Wednesday, January 26, 2011

Tips to successfully purchasing foreclosure and/or short sale properties.

As you have already probably read in the news and heard in the media, our real estate market is currently flooded with distressed sales, both foreclosures and short sales. I am quite confident that in 2011 the glut of foreclosures and short sales currently on the market will not only remain constant but will grow larger. If you are currently in the market to purchase residential real estate or if you will be in the market to purchase residential real estate within the next year or two, there is a very good chance that you will end up deciding to purchase either a short sale or a foreclosure property. I don't blame anyone for wanting to purchase a foreclosure or a short sale. You can end up getting a great deal if you do. However, there are certain risks associated with purchasing these types of properties, and there are all sorts of problems you can run into. Today I am going to provide you with some tips that will help you minimize these risks and help you avoid potential pitfalls that could end up costing you both precious time and money.

1) Choose a Realtor who has ample experience at dealing with and successfully closing on foreclosures and short sales.

If you make a decision to purchase a short sale or a foreclosure property, it's important to have a Realtor in your corner who has the experience that is needed to overcome potential obstacles and problems that can come up along the way toward closing on one of these properties. An experienced Realtor can provide you with a wealth of knowledge and resources to make the transaction as smooth as it possibly can be.

When choosing a Realtor to represent you if you buy a short sale or foreclosure, be sure to ask the Realtor how long have they been actively working as a Realtor in the area you are looking to buy, how much experience they have at dealing with foreclosure and short sale properties, and how many foreclosure and short sale properties have they closed on.

From my experience, there are all kinds of problems that can pop up when you are dealing with distressed properties. Having an experienced real estate agent that is familiar at dealing with these types of properties can be the difference between you closing on the deal and the deal falling through.

2) Go to a lender or mortgage broker and get pre-qualified for a loan before you begin your home search.

If you are paying cash for a property, this does not apply. However, if you are going to be obtaining a loan for purchasing a property, you need to go to a lender or mortgage broker and get pre-qualified for a home loan before you start your home search.

If you are purchasing a foreclosure property, the property is usually owned by a bank or some other type of financial institution. These financial institutions that have acquired properties through foreclosing on the properties are serious about selling these properties because they don't want to own them. With that being said, if they have a prospective buyer for one of the properties that they own, they want to make sure the buyer has the ability to buy the property in question of being purchased before they take the property off of the market. Banks who are trying to sell off their inventory of foreclosure properties will not even look at an offer unless the buyer has provided them with a pre-qualification or pre-approval letter stating that the buyer has the ability to buy the property for what they are offering to purchase the property for.

With a short sale, the property has not been foreclosed on yet, but the current owner's lender, who the owner has his/her home loan with, still must approve the buyer's offer in order for the deal to close. From my experience with short sales, the owner's lender will always require that the buyer provide a pre-qualification letter with the offer on the property. Again, if the buyer does not do this, the seller's lender will not even look at the offer.

Banks and lenders have a lot of foreclosure properties on their books that they want to get rid of, and they also have a lot of short sales that they are trying to get sold so that they don't have to foreclose on those properties. They don't have time to waste. If they took offers without being sure the buyer has the ability obtain the loan that they need in order to purchase the property at hand, these banks could end up doing a lot of work thus wasting a lot of time and money. For this reason, they won't look at offers where the buyer is getting a home loan unless the buyer can prove they have the ability to get the loan they need to buy the property. You must get a pre qualification letter from a lender before you start searching for foreclosure or short sale properties.

If you don't know of any good lenders out there who can help you obtain a home loan, visit my website at and click on the "preferred lenders and partners" tab on the left hand side of the screen.

3) If you are looking at buying a short sale, ask if the property is an approved short sale at the listing price. If not, ask the listing agent to provide you with a list of comparable properties that have recently sold.

If you have found a short sale that looks like a great deal, you need to find out some information before you start moving forward with the property. Remember that with short sales, the properties have not been foreclosed on yet. However, the owner's lender still must approve the offer that you make on the property. So the question is "how does the owner's lender decide whether or not to take an offer on a property." Once an offer is received, the owner's lien holder will usually pay a third party real estate broker, who is not involved with the transaction, to come look at the property, evaluate comparable properties, and give them their estimate of value. If the offer is in line with or is higher than the value that the third party broker assigns to that property, the owners lender will usually approve the offer.

