For Buyer’s
Buying a Foreclosure or Short Sale Home
Here are pros & cons of buying a foreclosure, tips on how to find foreclosures. buy homes prior to the filing of a Notice of Default and how to do a short sale (when lenders discount existing loan payoffs).
Buying a Foreclosure
Banks own real estate because the banks have acquired the homes through foreclosure. Homes on a bank’s books are called REOs, which is an acronym for “real estate owned.” Realize that when banks receive property deeds to homes through foreclosure, it’s because no one showed up on the courthouse steps to bid the minimum amount of the existing mortgage(s).
On the surface, it might not sound as though foreclosures are profitable, especially if the bank wants to sell its inventory on the open market for the amount that was once owed to the bank by the previous mortgagor. However, here are at least two reasons why an REO can be profitable to you:
- If two loans were secured to the property (which is common these days), the second lender sometimes does not foreclose. If the second lender does not make up the back payments to the first lender and commence its own foreclosure proceedings, the second lender gets wiped out in the foreclosure. Many second mortgages comprise 20% or more of original market value.
- The bank does not want to sit on its inventory. Since it did not receive its minimum bid from an investor or home buyer during the foreclosure sale at the courthouse, the bank is likely to price that REO home for less, just to get rid of it.
REO Listing Agents
There are many places available online to find foreclosures. However, you can also find them in MLS. If you ask your buyer’s agent to search MLS for “REOs,” you will probably find that a very small handful of real estate agents specialize in listing REOs for sale in your neighborhood.
Here are tips about REO listing agents:
- Most REO listing agents list only REOs, no other type of property.
- REO listing agents often give discounts to the banks in return for its business, because these agents deal in volume
- REO listing agents make money by either selling a lot of REOs or operating as a dual agent. Under dual agency, the REO listing agent will earn both the listing commission and the buyer’s agent’s commission.
- To attract buyer’s agents, many banks offer a larger percentage of the commission to the buyer’s agent while discounting the listing agent’s commission.
- REO listing agents generally represent the seller, not the buyer.
- REO listing agents are typically top-producing agents because of the volume of business they conduct.
- Some REO listing agents are so busy that they hire assistants to field calls. Many do not give out their private cell phone number, which can make communication difficult.
Hiring a Buyer’s Agent
Unless you have direct experience negotiating with banks, you may receive better representation by hiring your own buyer’s agent. Before you select an agent, choose several and interview the real estate agents to find a good fit.
- Buyer’s agent have a fiduciary responsibility to protect your interests.
- Buyer’s agents do not represent the seller.
- Buyer’s agents are generally paid by the seller.
- Buyer’s agents may ask you to sign a buyer’s broker agreement, which will lay out the agent’s duties to you and specify who pays the commission.
- Hire a buyer’s agent who has experience working with REOs.
Negotiating with REOs
If the listing is relatively new to the market, it is very possible that the bank will not deviate much from its asking price. You will have greater negotiating power if you make offers on homes that have been on the market for longer than 30 days. Here are more tips:
- Banks negotiate bulk-rate discounts with title and escrow companies. If you elect to use the bank’s title / escrow company, check the fees those companies will charge you. Generally, fees not paid by the bank but paid by the buyer will be higher because title and escrow often make up those discounts by charging buyers more.
- Many banks are moving away from paying typical closing costs for the buyer. Some fees such as transfer taxes, county and state fees, are borne by the buyer and not the bank. Banks do not often pay for pest reports, repairs or home warranty plans.
- Some banks will not sign a counter offer until all terms are mutually agreed upon between the parties verbally.
- Expect the bank to draw its own purchase contract or addendum to your standard purchase contract. Read it thoroughly and ask a real estate lawyer for advice if you do not understand it. You can bet the bank’s lawyer drew up that contract, and it’s not in your favor.
- If the bank won’t budge and you receive an offer rejection, wait another 30 days and then resubmit your original offer, with the original date crossed off and your new date inserted.
- You might wait 10 days for a response to your offer from the bank. Be patient.
- The bank may ask for you to submit a loan application so it can prequalify you; however, you are not obligated to obtain your loan from that bank.
- If you cannot close by the predetermined closing date, the bank may charge you a penalty for each day you pass that date. Make sure you have a loan preapproval letter from your own lender before submitting an offer, and get assurance that you will receive the financing from your lender without running into unexpected delays.
- You will likely be asked to buy the home “as is.” There are drawbacks to buying foreclosures. Make your offer subject to a home inspection. Some sellers in default strip assets from foreclosure homes.
