Posted By Alan Donald @ May 26th 2011 11:12am In: Foreclosures

THE RISKS OF BUYING DISTRESSED HOMES, FORECLOSURES AND REOs!

Distressed PropertiesIt seems that every time we meet with new buyers, the first word that comes out of their mouth is “foreclosures”. Buyers have been bombarded with news about the “state of the market” and the amazing buying opportunities that are available to them. Many buyers are not aware that there are three “stages” that a distressed property goes through, and that each of these may present different challenges and opportunities. Here is a summary of these stages:

1.      Stage 1 – Pre-foreclosure

When the homeowners experience a hardship that prevents them from keeping current with their mortgage payments, they normally start exploring re-financing and loan modification options with their lender. The statistics show that these options are unlikely to work for different reasons. As soon as the homeowners fall behind a couple of months, the lender may initiate foreclosure proceedings. In SC, this process may take anywhere from 3-12 months depending on the county and the lender. If the homeowners want to salvage their credit, they will try to sell their home as a SHORT SALE, taking market price offers to the lender and asking the lender to accept less than what it is owed to them, to prevent the foreclosure.

2.      Stage 2 – Foreclosure

If a short sale is not successful, or the homeowners did not try to solve the problem by trying a short sale (70% of all foreclosures are never offered to the marketplace!) , the home is offered for sale by public auction at the courthouse steps. Normally the first lienholder (lender) will buy it back for the amount it is owed. However, anyone can bid and buy a home at the county public auction.

3.      Stage 3 – Post-foreclosure

Once the lender takes over the property, they will evict the previous homeowner and place the home under their “asset management”. Normally they will change locks, establish a maintenance program, and list the home for sale as a lender-owned (REO, corporate-owned) property.

At each stage, home buyers may have different challenges. Table 1 shows a comparison

Table 1: Factors That May Affect Buyer’s Risk

Factor

Short Sale

Public Auction

Lender-Owned

Inspection Contingency Possible

Yes

No

Yes

Financing Contingency Possible

Yes

No

Yes

Predictable Closing Date

No

Yes

Yes

Earnest Money Required

Variable (~1%)

5-10%

Variable (~1%)

Average Time to Close

Variable (Ave 3-6 months)

30 days

30 days

Seller Performs Required Repairs

Not likely

No

Not Likely (*)

Ability to View/Inspect Home

Yes

Rarely

Yes

Predictable Outcome to Buyer's Offer

No

Yes (after winning bid!)

Yes

Seller Paid Closing Costs Possible

Yes

No

Yes

Average Property Condition

Fair

Fair

Fair/Poor

203K Renovation Loan Possible

Yes

No

Yes

Risk to Inexperienced Buyer

Low (**)

High

Medium

(*) Although all lender-owned homes are offered in “as-is” condition and normally it is stated that the seller will do no repairs, in certain instances the buyer can convince the seller to perform certain repairs which the new lender may require to close.  Examples of such repairs are structural problems, live termites and roof leaks. (**) For those buyers with no urgency or deadlines to meet.

It is very important for inexperienced buyers to be well represented by an experienced REALTOR® who can protect their earnest money, represent their interests and make sure that all parties in the transaction are doing what they are supposed to.  Likewise, it is important to hire a real estate attorney who is well versed in dealing with liens and title issues to avoid problems buying distressed properties.

Visit our website AlanDonald.com to subscribe to our FREE DAILY ALERTS for SHORT SALES, FORECLOSURES AND BANK-OWNED PROPERTIES.

The Alan Donald Real Estate Team is experienced in all facets of distressed sales and offers FREE, no obligation consultation to buyers and sellers who may wish to learn more about the options available to them. Call us for more information.



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