By Suzanne Grace
Special to Relocation.com
Real estate players are intent on getting a "steal."
I get about 20 calls or emails a day from buyers looking for an awesome deal. They all want that magical foreclosure list so many companies advertise they will send you -- for a price!
Some of the online companies want you to pay $50 per month, stating that they will keep you updated on the latest foreclosures to hit the market. Nine out of ten times, these sites have inaccurate information, deceiving buyers into believing that they can buy a home in a high-end market for pennies on the dollar.
You want a steal? Let me give you some quick tips and tricks for the best way to identify a bargain in today's real estate climate.
Keep in mind as you begin your search that many real estate agents use certain terminology for marketing purposes because today's buyer equates those terms with a good value and this isn't always the case. Each home should be evaluated on a case-by-case basis and remember to ask your real estate agent for their professional opinion – check the comparables as well as this guide to whether you are getting a "steal" or simply paying market value.
What is an REO?
REO is an abbreviation for Real Estate Owned properties.
If no one purchases the property at the Trustee Sale or auction, then the property becomes an REO, now owned by the bank. One of the main reasons a property doesn't sell in a Trustee Sale is because it doesn't pencil out to be a good investment for the investors or there are so many bids that the sale price is driven up and no longer a good deal.
A home that has been "foreclosed" and is now a bank owned property can then be listed by a Realtor who is hired by the bank to market and sell the property. In order to be able to sell the house as quickly as possible the lender will remove any liens on title, and clear any other issues that may arise or slow down the sale of the property.
Typically the lenders are very motivated to sell the properties as quickly as possible as they are in the business of lending money, not owning real estate. REOs unnecessarily tie up the bank's capital reserves and hamper their ability to lend money. The management and upkeep of these properties can become very costly as well. HOWEVER, this is YOUR best opportunity to find a good deal.
Banks will do anywhere from 1 to 3 appraisals on the property, depending on the investors as well as the results from the broker price opinion that has been submitted by a local Realtor. The investors then meet to determine the marketing plan, price as well as what repairs, if any, will be done in order to garner the highest possible price.
Typically, the banks will not budge on their price for the first 30 days and need to see it sit unsold for this long in order for them to be a little more flexible. However, some banks want it off their books as quickly as possible and will pass that savings onto the buyer, pricing it way below current market value.
Most REOs are sold as is, where is and the banks will not commit to any repairs or even termite work. I recommend that you still ask for it as my clients have been pleasantly surprised by the credits the banks have been willing to give for repairs. One of the most important things to take into consideration is that you are buying a home with no disclosures – which means you are getting little or no history on the property at all.
It is wise to go to the city and obtain copies of permits if at all possible in order to help you to determine the quality of the workmanship – this is especially important on an upgraded home in order to make sure Uncle Bob didn't do the work on evenings or weekends and that a licensed contractor did!
Review the termite report as well as this will outline the amount of damage and/or infestation and the cost to do the repairs. Some lending institutions will not lend money on a property that hasn't had the Section 1 termite completed and you may be responsible for bringing in this money prior to the close of escrow.
You also need to be sure that the roof is in acceptable condition for the insurance company, too, as you may wind up having to cover this prior to the close of escrow. Sometimes you may be able to get it waived for 30 days but check with your insurance broker for details.
Knowing what you are buying is equally as important as the price you pay for it so do your due diligence; if you are working with a buyer's agent, they are representing you – the bank's agent is of course working for the bank, so it is usually a good idea to have someone looking out for your best interests – using the listing agent will not get you a better deal on the property so be sure not to fall for that line, one of the oldest in the book!
Over all, buying an REO is your best bet to purchasing a property at under market value; however, there are many homes available for sale that are not in distress. The owners are motivated to sell and have priced their homes to sell quickly. Keep in mind that just because it is listed or marketed as distressed, it may not always work out to be the best deal nor the best way to find a great deal. Ask your Real Estate professional for advice and be sure to study the comparables for any home you are considering; don't get held up by the notion that because it is an REO, foreclosure or short pay that it is a steal!
Short Sale (Short Pay)
A short sale (or short pay) occurs when a lender agrees to take less than the full amount the current owner owes on the property. In most cases, the owner is not making their payments and is in default. I have noticed that this typically occurs when the owners monthly payment has increased beyond what they can afford, due to an adjustment on their loan; in other words, their interest rate went up and so did their mortgage payments.
