Buying Distressed Properties- Foreclosures and Short Sales

A distressed property doesn’t mean they have holes in the knees like the jeans, it means they are owned by a bank or will be very soon.

We have had quite a few people ask us about buying a foreclosure or short sale. They like the idea of putting in a little bit of work and having some quick equity or maybe flipping the house for a profit. Most of us look to get the most house possible for the least money possible. I completely understand this idea. Nothing puts in prospective why someone may want to buy a large house via short sale or foreclosure better than what a client recently told me about making lunches in his home. “When you have seven kids, as soon as you open one loaf of bread it’s gone and its time to open another. Don’t even get me started on milk.” But if it was easy to buy a distressed property, fix it up, and sell it everyone would be doing it. Here are some factors that often sway buyers away from these properties after all.

Its not as easy as they make it look on TV. I think we all instinctively know that, but lets talk about how the process goes after you find one. Most of us are not in the position to pay cash for a house. If you use financing, things like rate increases are more important when the whole process may take several months.

1. Submit offer. If the listing agent has a contact at the Bank that owns the property, it goes more smoothly. Offers are generally put into a system that isn’t closely monitored. It could take up to 2 days for the offer to be submitted. Once submitted it could be a few days to a week before we hear back. Unlike the rest of us in real estate, banks don’t work on weekends or Holidays and often leave at 5. All negotiations are done verbally, and the property is not marked as “Contingent” until all contracts are fully executed. This means it is more likely to enter into a multiple offer situation. Even if there are not multiple offers, the bank may ask for the “Highest and Best” offer. Rather than countering the original offer, they make their determination of acceptance based on the your best offer versus the parameters the bank has set for the property.
2. Concessions. The Bank may consider a percentage towards closing costs if it is not excessive. Banks are often not local. Meaning costs customarily paid by the seller may be refused by the bank, this is sometimes disclosed up-front but not always. Surprise fees often find their way into the deal near the end and are typically non-negotiable. Properties are almost always bought “As is”. If repairs are needed for financing, they may be considered if the costs are included in the original agreed upon price.
3. Binder Deposit or Earnest Money. The minimum binder is $1,000. Cash buyers may be required to put 10% down. The binder is held by a closing agent, who is typically not local. This is a good-faith deposit which will be credited toward the purchase price at closing.
4. Inspections. Our contracts have a 10 day inspection period, the bank may put in an addendum shortening this period. The bank also may have the power and water turned off. Many times the power and water need to be on for proper inspections. We typically do not suggest setting it up in your name, but it may be necessary and the bank may not be willing to do it themselves. It can be time consuming and eat into the already abbreviated inspection period.
5. Closing. The closing often happens locally if done by a “mobile notary”. This costs between $150-$300 and they will not explain the forms you need to sign. If you want to have a review done by a closing Attorney, they will do the title work and explain the forms but it can cost $675 or more.
6. Keys. One of the best parts of the closing in receiving the keys to your new home. Banks often use master keys, it is impossible to know how many people have access to those keys. The Bank often charges a fee to re-key the house. It is always advisable to re-key whether you have them do it or do it yourself. You probably won’t get garage door openers, and if there is a community mailbox bank, that key often is not provided either.
7. Possession. Because the bank is often out of town you will likely not be given possession of the property at closing, the forms need to be mailed away to them. It could take 24-48 hours after closing to be given possession. Remember, that doesn’t include weekend days. We typically try to close early in the week to avoid having to wait to move in until Tuesday of the next week.

The process is generally more lengthy with distressed properties. We do our best to prepare you and tell you what to expect. Whereas homes are typically sentimental things, to the bank it is just an asset to be liquidated as favorably for them as possible. They don’t mind dragging it out a bit, they don’t need to sell it to move somewhere else. Whoever lived in the property before you may have been in a position where they could not keep up with repairs or chose not to. The property often has sat a while unoccupied and may not have been in fantastic shape while it was occupied. On the other hand I have seen foreclosures that were pristine, so it is not a rule.

If you are thinking about buying a distressed property give us a call. We are more than willing to sit down and discuss options and the process in more detail. It can be a great investment if done right! Its not easy, but we will work with you to make the transaction as smooth as possible.