THE RISKS OF BUYING DISTRESSED HOMES, FORECLOSURES AND REOs!
It 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.
Please contact us if you have any questions or comments.