Thursday, April 03, 2008

Buying? How to Navigate those Short Sale & Foreclosures

Hello again, I am back as promised, ready to sort out all your misconceptions…


Short sale: The homeowner is usually in pre-foreclosure, and behind on his payments, but not necessarily. If so, the property will eventually be taken back in a foreclosure procedure, but as of right now, the seller is still in ownership position, but cannot sell it for enough money to cover all the debt that he owes, so it will be a “short sale”…meaning that the property will be sold for less than is owed. Don’t get excited yet…everything is not what it seems. The owner must have the banks approval in order to sell and the property could have more than one mortgage.

In the old days the seller would speak to the bank/lender and the lender would approve to take $XX less for the payoff. The seller would then market the property accordingly and everyone would be happy. Today is not the “old days”, and the rules are much more difficult.

Today, the lender (bank) is not giving their bottom price until the seller has a bonafide offer. Therefore, the asking price listed may be much less than what the bank is actually willing to settle for. Since the listing agent has no guidelines to follow, they are just guessing as to what amount the bank may agree to sell and will usually price it to be the lowest property in the neighborhood; sometimes the price is too low to realistically work. If the bank does not agree, the seller/owner cannot sell. On most “short sale” listings there are now disclaimers (visible only to the RE agents) that say that asking price may not be enough to cover what the bank wants, the commissions owed, or all the encumbrances on the property. In some cases, the buyer may be required to pay off some of the other debt against the property. The bank and current owner are also not willing to accept any contract contingencies (other than financing) or able to repair any problems…these homes are typically not in move in condition, but are usually not damaged since the owner probably still lives there.

Once you submit an offer on a “short sale”, you are put into the “waiting game”…you wait, and wait, and wait till the bank decides that enough time has lapsed for more offers to come in and they are now ready to select one(possibly only to counteroffer, not accept) with the highest price and most favorable financing. In most cases, it is an 8-12 week wait, just to get a response…if you are lucky. Short sales are not for someone who needs to move, needs a house, needs a response, or is particular about the condition of the home. It is for buyers that are throwing out offers in the hopes that they snag a good deal. If you are on a time crunch, then short sales will not work out. If you are planning to low-ball the offer, that will probably not work out either, as more than likely there will be other offers better than yours.

Foreclosures: Are much easier to negotiate than a “short sale”. The bank has already re-possessed the property in a foreclosure process, so the bank now owns the property and the previous owner is out of the house. Banks do not accept contract contingencies (except for financing) and will add addendums to your contract selling the property “as is” and releasing them of any liability for the condition of the property. You still have the right to have an inspection. The condition of the property will range from “dirty”, (just need cleaning and paint) to totally “trashed” with missing appliances, torn out fixtures and intentional damage to the house. In rare cases, usually higher priced homes, the condition may be very good.

One of the biggest buyer misconceptions is that the bank will only try to sell for just enough to cover the previous debt on the property. That is not true. While the bank will wipe out all the debt and pay off all the liens, they will still try to get as much money as they can from the sale. The bank may get one or two appraisals, maybe even get a broker’s opinion of value, and then evaluate that along with the market conditions. Banks do not like to manage properties and will try to work to sell the property, by responding to offers within a week and accepting a lower price. How much lower just depends upon many factors including the attitude of the person handling the case for the bank, and just how good your agent is.