A major consequence of the recent real estate boom and bust has been the flood of foreclosures and short sales that have hit the market in recent years. While it can’t be denied that the circumstances that face homeowners in these situations are upsetting, it also creates a tremendous opportunity for prospective buyers. But before you decide to dive into searching for foreclosures and short sales let’s take a few minutes to go over exactly what they are as well as the pros and cons of buying them.
Real estate owned (REO) by banks are more commonly referred to as foreclosures. Banks acquire these homes because the owner was unable to satisfy the loan that was held against the property. When a loan falls far enough behind and it cannot be paid off the bank begins the foreclosure process to take back their collateral. Due to much of the frivolous lending that took place during the boom, more and more properties are reverting control to the bank as owners cannot afford the payments or simply walk away because the home’s value has dropped so significantly.
Even though it’s disheartening to know someone had to give up their home there is good news as well. Foreclosure properties create a tremendous opportunity for buyers to get a good deal on their new home. Banks are in the business of lending money, not owning real estate, so they want to sell the properties they’re holding as soon as possible. Also, in most cases, banks do not want to spend any money fixing up a home so a buyer that’s not afraid to do some work can negotiate an even better deal. In fact, there are even government backed loans that will assist with the renovation costs without the buyer having to use cash from their own pocket. Talk about a win-win!
Of course, as with any opportunity there are risks involved as well. As we mentioned, in most cases banks will not do any work to a property they’ve acquired. The buyer has the assume to home in “as-is” condition, though a home inspection is still allowed and strongly suggested. Because banks are unwilling to make any fixes this will limit some buyers who are using specific loans, usually government backed, from being able to purchase them. Also, because they can be great deals, foreclosures many times receive multiple offers in our current market. This means that almost every foreclosure you make an offer on you will be in competition.
So in a nutshell, foreclosures can be a source of good deals to prospective buyers but they are not for the faint of heart or those that are unwilling to put in some elbow grease.
Short sales, also known as pre-foreclosures, are another good source for a buyer to find a deal. A short sale occurs when a homeowner owes more for their home than what it’s currently worth. Usually owners are unable to afford the home any longer so they try to get the bank to accept a lower payoff in order to avoid foreclosure. Unlike foreclosures where the bank owns the property, in the case of short sales it is still controlled by the homeowner.
As always, there are also downsides to going after short sales. Even though the property is still owned by the individual owner you must negotiate directly with the bank(s) that hold the loan(s). Similar to foreclosures, most banks are unwilling to do any repairs during a short sale. The short sale process in itself can range anywhere from 2-6 months so a buyer needs to be very patient. Probably the biggest pitfall about short sales is that only about 50% are being approved and making it to closing in our current market.
In conclusion, both foreclosures and short sales present a tremendous opportunity to buyers in today’s market. If you are going to try to purchase a home in one of these categories, it's just important to go into it with your eyes open. Our agents have lots of experience dealing with these transactions and are able to give you the knowledge and insight necessary for you to make an informed decision. Don't make a mistake and wish you had done things differently. Let's do it right the first time together.