West Michigan you can find a short sale or foreclosure in most any subdivision with homes for sale. It is ridiculous. I am anxious for the sake of my sellers to see the number of these types of listing diminish. It is constantly bringing down their homes value.
Mar 25, 2008 12:34 AM
Sue Prins
Five Star Real Estate - Forest Hills, MI
Realtor- Greater Grand Rapids, MI

Hi Kathy- I hear what you are saying about the representation of the seller, but in most of the transactions I have done on the sellers side, my sellers in a short sale are just so ready to move on. They are experiencing hardship and trying to avoid foreclosure for the sake of their credit. They do not have much control over the outcome of the offer. I am learning I don't have that much control either. You can argue all you want the value of the property compared to the offer but they either like it or they don't. More and more the sellers are having to sign promisary notes to move on and that is somethng that should not be done lightly either. As you don't want them in further hardship.

In the case of foreclosure sales where I am representing the seller, well you know who the seller is (the bank). Try forming a caring, touchy feely relationship with them.

I have argued with banks about what I feel is in the best interest of the sellers in both short sales and foreclosures but it is ALL about the bottom line.  And often times, quite frankly, the bottom line does not make sense, for example; when they would rather have the property go into foreclosure and have further loss, as is the case I have written about in the above comments. They are fools! 

UGH! Can you tell I am a little passionate over this subject?  :-)

I appreciate your comment Kathy. Thanks!

Mar 25, 2008 12:52 AM