So you want to get an investment property, and fed by the media hype surrounding the mortgage crisis you have decided to pursue an REO (bank owned property) or a short sale (distressed property where seller is selling the home for less than is owed).
There are drawbacks to both of these situations, and things you should know ahead of time to help you figure out which scenario is better for your intentions, and what strategy will help you best move toward that goal.
Short sales are a typical solution in our current market for sellers who have an ARM (Adjustable rate mortgage) that is starting to increase, or they have had some sort of economic crisis that makes them no longer able to pay the payment. The bank will only consider a short sale if you are;
- Financially Insolvent
- Upside down in your loan, meaning you owe more on the property than it is worth in the current market
- If you have presented all the necessary paperwork in the right way to get a bank approval.
For these reasons, you need a Realtor if you are going to attempt to do a short sale on your home. If this package isn't done right, you will never have a chance of the bank accepting your short sale.
These reasons also make short sales both difficult and frustrating to deal with as a buyer. Sure there is the potential to get a great property at a significantly discounted price. There is also potential to wait for several months to hear anything back from the bank after the seller agrees to sell the property. Also, a buyer has more negotiation power in a transaction in which the party you are negotiating with is not financially insolvent. If you are looking at a short sale as an investment, you might save a few thousand on the purchase price but the seller will not be able to contribute to your closing costs, the seller will not be able to conduct repairs and will more than likely only accept as-is offers.
Big difference in dealing with the banks on REOs. True traditionally the bank has held the line firmly on these properties, but with more and more bank owned properties composing the inventory of available homes, you can get the banks to pay for more and more. However, buying an REO is no picnic either. The bank has already lost a ton of money on the re-acquisition of the property, and is really going to try and be tough on the purchase and sneak thing by you. It is best to always have your own Realtor when dealing with a bank owned property. An REO purchase typically comes with a 25-35 page addend to a standard purchase contract in which they try to remove all the conventional contingencies in a transaction. You will need a Realtor who knows the local real estate law to make sure that your contract will hold up to the Addenda and protect the buyer's contingencies. They will try and get you for per-diem for delays in closing that they cause, they will do repairs half way, and if you don't re-inspect you will be stuck with an incomplete repair. They are also masters of knowing nothing about the property so I would always recommend hiring an inspector on any property that is giving a property disclosure exemption.
Bottom line is there are lots of opportunities out there caused by the mortgage subprime and prime crisis' that are waiting for you to jump, just make sure you have the help of a qualified local Realtor to act as a life preserve in the sometimes troubled water of investment properties.
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