While buying a “short sale”, foreclosure or “bank-owned” (or “REO”) property may be a good deal, they are almost never the steal-of-the-century, “pennies on the dollar” purchase than some buyers believe them to be (and some unscrupulous salesmen may suggest). These purchases have their own unique risks and benefits. Let’s review each, in chronological order.
Short Sales are where the owner owes more than the home is worth and a sale can only occur if the seller’s lender agrees to accept payment that is short of the full amount due on the mortgage (hence the name “short” sale). Banks will agree if they believe the owner truly has no other money to pay off the mortgage and if they believe the payoff of a short sale will be better for the bank than to foreclose and resale the home on their own.
Benefits of a short sale to the buyer are the possibility of getting a “good deal.” Risks include the fact that the seller/lender typically will make no repairs as a result of a home inspection, and that approximately 65% of attempted short sales fail, usually because the seller and/or listing agent failed to adequately convince the bank that the sale price was “fair” and/or that the seller’s financial situation was too dire to be able to repay the loan. Also, short sales often drag on for months and months, waiting for the lender to finally consent to the sale.
Foreclosure Sales are where the owner has defaulted on their loan, typically for six months or more, and the lender files suit to “foreclose” and to sell the home at public auction, nearly always on the steps of the county courthouse. In a true foreclosure the home is almost always vacant.
The only benefits to a buyer of buying in a foreclosure auction is that you may get a “good deal.” However, the risks are huge. First, you usually cannot even visit the home’s interior before you bid (you are “buying blind”). Second, certain costs are “shifted” from the seller to you that aren’t common (e.g. you must pay both the buyer’s and seller’s share of transfer taxes; you must pay property taxes, utilities and insurance from the date of the auction even though you don’t get possession until another 30 – 45 days later; and, if you fail to secure financing for any reason you automatically forfeit your 10% cash downpayment).
Buying a home in a true foreclosure auction is not for the feint of heart and is best left to professional investors, who can better absorb the risks involved.
Bank Owned Sales, or “Real Estate Owned” (REO) sales, are where the owner defaulted on their mortgage, they failed to sell through a short sale, and when the home was put up for public auction no investors bid an amount high enough to pay off the bank’s loan, so the bank “bought” the home.
Of the three types of “foreclosure” or distress sales, a bank-owned or REO sale is probably the “safest” for a buyer. You can have a home inspection and, even though most banks will be reluctant to fix property flaws, at least you will have the chance to cancel the purchase if the flaws are too numerous. You do receive your contract deposit money back if for any reason your loan isn’t approved. And, banks typically respond to your offer within a few days, rather than the months it takes to get a short sale offer approved.
Finally: You Should Always Consider A “Normal” Home Purchase Too, Because as often as not the “best deal” for you may well be a “normal” sale. Suppose you buy a home for, say, $300,000 in a distress sale. It’s beat up, so you spend almost $100,000 to make repairs and improvements, which take three months. What if you could have bought the same home for, say, $420,000 already fixed up? You’d save yourself the hassle, delay and expense (and risk) of buying a distress sale home.
The final decision is up to you. We don’t push for, or against, buying a short sale, foreclosure, or bank-owned property. We think you should search all property types. We just want to caution you to remember that, just because a home is in some stage of the foreclosure process, that alone does not mean you will be able to buy it for “pennies on the dollar.”
We’d love to bring our collective 51 years of experience to you in helping you buy whatever type home is the best for you. Enjoy our foreclosure/distress sale home search with our compliments.