As the housing market recovers, many homeowners still owe more on their house than it is presently worth. In many cases, people who are “upside down” on their mortgage, as this is known, can negotiate with their lenders to sell their homes for less than what they owe, rather than go through foreclosure. These types of sales are referred to as short sales, short pays or pre-foreclosures. In these cases, the banks do not own the properties like they do with foreclosures. However, because the bank will be taking the loss, they are stakeholders and must approve the sale.
When dealing with lending institutions, the process tends to be lengthy. Therefore, be prepared for the sale to span several months, and keep in mind that banks are primarily looking at the numbers. Depending on the institution, there may be very little room for negotiation and only the highest offers will be considered or accepted. This could mean that you will have to go in higher than the asking price (while still coming in under market value). As is often the case, the more cash in the offer, the better.
Just because buying a short-sale or foreclosure property can be time consuming does not mean you should delay making an offer. From the moment a home is listed, make every effort to see the property and make an offer quickly if the home meets your criteria. Being the first prospective buyer to have the home under contract gives you an edge.
Before an offer can be considered on a short-sale home, the lender will request a Broker’s Price Opinion (BPO) before agreeing to a sale. A BPO is a real estate agent’s opinion of the home’s value, and is generally based on the comparison of three active listings and three sale prices of comparable homes in the neighborhood of the property. BPOs help the bank determine a fair market value for the home.
If you decide to go the short-sale route, having a trustworthy and thorough home inspection is key in making a less risky purchase. However, if you are an investor and have extensive expertise in home remodeling (and the cash flow to handle some significant structural surprises), waiving the inspection contingency may make your offer more appealing, but your purchase riskier.
A good place to find foreclosure properties for sale is to check the Real Estate Owned (REO) listings in the national Multiple Listing Service (MLS) online at www.mls.com. REOs are properties that have been foreclosed upon and seized by the bank. Each bank handles their REOs differently. For example, you might find some lenders that are willing to repair homes prior to putting them on the market, while others just list them. Foreclosed homes are frequently sold at auction and the listed price reflects the opening bid. The list price is intentionally low to pique interest and to set the stage for a bidding war.
In many foreclosed property sales, buyers do not get the opportunity to see the interior at all, and cash may be the only accepted form of payment. In addition, a clear title may not be guaranteed, so buyers could wind up being responsible for surviving liens on the title. To avoid this scenario — or at a minimum, to fully understand the total amount that you will be responsible for in addition to the auction price — you can hire a title company for about $100 to $200 to conduct a lien search on the property on which you plan to bid.
Short-sale homes generally tend to be in better condition than foreclosures because the owner is most likely still living in the home. Foreclosed homes may be vandalized either by the previous homeowner or because the home has been abandoned. Whether you decide to go the short sale or foreclosure route, you’ll need to analyze your situation. As an owner-occupier, you may decide that it is not in your best interest to purchase a foreclosed home, while an investor may be able to better mitigate mold or other unforeseen damage to the interior of the property. By carefully balancing all of these potential risks with your return on investment, you may still be able to purchase a property in today’s market that is still well below market value.
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