However, the owner's bank will usually not tell the owner or the agent listing the property, how much they will take for the property before they receive an offer on the property. This means that the listing agent must list the property for what they perceive the market value is. I have seen agents list short sale properties for outrageously cheap prices that are well below market value. This means that they usually don't have any comparable sales to back up the price that they have it listed for sale at. If that happens and someone makes an offer on the property for the price they have the property listed at or below the already very cheap list price, the owner's lender will usually reject this offer because the offer can't be supported by comparable sales. When this happens, you can end up wasting a lot of your time and effort. With short sales, it can sometimes take up to 90 days before you get an answer from the owner's lender about your offer, so you can also miss other opportunities as well while you are waiting on an answer.

This situation can usually be prevented. Before you make an offer on the short sale that you have your eye on, approach the listing agent or approach your real estate agent who is representing you and ask him/her to provide you with at least 3 comparable sales from the same area or neighborhood that have sold within the last 6 months. Within the last 3 months would be even better. Also, ask the listing agent or your real estate agent to provide you with at least 3 comparable properties in the same area or neighborhood that are currently listed for sale. If the price that the property is listed for is well below the prices that these comparable properties suggest that the property you are interested in should be listed at, than chances are the the owner's lender won't approve an offer for the price it is listed at.

At this point you would need to ask the agent who is listing the house for sale if the owner's lender has pre-approved this short sale at the low price they have it listed for sale at. If they do, ask to see a copy of the approval letter from the owner's lender/lien holder. If they have not approved the list price, you should probably make an offer somewhere in the price range of the comparable properties you looked at, or you should move on and find another property. Otherwise, you will most likely be wasting your time and effort.

4)If you are purchasing a short sale, see if you can get a Seller's Property Disclosure filled out by the owner of the property you are buying.

A seller's property disclosure is a form that the owner of a property sometimes will fill out when they are selling their home. These seller's property disclosures have useful information about the property including the plumbing, electrical, and roof systems, whether or not the property has had any trouble with termites or any other wood destroying organisms, the condition of the appliances, any additions or remodeling that was done to the property, ect...

A seller's property disclosure is no substitute for making sure you have the property properly inspected, but they can provide you with useful information about the property that you can look at to screen the property before you go spending your hard earned money on inspections.

Please make a note that if you are buying a foreclosure property, the owner of the property will pretty much never provide you with a seller's property disclosure. This is because foreclosure properties are usually owned by some financial institution halfway across the country, and they probably know next to nothing about this property they own that you are interested in buying. So with foreclosures, make an extra effort to have the property carefully inspected.

5) Always make sure you order a general home inspection to be done by a licensed and experienced home inspector.

You are about to make a big investment. Before you go ahead and spend all of this money to purchase a property, it's a good idea to have the place carefully inspected so you know you aren't buying a pig and a poke. With a general home inspection, the home inspector will look at the heating and cooling system, he will evaluate the general condition of the roof, he will check out the plumbing and electrical system, he will check for any signs that suggest the property has any structural or foundational issues, and he will also check the condition of all of the appliances in the house. Also, if the inspector sees any other misc. problems, he will make note of those issues in his report as well. If there are any serious problems with any of the big ticket items such as the plumbing, roof or the electrical system, the inspector will usually recommend further inspection by a specialist. For example, if the plumbing was all messed up, the home inspector would recommend to have the plumbing checked out by a licensed plumber to give you an idea of the extent of the repairs that are needed.

When buying foreclosures, home inspections are even more necessary. Again, this is because the owner is probably a bank that knows nothing about the property, so it's up to you to discover any unknown or undisclosed problems. Also, from my experience, a lot of the time foreclosure properties have not been lived in for a while, and they are often beat up and in poor condition. As the old Latin saying goes.... Caveat Emptor. Translated to english...buyer beware. Applied to this situation...get a home inspection done before you buy a distressed property.

