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Tips For Buying A Distressed Property

Laura is SFR Certified by National Association of Realtors



Short Sale

A Short Sale is a negotiated property sales transaction in which the proceeds from the sale are insufficient to satisfy the existing liens/ mortgages on the property.

Typically, the homeowner is delinquent in their mortgage payments and the home is worth less than the existing mortgage(s). If the homeowner is able to find a buyer and get the lender’s approval on the transaction, it means the lender will accept a portion of the total loan payoff amount. The lender is hence left short of the loan's balance.  It can be in the lender's best interest to proceed with a Short Sale and accept less than what they are owed if it appears foreclosure is eminent, however it can take months for the lender to reach this decision.  For the lender, a Short Sale can limit ownership expenses, bank expenses, damage to the property, evictions, costs of resale and cut losses, and thus potentially the quickest way to mitigate loss and hedge against declining value

Short Sales are sometimes great bargains for buyers, but knowing that, buying a short sale property can take months, and the buyer has little to no control of this. Buyers can inspect the property but sellers/lenders won’t do any repairs and will almost certainly not contribute to the buyers’ costs.

A short sale is a better option for a homeowner than a deed-in-lieu or foreclosure, as there is potentially less credit damage, is not a public record like a foreclosure and doesn't remain on a credit record as long.  However, before proceeding with a short sale, a homeowner should have exhausted loan modification and refinance options and also evaluate potential tax implications and future financial obligations.

For a Short Sale property, there will be more paperwork for the buyer, in addition to the typical escrow paperwork, that is required by the seller's lender.  There is also a significant amount of paperwork and financial documentation that the homeowner will need to provide to the bank.  

The ideal buyer candidate for short sales are those who:
  • Have few to no contingencies
  • Do not have to sell their current home before purchase a short sale
  • Are patient and have the time to wait out the months of delay
  • Have resources to repair and rehab the property, if needed

Reasons that a short sale can fail include:

  • Incomplete Short Sale package
  • Package not submitted properly
  • Offer to low
  • Buyer not strong enough
  • Lender took too long and buyer backed out
  • Inaccurate BPOs (Broker Price Opinion)
  • Doesn't meet lender criteria
  • Investor will not approve
  • Junior lien holder says "no"

 

REO (Bank Owned)

A Real Estate Owned (REO) or Bank Owned property is just that, a property the bank owns that they once issued the mortgage on.  The property is transferred to the lender, who is in turn motivated to recover the current balance of the asset, or property, and minimize future loss.

When refinancing, a loan modification or a short sale doesn't work, the distressed homeowner is left with only one option, foreclosure, which results in a forced sale of the property and eviction of the homeowner.

Usually, after three to six months of a homeowner missing payments, the lender orders a trustee to record a Notice of Default (NOD) at the County Recorder’s Office. This puts the homeowner/ borrower on notice that they are facing foreclosure and starts a reinstatement period that typically runs until five days before the home is auctioned off. If the default isn't corrected, a foreclosure sale date is established. The homeowner will receive a Notice of Sale, and this notice will also be posted on the property, recorded with the county and published in local newspapers. The foreclosure Trustee Sale typically occurs on the steps of the county courthouse in which the property is located. At the Trustee Sale, the property is auctioned to the highest bidder, who must pay in cash and will then receive the trustee’s deed to the property. If the opening bid is not met, the property is deemed a REO. This typically occurs because many of the properties up for sale at foreclosure auctions are worth less than the total amount owed to the bank or lender.

At this point the bank is down more than just the mortgage that they issued on the properpty as they have taken a loss through the homeowner's delinquent payments that caused the foreclosure and the foreclosure process costs money.

For a homebuyer, REO properties carry all the downside of short sales, except that the buyer is more likely to get a response to their offer within days or weeks, versus months. However, the bank is unlikely to take much below list price, as usually these properties are listed pretty close to the bottom of what the bank will accept.

The chances of a buyer's offer being accepted are greater when:
  • Offer is based upon market value
  • Offer includes a pre-approval for financing
  • Quick closing date
  • "As-is" property condition
  • Few to no contingencies 

A counteroffer from the lender is handled through an addendum and it is imperative that the buyer understands fully the contents of the addendum and possibly seeks legal counsel.  Frequent addendum issues include:

  • Altering the inspection period
  • Modifying the seller warranties
  • Changing the financing provisions
  • Imposing monetary penalties for buyer's failure to close
  • Limiting the seller's liability and disclosures