Thursday, February 25, 2010

Foreclosures and Shortsales. What you should know

Today I will be talking about foreclosure sales and short sales. In today's real estate market, our housing inventory is loaded with distressed properties. Both short sales and bank foreclosed homes are sitting on the market waiting for buyers to come along and move in. While you can get a great when you buy one of these properties, you also must understand that buying one of these properties entails more risk.

Before I get into talking about short sales and foreclosure, I think it would be a good idea to define what a short sale and a foreclosure property are. A foreclosure property is when a bank has already seized the property from the last owner of the property because the previous owner was not making his/her mortgage payments. The property is now owned by the bank.

With a short sale, the current owner has a mortgage on his/her property, but the fair market value of the property is less than what they owe on their loan to the bank. Also, property owners are also usually behind on their mortgage payments when they want to do a short sale. When a property owner is in this situation, and wants to sell his/her home, they negotiate with the bank to accept an amount of payment from the sale of the property that is less the the amount of money they owe the bank for their home loan. Banks have incentive to take less money than the property owner owes to them because they do not want to foreclose on and repossess the home. It costs the banks a lot of money to foreclose on a home, so by working a short sale, the bank avoids the foreclosure expenses.

As I mentioned, you can get a great deal when you buy a short sale or a foreclosure property.

With foreclosed properties, banks own the properties and are paying taxes and insurance on these properties every month. In addition to that, these properties have a high opportunity costs to the banks. Instead of having these "non performing assets" as banks call them, on their books, they would rather sell them and have cash to make more loans with. All these things I have just mentioned make banks motivated to sell these properties. If you have cash to purchase a property, and you can close on the deal quickly, there is a good chance you can get a great deal on a foreclosure property. Banks like it when buyers purchase properties with cash because they do not have to worry about the deal falling through because the buyer's home loan financing falls through. Banks also like quick closings because the faster they sell the property, the less money they have to pay on taxes and insurance related to the property.

However, just because you can find a great deal on a forclosure property, it does not mean the bank is going to give the property away. Banks do their due diligence in order to find out the value of the property that they own so that they can get fair market value or at least close to fair market value when they sell the property. Banks usually have a real estate agent, in the town where the property is located, go ahead and list the property for sale. The listing agent will use his/her knowledge of the local real estate market to list the property at fair market value. Also, banks will sometimes have an appraisal performed on the property by a liscensed property appraiser, to find out what the value of the property is. I have had clients who have gotten great deals on forclosed home, and I have had clients, who have put offers on foreclosed homes, have their offers rejected by banks.

When you are buying a foreclosed property, you are taking a larger risk than when you buy other property. Banks own these homes. However, the banks usually do not know anything about these properties, and they almost always make buyers purchase the homes in "as is" condition. This means that it is up to the buyer to verify everything that is wrong with the property before purchasing it. When purchasing a foreclosure property there are a few things you can do to minimize risk. First off, work with a competant real estate agent who has worked with foreclosure properties before. Second, make sure that you have the property inspected by professionals before purchasing the property. The inspections I would recommend include include a general home inspection performed by competant home inspection company, and a wood destroying organisms inspection. If you need any other inspections done, the general home inspector should let you know. You can visit to find home inspection companies that I suggest using. In addition to inspections, you need to have a survey performed on the property to make sure there are no encroachments on the property. You also need to have a title search done on the property to make sure that you are buying the property with clear title. You should purchase a title insurance policy as well which will protect you from title defects if any pop up that are not found in the title search.

Going through a foreclosure is much like buying a normal property, but instead of dealing with a seller that has lived in the property or at least seen the property, you are dealing with a bank who has never seen the property. The time frame to close for a foreclosure is the same as a normal sale. When you are buying a foreclosed property you must prove to the seller bank that you either have the funds to purchase the property or that you have been approved for a loan to purchase the property.

While foreclosures are a little more risky than normal sales, they are a lot less complicated and time consuming than short sales are. When you are purchasing a short sale, you are dealing with two parties. You are dealing with the actual owner of the property, and you are dealing with the bank that the property owner has their home loan through (remember this is because in a shortsale the bank has not repossessed the owner's home yet, so they are not officially the owners). You have to get both the bank and the property owner to agree to the offer you make. In short sales, banks usually take a while to approve the offer. This approval process usually makes the short sales take a longer time. When you go to purchase a short sale, expect about 60-90 days before you can close and move in to your home.

There are usually less unknowns with a short sale as opposed to a foreclosure home because you are dealing with a property owner who usually knows about the property. However, you still need to perform your due diligence to make sure you know as much as possible about the property before you purchase it. Again you should work with a REALTOR who has experience with short sales, get inspections done, a survey done, a title search done and get title insurance. Short sales are usually sold "as is" but sometimes the seller's will perform repairs.

In summary, there are a lot of short sales and foreclosed properties for sale right now. You can find great deals when buying these properties, but you need to understand that you must do your homework before you purchase one of these properties.

If you have any other questions about short sales or foreclosure properties, please feel free to call me at (850) 567-0037 or email me at

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