For a list of good home inspectors, you can visit my website at and look under the "preferred lenders and partners" tab.

6) Always get a wood destroying organisms inspection (WDO inspection) done before you purchase a distressed property.

Termites, wood rot, powder post beetles and other wood destroying organisms can end up costing you a lot of money in repairs. Before you purchase any property, you always need to have a WDO inspection done. These inspections cost around $125, but could save you from buying a property that requires thousands of dollars in needed repairs caused by termites or other wood destroying organisms.

7) Have the property inspected for both Radon Gas and Mold.

Radon Gas-Radon Gas is an odorless and colorless gas that can come up into your home from the soil underneath the house. The gas can accumulate in the slab, crawl space or basement in your house and seep into your home. Radon gas runs randomly in veins of soil. This means that your neighbor could have radon gas issues while your home is free of radon gas. Radon gas can cause lung cancer over a long period of time. In Leon County, statistics show that 1 in 4 homes have radon gas levels above the level that Environmental Protection Agency deems safe.

The two home inspection companies that I have on my website will perform a radon gas inspection. If you are getting a home inspection done by one of these companies, they only charge a small additional fee to also include a radon inspection.

Mold-The weather conditions here in Tallahassee most of the year are perfect for mold growth. Tallahassee is hot and humid most of the year. A warm and moist environment is just what mold needs to grow. A lot of the time, short sale and foreclosure properties have been sitting vacant with no air conditioning to cool the place and keep the air dry. If there have been any water leaks in the property, this will make matters even worse. Water leaks plus no air conditioning could mean that the property could have serious mold issues.

Mold can cause serious health problems. Many home inspection companies, including the two on my website, will also do a mold inspection. If you are already getting a home inspection, sometimes these companies will only charge you a small additional fee to have the inspection done.

8) If the home you are looking to buy is built before 1978, you should get a lead based paint inspection.

Inhaling only small amounts of lead based paint dust can cause serious health issues...especially among infants and small children. Southern Home Consultants, one of the inspection companies on my website, does lead based paint inspections. You can also search the internet for lead based paint inspectors.

9) Be Sure to purchase owners title insurance, and have a title search done on the property before you close on the property.

Before you close on a short sale or a foreclosure property, you need to make sure you have a title search done, and you need to make sure that you also buy title insurance.

When a title company performs a title search, they go through the chain of ownership back as far as the property has been listed on public record. They make sure that the person you are buying the property from actually owns the property and has the right to sell it to you. They also make sure no one undisclosed owners own the property. The reason for this, is that you don't want any undisclosed owners coming around later on saying they own the property still since they did not sign off on selling the property to you. Also, when the title company does a title search, they check to see if there are any liens attached to the property. If there are, the seller has to take care of removing the liens before they can sell you the property. Unless you want to assume the liens...which I would advise against.

In addition to performing a title search, the title company is going to provide you with an owner's title insurance policy. The owner's title insurance policy will basically cover you in the event that the title search fails to discover any of the potential title issues I mentioned above. Title insurance is just a one time fee that you pay at closing. It's well worth the investment.

Having a title search and getting title insurance is very important...especially if you are purchasing a short sale or foreclosure property. A lot of the time with short sales, you will have liens attached to the property. The owners have not been paying their mortgage payment, and a lot of the time they have not paid other bills including homeowners association dues and their might be liens attached to property. A title search would discover those liens. With foreclosures, there have been many issues lately with banks not properly foreclosing on properties, and the previous owners who were foreclosed on sometimes come back and claim ownership of the home. With this type of issue, an owners title insurance policy would cover you.

Moral of the story, before buy a distressed sale, make sure you have a title search done and purchase an owners title insurance policy.


You can get a great deal if you purchase a short sale or foreclosure property. You just need to make sure that you are careful and prudent going into it. You can run into a lot of problems with foreclosures and short sales. If you take my advice and follow the tips I have suggested here today, you will have much less of a chance of running into unpleasant surprises after you close on the property.

If you have any questions about purchasing a foreclosure or short sale property, feel free to email me at or give me a call at (850) 567-0037. You can also write to me on my blog.