Is Buying A Foreclosure or Short Sale Worth It?
Home buyers are finding that the battered real-estate market offers just as many opportunities for headaches as for bargains.
Lots of home buyers are learning about patience these days. In August, nearly a third of overall housing sales were distress sales, according to the National Association of Realtors, up from 18% in March 2008, when it began tracking such sales. The figure includes both foreclosures and so-called short sales, in which the lender agrees to accept less than the full balance of a mortgage in order to unload the property.
Buying distressed properties isn't easy. Bidding wars are erupting for the lowest-priced foreclosures. Experienced investors with cash are elbowing aside first-time buyers who need mortgages. And banks generally sell property "as is," without the defect disclosures required of other owners. Short-sale buyers, for their part, often face delays of weeks or months as they wait to hear back from lenders—and from the institutional investors who bought securities based on the mortgages.
Distressed-property buyers also often have to cope with the fallout from the ruined lives of previous owners, such as vandalized properties and liens from second mortgages, taxes, unpaid water bills, homeowner-association dues and court judgments. For all that, final sale prices often aren't significantly lower than average in some areas, because the foreclosure glut has also driven down prices for sellers who aren't in default.
Buyers have to be thoroughly prepared by securing financing in advance and making sure they have a strong stomach, experts say. They should seek out agents with extensive experience and training in distressed property because the transactions are often complicated and time-consuming. Pushing and prodding bank officials, loan servicers and others is a big part of the job.
Short sales like the Shearns' are particularly complicated. Lenders require detailed information about both buyers' and sellers' finances, and homeowners generally have to prove hardship. The entire package of documents is scrutinized not just by lenders but by the mortgage investors. Second- and third-lien holders frequently hold up transactions demanding a larger share of the settlement. The average transaction takes four to six months or more, agents say.
Buying a foreclosure is usually speedier than a short sale because lenders already possess the property. But there are other drawbacks. State laws vary considerably with respect to legal procedures surrounding foreclosures. Many states require judicial proceedings for foreclosing on a home that can take more than 12 months, a period during which the home may be vacant or occupied by tenants or squatters. Homes may have appliances, pipes and even electrical wiring ripped out.
Buyers of bank-owned properties are usually stuck with whatever hidden problems they discover, including construction defects, and they seldom get additional price concessions. For these reasons, it's especially important for distressed-property buyers to have a thorough inspection by a qualified home inspector or inspection engineer, as well as a thorough title search and title insurance.
Buyers must be prepared and ready to move on a dime. If they're paying cash, they have to certify they have the funds available. Those who need financing should obtain pre-approval from a lender before even looking at properties. Successful foreclosure buyers often bid significantly above the asking price.
Although there are alot of hassles with buying distressed property, there is also alot of potential to obtain some great bargains. Buying distressed property is not for everyone, only for those who have the patience, the funds for repairs and the knowledge of the process should attempt going after those bargains.