Foreclosures/Bank Owned Properties/Short Sales

As the real estate market continues to slog along, I have buyer-clients who are inquiring about "deals". Many times they view foreclosures, bank owned properties and short sales as these "deals". As I've disclaimed in the past and as I will continue to do so, I am not an attorney and am not giving legal advice. That being said I want to bring to the forefront some questions we all need to ask in order to ensure we're making the right decision(s) when it comes to real estate.

First off, yes, there are some very good deals in the market right now for buyers. For sellers? Not so much. It's true that if someone has their home on the market right now they probably "need" to sell. This need can be as simple as they have had enough of a larger home and want to downsize or it could be as dire as they're so far behind on their payments that they are facing foreclosure (which is a legal process and not just an end result) or they're "upside down" on their home (it's not worth as much as is owed on the mortgage). For this post, I'm only going to address "distressed" sales: in other words I'm going to ignore the people who are not financially strained.

When I first start working with a client looking for a deal, I take them through the process in working with a bank being involved with the seller. I explain to them that the bank is not interested in moving quickly (that's a whole other conversation), is not interested in listening to all the reasons why our offer is the best one, is not interested in anything other than making sure it takes the track that they want it to take. In other words, I explain to my clients that they really are falling in love with the idea of a home such as this, but not necessarily the home they have found. In other words; fall in love with the deal but not the home. Because, in actuality, they will probably need to negotiate on more than one purchase due to the high possibility of the first home not actually going to closing. There are a multitude of problems that can arise and almost all of them are on the seller's side and their paperwork ensures that it's going to happen and there's nothing the buyer can do about it.

In a short sale situation, there are actually two parties that need to approve the terms of the deal (purchase price, closing date, inspections, possession, everything). The first is the seller who owns the home; the second is the mortgage holder (and there very well can be more than one mortgage holder if the seller has gotten an equity line of credit that has a balance on it and even possibly a third mortgage). This second "group" of people has a say in EVERYTHING that the deal entails because they need to either agree to accept less than the payoff amount on the mortgage(s) or approve the fact that the payoff will be short and the people who on it will pay them at a later date. Therefore the term "short sale". So as you as the buyer are negotiating with the seller(s), patience will be the key because they will take their time to review all terms of the contract. In addition, they will be looking for better offers as they are negotiating your offer (remember, everyone likes a deal so it's very likely that there's more than one offer being negotiated). Lastly, it's not always the highest price that the bank looks for but rather what is the best deal for them (quick closing, cash buyer, etc).

On a bank owned property, it's a little better because you as the buyer are only negotiating with one group: the bank. But the amount of frustrations and the amount of time that is needed (along with the amount of patience) is just as much. You see, in both a short sale and a bank owned property, there is someone - more like a massive committee of people - who has to "sign off" on the deal to admit that the bank will be taking a loss to sell that home. Please realize that no one wants to lose money and no one wants to be the person in the bank who agrees to lose money on the deal. Yes, they know that they'll eventually have to do it; but no one wants to actually do it. And fundamentally, that's why those deals take SO LONG to come together.

Lastly, and this is just as important as the financial side of things, is that when you purchase that home, you are typically taking a much bigger risk of the condition of the home. When a person knows they will no longer be living in the home, what are the odds that they're maintaining that home? What are the chances that they've maintained the home for the past year or two? Changed the furnace filters? Painted the exterior to ensure that there's no wood rot? Taken care of the septic system to ensure that it isn't overflowing? Taken care of any small leaks that are minor to start but always turn major? The odds are that they've spent no time or money to do that. And the bank owned properties? What are the odds that a bank in California has any idea of the condition of a home in Columbus, Ohio? None. So when you're looking to purchase those homes you need to realize that you're really in a position of buying a home in a condition known as "where is, as is". In other words: the seller takes NO responsibility for the condition of the home and YOU ARE SIGNING A CONTRACT RELEASING THE BANK FROM ANY/ALL RESPONSIBILITY FOR THE CONDITION OF THE HOME.

So what do you, as a buyer, do? Well, you need to weigh your options very carefully. Is the home really a great deal? If you have the ability of purchasing the home for below market; when you bring it back to market condition have you just spent your savings? If you are hiring a contractor such as me to come in and do all the things that need to be done, is it still such a good deal? If you decide to remodel it to a nicer level than what is in the community, it's great and you'll love it but you no longer have the deal. What type of living conditions are you having your family live in until the home is brought up to snuff? I have a client that is looking at VERY distressed properties and most of them have mold. They have three small children. They cannot afford to purchase the home and stay where they are until the purchased home is fixed. I keep explaining to them that three small children and black mold are not a good combination. After the third conversation I think they are starting to get it.

In real estate, as is true many times in life, not all great deals are as great as they originally seemed. Do your homework, work with someone who KNOWS what they're doing (not just assumes they know what they're doing), make sure they're looking out for your best interest and not just looking for their next commission. The barometer I give my clients is fairly strict: if I do not feel that I want the listing in the future then I tell them that I typically don't want to help them with the current purchase. I'm different than many real estate agents because I have the experience in both real estate and construction so I know what it takes. And my clients appreciate that expertise when it comes to "great deals". Know your subject matter and know your clients well enough to be able to speak with them on a level of honesty that is best for them.