Short Sales and Foreclosures: Get Your Dream Home for Cheap?
For most people when starting their search, they come across a property with pictures that make them fall in love and immediately shoot the listing over to their agent saying “This is the one! I just know it!” – only to be shot down by their agent who brings them back to reality about what kind of transaction they would be getting themselves into.
“It’s a short sale, I don’t believe this home is right for what you’re trying to accomplish,” the agent responds. Or “sorry, this property is only accepting cash offers, we’ll have to look at something else.”
So what’s the point of these homes being for sale if it takes an arm, leg, and your first born to get the transaction done? The answer is simple, a cheaper price.
Yes, you can find your dream home at a discount, however, at what cost to your time and energy are you willing to sacrifice to go after these types of properties? I’m not saying every Short Sale or Foreclosure will be the bane of your existence, but there are more things that come into play during your transaction. Like with everything in life, with opportunity, comes difficulty!
Short Sales
A short sale is the sale of a property that is underwater, meaning, the homeowner owes more than what the property is currently worth. Could you imagine paying a monthly mortgage based on a $350k purchase price when your property is now only worth $250k?
That’s like paying a $400 car payment for a hoopty.
In many cases, short sale properties are generally in better shape than foreclosures. That’s usually because someone is still living there. I can’t tell you how many times buyers have sent me a home that’s worth $350k, but instead is listed for, $250k. My buyers immediately salivate over the idea of getting their dream home for $100k less, but not so fast! Before you choose to pursue it, there are some things you’ll need to understand about short sales.
Short sales are a relatively newer concept than foreclosures. Foreclosures have been around since the beginning of individuals not being able to keep up with their mortgage payments. Short sales started to emerge after the financial collapse of 2008.
Before 2008, the bank used to accept their fate that the mortgage holder will no longer be able to pay the mortgage and the banks would attempt to sell the property in auction, usually at a huge discount. If the banks allowed this to happen more often than not in 2008, the economy would have been in a much deeper hole.
The banks were able to develop the concept of a short sale in an attempt to recoup as much money as possible from their failing investment due to the defaulting borrower.
Here’s the catch: The owner must have found themselves in some form of financial hardship in order for the bank to accept a short sale opportunity. An individual can’t be making $100k a year and ask for a short sale just because their home is not worth the amount they’re currently paying – they accepted that risk by taking on the mortgage to begin with. However, if that individual had loss a job, suffered from a new medical condition, had to move because of relocation, got a divorce, saw an unexpected increase in debt (medical bills), etc., then that’s more of a reason to request a short sale. The owner must be able to prove that the monthly mortgage payments are too much for their current financial situation.
That alone won’t convince the bank to conduct a short sale. First, they may still attempt to do a loan modification to make your monthly payments a little cheaper. It’s only when the bank can see that the loan modification still won’t solve the problem that they will look at the short sale option.
That brings us back to my clients seeing the home of their dreams for $100k less. In my experience, out of 10 homes that are short sales, only 1 or 2 of them may actually be an approved short sale at the time of the listing. Since many of them are not approved by the bank as of yet, the price you’re seeing still has to be accepted by the bank. The main reason why these homes are priced so cheaply is to be able to produce an offer as quickly as possible. So in this case, sure, you may be able to submit an offer for the listing price of say $250k, but the bank will still do their own appraisal and may determine that they are accepting nothing less than $325k. Just like that, your hopes of getting your dream home $100k cheaper is now diminished to just a $25k discount. Still a win right?
There is one other element that gives short sale transactions a bad rep…..time.
Short sale transactions are notorious for taking a significant amount of time to close. I’ve heard of transactions easily lasting nearly two years before getting to the closing table. Is this always the case, no, but just be prepared for a longer than usual closing process more often than not. A normal transaction can take up to 45 days while a short sale can take a few months, or worst, years. Like I mentioned, every short sale won’t take an eternity to close, but the ratio isn’t in your favor either. It will be important to go after homes that are short sales in which the price has been APPROVED already; it’s indicative the process will go much quicker. If the price is not approved yet, it will be up to the agent to gain information from the sell side about where they are in the process.
You don’t have to avoid short sales, just understand them if you’re looking for your primary residence.
Foreclosures
Foreclosures, in my opinion, are actually easier to go after when purchasing. A home that has been foreclosed on has already been bought back by the bank because the property was not able to be sold at the sheriff sale. Therefore, when you see a foreclosure listing, the bank has already taken the loss so the price you see doesn’t have to be further approved – the bank is already willing to sell.
Here’s what to keep in mind when dealing with foreclosures:
After a property is re-listed as a foreclosure, there’s no telling how long the property has been sitting vacant. Aside from a routine landscaping and a winterization (draining of all the plumbing pipes to avoid freezing during the winter months as the home is vacant), there isn’t anybody who is maintaining the mechanics or cosmetics of the home, leaving them to degrade from exposure to the elements and time.
Other times, you can find a foreclosure, like a recent transaction of mine, in which the home is in pristine condition. These are excellent opportunities to go after and you don’t have to worry about a time issue; the timeline is similar to that of a regular transaction between buyer and seller.
The condition of the foreclosed home can directly correlate with the type of transaction you’re getting into. Some foreclosed properties might only require cash or a renovation loan in order to go after them. Some buyers don’t mind the work, others would rather have something they could move right into to. It will be important to have the conversation with your agent before you get your house hunting started so you can focus on your objective.
Foreclosures are not what they used to be: the best way to get homes at an extreme discount.
The banks have caught on and they understand we are still currently in a seller’s market and therefore they aren’t deviating much from the original list price. Don’t be surprised if you were to find a foreclosed home that was listed at a price very similar to the surrounding owner-occupied homes, minus any renovation costs. The more distressed the home is, the cheaper the price tag will be, easy to understand, yet harder to transact. Nonetheless, you’re dealing directly with the bank at a listing price they are comfortable with selling. There isn’t another price approval that needs to occur, unlike short sales.
All that to say…..
This article is not to deter you from going after these types of homes, it’s just to inform you of what you’ll need to know in order to stay two steps ahead of your process. There’s nothing worse than having your emotions tied into a specific home only for you to have your heart broken and empty handed in the end. If you do your research and consult with your agent, you’ll have a much better shopping experience. Don’t make it harder than it already is, and be clear on your home buying goals and get to work!