Every day, I see the media touting what great deals exist today are on distress sales — foreclosed homes and short sales. The reports I’ve seen tend to minimize the downside of buying distressed properties. Here are several things to be cautious about when deciding to buy a distressed property:
Foreclosures
Pricing: Most banks hire experienced real estate brokers or appraisers to give them more than one opinion of value. While there are some cases where banks have accepted offers 10% less than the listed price, in most cases, the listed price takes condition and marketability into consideration and the property is priced to sell quickly and with as few complications to the lender/asset manager as possible.
Buyers who jump into the foreclosure market thinking they are going to make offers of 10, 20 or 30% under the list price will waste their time and effort. They will quickly discover they are competing with multiple offers from cash buyers and 20% down conventional mortgage buyers.
Why are foreclosures priced so low? One, banks cannot lend money when their assets are tied up with bad loans. They need to dump them at any cost. Two, they have so many bad loans on their books that their asset managers cannot be bothered with buyers who want things fixed, like bad furnaces, water damage, etc. They price them to get rid of them as easily and quickly as they can.
Buying As-is: Buying as-is means as-is Many foreclosed homes have no utilities operating no lights, no gas, water lines disconnected, etc. Some have been winterized properly; some haven’t been winterized at all. Even if it appears to be winterized, there is no way to tell if it was winterized before freezing weather did damage.
Many lenders and third-party foreclosure companies will NOT agree to turn the utilities on for a buyer to perform inspections. If there are competing offers, they will most likely choose to accept the offer that waives any and all inspections (i.e. the buyer is willing to assume all risk regarding frozen pipes, bad furnace, etc.)
In some cases, a lender/asset will allow a buyer to pay to connect utilities (in the buyer’s name), pay for any and all utility connection fees, pay to de-winterize the property and pay to re-winterize it after inspections, provided they get it all done in 5 days!!
Preparation: Lenders/asset managers will require a minimum $1,000 earnest deposit, usually in certified funds (bank money order or cashier’s check), made payable to and held by the lender’s title company. Imagine how difficult it will be to get that earnest deposit back if the inspections reveal major problems and you want to get out of the deal!
They will also require a Letter of Prequalification attached to the buy/sell agreement. They won’t even look at your offer without one.
Financing: Most first-time home buyers want to finance FHA or some other low-down payment program. FHA will (obviously) not underwrite a home purchase where the collateral (the house) may have water damage, a bad furnace, etc. The FHA appraiser will require inspections be performed so the buyer, if they wish to continue with the transaction, must pay to have the lights turned on, etc. (see Paragraph 2 above). With those costs added to a normal set of inspections structural, electrical, heating & cooling, plumbing, radon, termite, and, where applicable, fireplace and chimney, swimming pool and equipment the inspections can easily exceed $1,000, money that is lost if you choose to walk away.
Even private mortgage insurance options will require a full range of inspections.
Before you jump on the Foreclosure Bandwagon, know what you’re getting into!
Short Sales
As if buying foreclosures isn’t difficult enough, wait till you try to buy a short sale property (a home being sold for less than what is owed on the mortgage.) Many short sales properties are abandoned and face the same risks as foreclosures. But there are three big, additional headaches in attempting to buy a short-sale property:
Realtors are listing properties at prices they know the banks will not accept. Buyers are chasing after homes listed at, let’s say, $100,000, but the bank is owed $150,000. The Realtor knows good and well the bank will not accept $100,000, but is throwing in on the MLS wall to see if it sticks. If they get an offer for $100,000 (or even $110,000), the Realtor will submit it to the lender and see if it flies. Usually, the lender will counter at $130,000, for example, and the buyer will walk away angry (rightly so) because they offered full price or more and still didn’t buy a house.
Lenders have very little incentive to make a decision. Be prepared that you may not hear a decision from a bank on your offer for weeks or even months. One short sale in my office took 10 months for the bank to respond.
Short sales are notorious for sitting on the desk in a bank’s Loss Mitigation Department. Foreclosures are their first priority and there are more than enough to keep them busy.
Lenders have little incentive to accept an offer. Why? If the property was underwritten by F.H.A. or P.M.I., The bank has no incentive to take a loss. They may get more money by foreclosing and having the insurance pay them off.
If you still want to pursue buying distressed properties after reading this, choose a Realtor who is knowledgeable about the pitfalls. He or she will most likely know how to deal with them as expeditiously as possible.
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A reputed Colorado Springs REALTOR will help you find the perfect Colorado Springs real estate property that suits your style and budget. If you have any questions about Colorado Springs commercial real estate please contact Mike Stuard.
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