What's up with Short Sales and Foreclosures?
You may be wondering what the deal is with foreclosure and short sale homes. If you are buying a short sale or foreclosed home it is VERY important to work with a real estate agent who has completed these types of sales before. Short sales and foreclosures can be very different than a typical home sale, and making sure that you have someone who knows what is involved in the process is invaluable. These transactions require experience and can be very challenging so getting a seasoned agent involved sooner rather than later is your best chance for success.
What’s a short sale?
When the owner of a home can no longer afford to make payments on their home mortgage, the home may be sold in a short sale before it enters into foreclosure. A short sale is one of a homeowner’s last resorts. It occurs when a home is sold for less than the balance remaining on the mortgage. Typically the homeowner and lender strike a deal in which the homeowner agrees to accept less than the amount they owe on their home (making no profit) in exchange for the lender forgiving the remaining amount on the loan. This process may still damage the homeowner's credit, but they will avoid foreclosure.
What’s a foreclosure?
If a homeowner can’t make payments on their mortgage and the home does not sell through a short sale, their rights to the property are forfeited. At this time the bank who supplied their home loan takes possession of the home and will usually list it for sale in order to make back the money that they were owed.
Now that you understand what short sales and foreclosures are, there are a few things you will want to know when purchasing either type of home.
What you need to know about buying a short sale home
- Although the name can be deceiving, short sales are usually not short. In fact, the whole process can take quite a while. Keep in mind that you may want to continue to look at other homes (even if you have already submitted an offer) as short sales can be very delicate and are subject to many changes.
- When an offer is submitted it can often take a long time to hear back because neither the seller or agent is the one reviewing the offer. The bank has the final say, and as they can often be very busy it can take a while to hear anything back when an offer is submitted, especially if a low offer is being considered.
- Repairs on a home are not usually made even if they are necessary to secure a loan for the home. In some lucky cases a credit is issued and the buyer will be responsible for arranging the fixes. Sometimes the poor condition of a home can keep you from being able to get a loan on the home when you can't afford the repairs and the bank is not willing to give you any credit towards those. You are then at a stalemate.
- When an offer is approved by the bank you MUST close on time. Make sure you are prepared in every way possible so there are no hang ups or delays on your part. There are daily penalties for late closings.
How does this even affect you?
Bottom line: you may be enticed by a attractive (i.e. cheap) sales price being offered on a home. If the house price looks too good to be true for the size or quality of the home, be on guard. The public information does not usually reveal that the home is a short sale so only a real estate agent can share that behind-the-scenes information for you. Very frequently the low sales price causes a frenzy of offers from investors and other buyers patient enough to be able to wait.
Why does this matter?
It matters if you care about moving into a home in a certain period of time. Short sales are complex and can get messy fast. And even if the seller of the home has accepted your offer, it doesn’t mean you are out of the woods yet. That is the first small step. Your offer still has to be approved by the mortgage lender holding the note on the home. Delays are usually the norm in hearing any status on an offer.
Expect to wait 60 days to six months to even hear any news and it may not be the news you want. If you have written an offer, that means that your deposit money is also tied up which unless you have money to burn means you can’t put a deposit on another more attractive home without a big hassle. Rule of thumb: don’t get emotionally attached to a short sale or fool yourself into thinking you can wait. Buyers often think they can be patient but soon find out that they really are too impatient for the process. Your agent won’t likely have any status to even give you.
That’s not to say you can’t find a great deal on a short sale home from time to time -- just be sure you know that you will have to be extra patient and know what you are getting yourself into.
What you need to know about buying a foreclosed home
- Similar to a short sale home, the process of buying a foreclosure can take some time and you should expect delays. If you are also selling a home, you should take this into consideration as it will be difficult to pinpoint a date that your new home will be available for move-in.
- Make sure that you have an inspector familiar with foreclosed homes complete the inspection. Due to the nature of the property for sale, oftentimes foreclosures can be in rough shape. Typically there will be no disclosures on the home available since the bank has never been the occupant and the bank will not make any necessary repairs or alter the price of the home to cover the fixes. A thorough inspection is the only way to really know what you are getting yourself into. Sometimes the utilities are also turned off in these homes for various reasons and before you can even inspect, you as the buyer may have to contact the utilities and pay to have them turned on for the duration of our inspection.
- Before making an offer on the home, talk with some of the neighbors if you can. Since there is usually little information provided on a foreclosed home it can be helpful to see what the neighbors may know. They can often offer up insights that will allow you to consider if making an offer on the home is the right decision.
- You should not expect to play the offer game with a foreclosure home. Remember, chances are that the bank is already losing money on the home so they will be looking to get as much for the home as possible. This leaves little wiggle room for making low offers. If you are serious about the home, make a reasonable offer from the beginning that the bank will consider. Also, foreclosures commonly attract multiple offers so if you really want a home, you may want to consider writing a strong offer upfront. Please talk to your real estate agent when considering a foreclosed home.
- In the same way as a short sale, it is important to keep your options open and not stop looking at homes, even once you have submitted an offer. The foreclosure process can be tricky, so try to not get too attached to a home until everything is finalized.
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