We hold the Certified Short Sale Professional Designation !
Buying Distressed Properties
While the national housing market in general has taken a stiff and direct downturn over the past two plus years – some areas of the country have suffered more than others.
Florida Hit Hard
Florida has been hit particularly hard. While Central Florida has actually fared better than its neighbors to the south in the Miami and Port Charlotte areas – the prices in Central Florida have dropped anywhere from 25 to 65% over the past two years – including non-distressed and distressed sales.
Many Contributing Factors to the Downturn
There have been many factors which contributed to the real estate situation we now face. Among them: investor flight from equities as the stock market sank after the 9/11 attacks, relaxed and unrealistic loan guidelines, overbuilding and overdevelopment, and overall exuberance and the expectation of real estate price stability on an upward trend. However, the one factor today that has set the current trend for prices moving downward is the resetting of adjustable rate mortgages.
These loans reset to new and much higher interest rates – ones beyond the means of the borrowers. This has created a wave of unprecedented defaults – a tidal wave for which the lenders were, and are still today, unprepared to handle. These properties are a large part of the group known as distressed properties. Within this group, the adjustable rate defaults has swelled the number of properties for sale and tipped the balance of supply and demand to the supply side.
Distressed Properties Bring Big Opportunities
But – where there is a distressed property – there is often a good opportunity to get a great deal. Depending upon the type (condo, single family), condition and location of the property, some distressed properties these days can sell for as much as 80% less than what they were selling for two years ago. Today, however, it is more typical for them to be discounted by 20 to 50% from previous sales prices.
Short Sales, Pre Foreclosures, Foreclosures Bank-Owned and REOs –
What is the Difference?
Distressed properties fall into several categories and unfortunately the terms tend to be used interchangeably. They include: Short Sales, Pre-Foreclosures, Foreclosures, Bank-Owned and REOs.
A Short Sale is one where the lender has agreed to take less than what the borrower owes in order to release the mortgage. The term “Short” refers to the taking less than owed. As you will understand later – it does not accurately reflect the length of time it takes to complete the transaction. The bank may or may not seek the difference from the borrower later. Generally this does not affect or concern a buyer.
A Pre-Foreclosure is simply a marketing term for a listing whereby the borrower has been notified by the lender that they are in default and the lender has issued some sort of inquiry or demand. Generally speaking – the property is in the very early stages of foreclosure. It doesn’t necessarily mean the lender will actually foreclose. Usually it means the seller is trying to be more proactive and just sell the property before it forecloses. A Pre-Foreclosure may or may not be a Short Sale.
Foreclosures are when the lender, through the legal process, takes the property back from the borrower due to a default by the borrower.
Bank-Owned is just as it reads. A bank has gone through the foreclosure process and now is the legal owner of the property.
REO (or REOs) is a banking / lender acronym for “Real Estate Owned”. This is the same as Bank-Owned. It means the lender now is the legal owner of the property.
The Short Sale Process Can Be Complicated
A Short Sale is anything but short. Generally it takes anywhere from 60 days to 10 months or more depending upon what else may be involved. It is the most complicated and time consuming of all the distressed property sales and as such, about 65% of them fail to close. For these reasons, it is not uncommon for agents to shy away from getting involved with Short Sales – on either side of the transaction. On the other hand – for a buyer, particularly investors, who don’t have to move in quickly (or at all) some rather sweetheart deals can be had.
Foreclosures, Bank-Owned and REOs
In these situations, the lender has already made the unpleasant and unwanted leap of taking back the property. Usually, the borrower has already vacated or is in the process of vacating. While these can take longer than a normal sale and can have some rather odd requirements, they generally are not as complicated or time consuming as a Short Sale.
Some Pitfalls of Buying Distressed Properties
Short Sales – Who’s on First?
With many properties there are first mortgages and second mortgages. With a few exceptions, the first mortgage lender is in the “superior” or “senior” position. In these economic times, a Short Sale situation usually has a listing price less than the first mortgage – leaving nothing for the second mortgage at all. However, the second mortgage lender does have rights and can prevent a Short Sale even if the first mortgage lender has agreed to a Short Sale offer. Thus, most, if not all, second mortgage holders will hold up any Short Sale for at least some sort of payout – adding both time and cost to the process.
Who’s In Charge?
In this situation, you are still dealing with the owner of the property – but they are no longer “in charge”. Because they are trying to get the lender to accept less than what is owed – they must defer to the lender. Most times the lender hasn’t formally agreed to accept a Short Sale – and as such, they typically take a “wait and see what offers come” approach – which lengthens the process.
The Package Must Be Delivered
The first part of the process is actually one of the most critical – even more so than your offer. Before a Short Sale can be considered, the seller has to submit to the lender a package of information documenting a hardship situation. It is lengthy and involved and many listing agents simply submit incomplete, inaccurate or incorrect packages. Since many lenders are literally receiving hundreds of these packages – the ones incomplete, inaccurate or incorrect are put “at the bottom of the pile”. If your offer is made on one of these properties, it will not be processed until the seller’s package is made complete and accurate – even if your offer is at whatever the asking price is.