Many of my Sacramento home buyers have waited 4 to 6 months to close on a short sale, sometimes longer.
What is a Short Sale?
A short sale means the seller’s lender is accepting a discounted payoff to release an existing mortgage. Just because a property is listed with short sale terms does not mean the lender will accept your offer, even if the seller accepts it.Be aware that the seller need not be in default — to have stopped making mortgage payments — before a lender will consider a short sale. A lender may consider a short sale if the seller is current but the value has fallen. The seller may have over-encumbered, owe more than the home is worth, so a discounted price might bring the price in line with market value, not below it.
Check the Public Records
Do your research before making an offer to purchase. Your agent can find out who is in title, whether a foreclosure notice has been filed and how much is owed to the lender(s). This is important because it will help you to determine how much to offer.If there are two loans, you could have a problem. The first mortgage lender’s position is protected by the second lender, unless the second lender does not want to foreclose. If a seller owes $160,000 on the first and $40,000 on the second, offering $160,000 leaves nothing for the second. The first will need to give something to the second to gain its cooperation.
Hire an Agent with Short Sale Experience
It’s one strike against you if the listing agent has never handled a short sale, but it’s even worse if your own agent has no experience in that arena. You need an experienced short sale agent.An agent with experience in short sales will help to expedite your transaction and protect your interests. You don’t want to miss any important detail due to inexperience or find out your transaction is not going to close on time because no one has followed up in a timely manner.
Qualifying the Property and Seller for a Short Sale
A lender is unlikely to agree to a short sale unless the seller has no equity and is unable to repay the difference between your sales price and the existing loans. Sellers need to provide a hardship letter to the lender. Sellers may also owe taxes on the amount of debt that is forgiven.A seller I know once demanded that the buyer slip the seller $1,000 to be given the right to purchase the seller’s property. We said no. This is fraud. The lender legally pursued that seller. Do not be lured by sellers who suggest this practice. In a short sale, the seller receives no money because the lender is losing money.
Submit Documentation and Purchase Offer to Lender
Once the seller has accepted your offer, send it to the lender for approval. You do not have a deal until the lender accepts. Also, send the lender a copy of your earnest money deposit. Do not be astonished if the lender asks you to increase it.In addition, the lender will want to see that you have your own loan available and you are preapproved. Send a preapproval letter to the lender. It will help if your agent sends a list of comparable sales that support the price you are offering to pay for the home.
Give the Short Sale Lender Time to Respond
Make your offer contingent upon the lender’s acceptance. Give the lender a time frame in which to respond, after which, you will be free to cancel.Some lenders submit short sales to committee, but most can make a decision within two to three months. Get a name and phone number for the appropriate contact at the lender. Don’t send an offer blindly to a department.
Understand Short Sale Commissions
Regardless of the commission the seller has agreed to pay, the lender is actually the entity paying the commission. The reason is the seller is not receiving any money with which to pay a commission. Since the lender is losing money, the lender will likely negotiate the commission directly with the listing broker, who will then share the commission with your agent.If you have signed a buyer’s broker agreement with your agent, ask if the agent will waive the difference due or you might have to pay it out of your pocket. Some brokers feel it is unfair to penalize the agent, but the lender is calling the shots.
Reserve the Right to Conduct Inspections
Generally, the lender will not pay for customary items that a seller would pay. These include home protection plans for the buyer, buyer credits of any kind and pest / termite inspections. A buyer will be asked to purchase the property “as is,” which means no repairs.It is extremely important that a buyer obtain a home inspection. Back to How to Handle Short Sales
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Specializing in Costa Mesa Real Estate and homes for sale inculuding- Foreclosures, REO's, Costa Mesa Short Sales, Distressed Homes and MLS Searches Throughout Orange County. The ability to adapt to ever-changing market conditions has enabled Kurt to thrive even in the most challenging of times. His thorough knowledge of the industry- from residential and commercial transactions, to new construction and development, to short sales and REO properties- ensures he is always available to meet the needs of his diverse clientele. Kurt’s concierge-level service is a professional signature; he has built a team of Costa Mesa real estate professionals, The Kurt Real Estate Group, designed to care for each client’s unique needs. “Successful real estate professionals should operate with integrity, in-depth community and market knowledge, excellent negotiation skills, effective marketing plans, and a strong network of industry-related professionals,” observes Kurt. “In my business, another integral element is the ‘client-first’ philosophy with which I operate. I pride myself on being a good listener and an effective communicator, responding quickly and efficiently to my clients’ needs.”
