Buying Distressed Properties - Foreclosures & Short Sales
When buyers tell us they are looking for “short sales or foreclosures,” our interpretation is that they are looking for “bargains”!
While there are still distressed properties in our market, distressed inventory is trending downward and reducing. There are a few issues that buyers need to understand about different kinds of distressed properties. The most important are:
Short Sales – A “short” sale occurs when a homeowner has an adverse financial or personal situation that has prevented him/her from paying their mortgage on time. As they fall behind in their payments, the lender will initiate the foreclosure process, which can take months to conclude. In the meantime, the homeowner may try to sell the property for a “market price” (normally below what they owe to the lender) and ask the lender to accept less than what they are owed to prevent a foreclosure. All short sale contracts must be contingent upon third party approval, which can take anywhere from 3 months to over a year to happen. Short sales are normally: a) Very lengthy; and b) May have an unpredictable outcome -- the lender may not approve the short sale if they think they can make more money by foreclosing on the property. If you have any kind of urgency or deadline, we would urge you to stay away from any short sales.
Pre-approved Short Sales. These are short sales that had a buyer lined up, but the buyer lost patience and moved on, just as the lender approved the deal. So these are approved short sales looking for buyers and can normally be purchased in a "reasonable" time frame at the approved purchase price.
Foreclosures (also called REO.s, lender-owned, or corporate-owned). These are homes that were sold at the foreclosure auctions, purchased by the plaintiff (lender) and now released back to the market as a “lender-owned” property. These can be purchased in a “normal” time frame. Many of these have initial restrictions that may prevent investors from bidding during an initial period (only owner occupiers can bid).
In general, these properties have not been well cared for during the last few months (in some cases years), may have been vacant for a long time and may have also been vandalized. Most short sale properties and foreclosures are offered “As-Is”, “Where-Is”, which means that, although you as a buyer may have the right to conduct inspections as part of your due diligence, the sellers will NOT fix any of the found defects prior to closing.
Apart from the cost to fix these problems, some issues may pose a problem with your lender (especially if using a VA loan), as the lender may refuse to fund the transaction if the home is not in perfect working condition. A viable alternative to finance these homes is a RENOVATION LOAN.
Also, many of these properties have been “winterized” and have all the utilities disconnected. You may have to connect all the utilities in your name to conduct your inspections, and then re-winterize the property at your expense if you decide not to purchase it.
Are you thinking about purchasing a distressed property? Have questions or need advice? Give us a call or send us a text on 843-900-0155.