Bait & Switch Pricing?
This brings us to the asking or list price on a Short Sale. Many times the “price” at which the Short Sale property is listed is far below what a lender may accept. This is done to “jump start” the process with the lender because some lenders won’t respond at all regarding a Short Sale until they have both the complete package and there is an offer made – any offer.
Multiple Offers Can Continue…..
Many lenders will want to continue to accept offers while they “decide” what they will take. This can leave you and your offer hanging without word or direction for weeks or even months and in the end you may actually lose out to a higher offer – one that may have come in long after yours did. An improperly written offer can also bind you during this period with no out.
To Fix or Not to Fix?
Many times owners who know they are going to lose the house stop doing maintenance and let things go. Thus, the deferred maintenance and repair bill may be higher with these properties.
Some Short Sale Pitfalls Summary
* Seller hasn’t submitted its hardship package or it’s incomplete
* First and Second Mortgage Lenders can add complication and costs
* Price is just a “teaser” listing to get the process “jump started”
* Can be locked into a long and confusing waiting period
* May have to compete with multiple offers while waiting
* Repairs and deferred maintenance can be more costly
* Agents without Short Sale training can make matters worse
Foreclosures, REOs, and Bank Owned
In this situation you are dealing with the “owner” and the decision-maker, but they may be far removed from the property and the situation. The listing agent may not even be a local agent. In addition, some require offers be made electronically on their websites and request personal information from the buyer.
Negotiating is a part of any sale process and it involves decisions by each party as to what is acceptable and what is not. Usually any decision by a company has to go through channels and a hierarchy. Thus, with these types of sales, generally there is little typical give and take negotiating in a timely fashion.
One of the largest pitfalls with foreclosed properties comes with disclosures. Usually with a normal sale – even a Short Sale - the seller provides certain disclosures and is required to disclose known facts that would materially affect the property’s value.
Bank-Owned properties don’t come with disclosures of any kind and the lender-now-owner will disavow all knowledge of the property’s history. This isn’t unreasonable since the lender has never occupied the property and may or may not be aware of any trouble or defects. But the bottom line is you, as a buyer, will not have the benefit of any disclosures. An unknown defect or problem can outweigh any savings.
Everything But The Kitchen Sink Sometimes
Many bank owned properties are in need of significant repair and/or replacement. Missing cabinets, appliances and light fixtures are quite common – even door hardware goes missing in instances. Lenders tend to be reluctant to put any more money into a property they own. They see it as another capital expenditure for which they will see no return. Buyers must be able to accurately estimate the cost of repairs and replacements – including the time necessary to complete them. Investors particularly need to calculate in the timeframes correctly to accurately and completely estimate the costs in terms of rental income lost during the repair and replacement process. In addition, if the repairs and replacements are too significant compared to the price of the property – the property may not qualify for financing.
Some Bank-Owned Pitfalls Summary
*Slow decision making with hierarchies
* Reduced flexibility with corporate structures involved
* NO Disclosures increases risk of uncovered problems and defects
* Property can be in need of many repairs or replacements
* May not qualify for financing
Lenders are in the business of lending – not owning. The lender’s ability to loan money is affected in several ways when they end up owning the property. They have to put away additional capital reserves, incur additional scrutiny by the regulatory agencies, and simply have funds tied up in a “non-performing” asset.
Cash Is Still King
Thus, lenders do tend to be motivated to move the property the own in order to turn it into usable cash. But they are still going to pay attention to the neighborhood final selling prices and trends when selling. Thus, a bank or lender may price a property below the current market which reflects its motivated inclination – but may not go much lower to sell the property if it is already significantly below the market.
How Low Will They Go?
Many investors and would-be buyers make the mistake of assuming that because the distressed property is listed at a certain price that they will get it for even less. With only that, the buyer offers significantly less than the list price “out of principle” and they end up losing what was really an excellent buy at the already reduced list price. The key is to truly know the local market where the property is located.
Inspect... Inspect…...and Inspect
While some Short Sales might have repairs done as part of the deal, nearly all of these properties are sold AS-IS. While a typical seller would still have the responsibility of disclosing the material facts affecting the value – as stated earlier – lenders will always disclaim all knowledge and liability. While many of these properties are fine - a mold issue from a leaking roof or lot line encroachment issue and the like, can wipe out any savings and then some. Foregoing inspections, reports and surveys in the name of cost reduction is myopic and risky.
Get Pre-Qualified / Pre Approved
Where the buyer is financing the purchase, nearly every Short Sale, and all bank owned / REO listings will require the buyer to have been pre-qualified and in many cases a full loan approval. Either will have to be in writing from the buyer’s lending institution and be submitted as part of the offer. Buyers should get this done prior to even going out to look. Having an approval letter ready makes it possible to take advantage and immediately make an offer when that right opportunity comes along.
We hold the Certified Short Sale Professional Designation !
As you now know, the process of buying distressed properties presents some great opportunities – but brings with them additional and real risk considerations. To maximize your returns – work with a professional who has been trained to deal with the nuances and risks involved with today’s distressed property sales.
Contact us today !
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