Short sales (short payoffs), are typically the first step in avoiding foreclosure and can sometimes be less damaging to the owner's credit. Although the lender(s) will recover less than the total loan amount in a short sale, some may prefer this in lieu of a foreclosure. The costs of foreclosing on a property can be exhorbitant and taking a loss via a short sale may be in the bank's best interests. The bank has to keep in mind that the property may not sell at auction and then they are forced to take it back as an REO (Real Estate Owned) property, which they then would have to maintain, list, and sell themselves.
Short sales are very complicated and the outcome is of course not guaranteed. There are so many variables that I can not even cover everything in a couple paragraphs. The bank (lien holder) is not obligated to take a short sale and in most cases the process to get one approved is cumbersome and frustrating for the Buyer, Seller and the Realtors. Many times these requests are not approved by the bank and the property ends up going to foreclosure anyway. Banks currently are overwhelmed with short sale requests and the approval process can take months.
Each bank evaluates each individual request on a case-by-case basis and the decision is ultimately up to the investors. Many times there is more than one lender involved, which means that one lender, typically the 2nd lien holder, will not get paid at all and getting them to agree to such a loss is also extremely difficult. Not only do the banks consider the borrower's personal and financial situation, but they also consider an appraisal of the property, market conditions, the banks financial situation, their current portfolio and in many cases they may have to consult with an outside investor who purchased the loan at some point.
Given all of these varying circumstances, you can imagine why this process takes so long. Most buyers do not want to wait out this long process and deal with the uncertainty – and lose other opportunities to purchase another home in the meantime. If a short sale is approved, it can be below market (depending on the bank appraisal as well as the investors, the market conditions and climate), but by the time it is finally approved the market may have declined further and it may no longer be such a great deal after all. Keep in mind that a short pay is typically priced by the Realtor and the price chosen is one that will get the buyer's attention, and unless it states otherwise, this is not the price the bank wants for the home.
If you are considering a short pay as your purchase, you need to be certain that you can afford or are willing to raise your price based on what the bank is hoping to sell it for.
If you are considering selling your home as a short sale, please consult with a CPA and an Attorney first! Realtors ARE NOT qualified to give you the type of information you need to decide if a short sale is right for you. Depending on the types of loan(s) you have and your financial situation, it may or may not be the best option for you.
What is a pre-foreclosure?
A pre-foreclosure is a home in which a Notice of Default (NOD) has been filed. The owners of the home are in default on the loan and are trying to sell the home before it is taken through foreclosure. In most cases, it is also a short pay (see above). It is typically a marketing term to attract attention to the property as being a distressed sale, thus implying that it is a good deal. Realtors use this term to create interest in purchasing a home below market value. Be sure to do your research in order to determine the value.
IMPORTANT TO NOTE: If you are an investor who will NOT be occupying the property, there has been an NOD filed, AND the owners still reside in the property as their primary residence - a Realtor, by law, CAN NOT represent you as the Buyer. You must handle the transaction on your own. A Realtor can only represent the Seller in this case.
What is a Foreclosure?
A foreclosure is when the lender takes possession of the property.
When a home-owner can no longer make the payments on the mortgage, the lender can begin foreclosure proceedings. This is a very specific legal process with set timelines and outcomes. In a Short Sale situation, the home owner's name is still on title of the property and they are still the owner of the home (see above for more detailed explanation). In a foreclosure, the lender takes possession of the house and the homeowner is no longer involved in the sale – it becomes a Foreclosure (see above for information on REOs or Real Estate Owned properties).
Foreclosures are NOT sold by Realtors. Foreclosure properties are auctioned at a Trustee Sale in the local Court House in the County where the property resides. Foreclosure properties must be paid for in full, with a cashiers check at the time of the sale or auction. Only the most experienced investors should consider this option. When you purchase a home at a Trustee Sale, you could be placing yourself at an unnecessary risk and encounter various problems that are typically investigated by Realtors and Title professionals in a typical sales transactions.
These problems can be extremely serious!! The types of problems you could encounter are: title issues, superior loan pay offs, tax liens, tenants and tenant rights or in some cases the property is still owner-occupied as well as structural problems.
The price may seem good at the auction or sale but the costs and risks typically come after you try to take possession or title. Properties that are a good investment are purchased by seasoned investors who find a way to get them before anyone else, and in some cases even before the sale. Unless you really know what you are doing, this is the most risky way to purchase property!