Foreclosures – Playing to Win
Arizona is 3rd in the nation right now in foreclosures so we have quite a few bank-owned or foreclosed properties. The situation is pretty extreme in the Phoenix area, although we see our share of foreclosures here in Tucson as well. So how does buying a foreclosure differ from buying any other home? Peter is familiar with foreclosure investor strategies, the rules of the game, knows how to buy pre-foreclosures and how to bid at the auction. Click here to learn more about Tucson foreclosures.
Price
Of course the first thing home buyers usually think of when they contemplate buying a foreclosed home is that the price will be much lower than other homes on the market. This is generally true, although lenders price according to the amount of repairs needed, etc, so it is not exactly an apples to apples comparison with the move-in ready home up the street.
One interesting pricing strategy that I have seen lenders use quite successfully is what I like to call “Fire-Sale Pricing”. That is, they price the home much lower than it should be even for a foreclosure and simply let the bidding begin. They get 5 or 6 offers within the first week and sell to the highest bidder. Sometimes they actually get more than they would just putting it up at a normal price. Plus they get the added bonus of selling the house quickly instead of watching it languish on the market.
Condition
Many times a foreclosed home is a lower price, but more often than not, its condition reflects that price. So if you’re looking to buy a foreclosure it would be wise to have some cash set aside for repairs and/or cosmetic fix-up. People who are in a financial position to be foreclosed on don’t typically have the money for repairs or home maintenance and quite frequently foreclosures have deferred maintenance issues.
At times the maintenance issues can go further into very serious problems, such as extensive mold or other unsafe conditions, so if you’re buying a foreclosure make sure that you get thorough inspections and that you notify your inspector that the home is a foreclosure.
Disclosures
One of the main drawbacks to purchasing a foreclosed home is the lack of disclosure about the property. The lender is still required to disclose what they know, but the problem is that they don’t usually know much of anything. In Arizona, we have a Seller’s Property Disclosure Statement (SPDS) which contains all kinds of information from the kind of pipes that are in the home to whether or not it has been treated for termites and who provides electrical service to the home. If you’re buying a foreclosure, you are foregoing all that information and will have to do more research yourself. That is also another reason to make sure that your inspections are thorough.
Take it or Leave It
When purchasing a foreclosure it is wise to assume that you will be buying the house As-Is. In fact, most of the foreclosed homes I’ve seen advertised in Tucson require that the Buyer sign an As-Is Addendum. The bank does as much repair and clean-up as they are willing to do prior to putting the home on the market and they generally take the position that they are offering the home at a discounted price to compensate for the remaining fix-up that must be completed to make the home livable.
Once the buyer has completed their inspections, they get to make the decision to go forward with the home purchase or cancel the transaction. They still have the right to ask for repairs, but their request will usually be denied. There is an exception to this ‘rule’ however. If there are repairs required to make the house saleable, the lender will usually complete them. If they did not, then the buyer would walk and they would have to make the repairs anyway in order to sell the house to the next guy.
I attended an inspection with a buyer recently and we ended up in just such a scenario. The water main to the house was leaking and water could not get to the home. We could not even complete our inspection without running water. Instead of the bank telling my clients that they will have to shoulder that expense and risk there being other leaks in the plumbing, they have opted to repair the pipe and allow us to complete our inspections.
Conclusion
Buying a home that has been foreclosed can be a very good deal, particularly if you have money to invest in fixing it up. You generally end up with more in equity than the amount you spend fixing the property, particularly when you do some of the work yourself. Buying a foreclosure is much faster than a short sale because it usually only takes 2 business days for the bank to respond to your offer. This is much better than 2 months!!!
Even if you’re a first time homebuyer with no money for cosmetic or other repairs, a foreclosure may be within your reach with creative financing that allows you to finance the repairs based on the repaired value of the home. It’s a buyer’s market and there are plenty of options for everyone who is ready to buy!
Attention Sellers!!
If you are going to lose your house to foreclosure, you may want to consider a short sale. It is not an easy decision, and the process is also challenging. But if you look at it as a business decision it may make more sense.
A short sale is a sale of real estate in which the proceeds from the sale fall short of the balance owed on a loan secured by the property sold.
In a short sale, the bank or mortgage lender agrees to discount a loan balance due to an economic or financial hardship on the part of the mortgagor. This negotiation is done through your agent with the bank’s loss mitigation or workout department.
The process in a short sale is quite different than a standard sale between buyer and seller. It can often be a frustrating experience for everyone involved. But banks are doing a better job recently of trying to streamline the transactions.
Here is typically what the bank will expect from the seller and listing agent to get the ball rolling on a short sale:
- Letter of Authorization: The bank will require a letter from the seller to let the listing agent speak on their behalf and represent them in negotiations. They will also want to see the listing agreement between agent and seller.
- Hardship Letter: The seller will have to explain why they are requesting the short sale. Job loss, divorce, or any other factors that express the reasons for you not being able to make the payments.
- Purchase Agreement: They want to see an executed contract between buyer and seller contingent upon acceptance of the short sale. Like any seller, they will want to see the buyer is qualified with fico scores, lenders approval, and proof of funds of down payment.
- Estimated HUD Net Sheet: The bank will need to know what the bottom line is after expenses from the sale. Usually the escrow company being used will be glad to assist in providing this information.
- Sellers Financial Information: It will be like when you originally qualified for the loan to purchase the home. They will want to see bank statements, investments, paycheck stubs, etc…to help determine your worth for a short sale.
After everything has been submitted to the bank, the fun begins! Patience is truly needed for the next 3-4 weeks as your offer sits until the file has been assigned to a negotiator. After (and if) the bank approves the short sale, escrow shall open. All time frames that are agreed upon in the purchase agreement begin. Now, you just have to hope the buyer hasn’t lost interest and can qualify for the loan!
As a homeowner, you need to look out for your and your family’s best interest. Short sales are thought to negatively affect your credit for 3-5 years LESS than foreclosure. If it looks like your home will be lost to the bank or you are having trouble making mortgage payments doing a short sale may be your best option. View my section on Short Sales to learn more.
IMPORTANT: Make sure the bank agrees to extinguish the remaining balance and it is clearly indicated on the acceptance of the offer. Without that stipulation from the bank, they would still be able to go after the sellers for the amount owed.