Short sale and foreclosure bargains?

Short sale homes and homes in foreclosure may sell at 10% to 20% below market value but that savings comes at a price some buyers may not be prepared to pay. Sure, it’s still a buyer’s market and I get calls all the time from people looking to take advantage of the bargains short sales and foreclosures seem to present. Here are a few of the costs you should examine before you decide to pursue purchasing one of these homes.

* Time & Uncertainty – because these transactions have to be approved by third parties, there is no telling how fast or slow the purchase process will take. Banks are simply overwhelmed with files for potential sales. They are not equipped with the staff or systems to handle their current load. (Not being a profit center for them, it seems unlikely that banks are working hard to increase their staff in these departments.) Even once your file gets looked at 30 or 60 or 100 days after being submitted, there’s no guarantee the bank will accept.
* Property Inspections – Usually, short sale and foreclosure homes are sold in AS-IS condition, meaning the sellers will not pay for any repairs prior to closing. More often, a property inspection is allowed as a contingency only, giving the buyer a legal “out”, perhaps with the option to re-negotiate the offer price but without the option of asking for repairs. Here’s what this means for buyers: First, if cash is scarce for the buyer, she may not have the funds to make the repairs right away, and who wants to move into a house with unfixed “issues”. Second, to stand any chance of negotiating on price (or possible repairs), the buyer has to do the inspection prior to getting bank approval. This presents the possibility that the buyer is out the $300 to $400 inspection fee if the deal doesn’t get approved.
* Appraisal fees – The same thing goes for the appraisal fee $400 to $500 that the buyer pays so that his loan can close. If, after the buyer’s appraisal has been ordered and completed, the bank refuses the deal, the buyer is out the $400 to $500 he spent on the appraisal.
* Property Condition – Even if these properties don’t have major home inspection issues, they are typically in poor condition, especially foreclosures. A buyer should expect to replace all flooring and repaint the house at a minimum. Kitchens and bathrooms tend to be gross, too, so expect to spend a good deal of time with a suds bucket and a sponge.
* Getting a mortgage – This has to do with condition problems, too. Part of an appraiser’s job is to make sure a property meets some minimum standards for safety, soundness, and security. Appraisers, especially on VA and FHA loans, will look for things like broken windows, missing siding, and even peeling paint. If a home has any of these problems, the appraiser will issue an appraisal of value “subject to”. The “subject to” is subject to problem items being addressed. Since banks typically will not approve money to be spent on a house prior to closing, this potentially puts the buyer in a very bad position of having to pay for repairs prior to taking ownership of the house. If you are a big time cash buyer house investor, you may be able to handle this level of risk, but it’s not for the typical home buyer looking to purchase a primary residence.

These are some of the biggest costs associated with purchasing a short sale or a foreclosure, but there are others. Yes, the bargains are out there, but they come at a price.
If you still feel like it’s worth pursuing a short sale or foreclosure there are ways to mitigate some of these costs. In my business, I belong to a group called the Home Rescue Institute. This is a group of like minded real estate attorneys, bank negotiators, credit counselors, bankruptcy attorneys, and of course real estate agents dedicated to helping struggling home owners no matter what their situation. As part of that group, I offer a short sale program for sellers that is designed in part to offset the above mentioned factors that make it so hard to sell short sales and foreclosures. This program can be used by buyer’s I represent, too, that is, as long as the seller agrees to have a law firm negotiate the sale on their behalf at no cost to them (no brainer). In practice, it still requires a lot of patience, but it does eliminate a lot of the uncertainty associated with the process. Additionally, if done correctly, there is a way to negotiate repairs from the banks.

I hope this blog has provided some good information. It’s probably nothing new to agents who’ve been doing a lot of business the last 18 to 24 months, but for potential buyers and sellers, I hope it’s been useful. Please feel free to contact me directly at brad@bradsmyagent.com or visit my website bradsmyagent.com.

I am licensed in the state of Virginia and serve Hampton Roads.
Brad Anderson, REALTOR
Keller Williams Realty
(757) 816-2968

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