Down Payment Isn’t Everything
Set aside 1-3% of your purchase price to cover unexpected fees and expenses.
If you have any questions o would like more information about distressed homes & properties please Contact Us. If you are planning on buying your next dream home or property visit our Buying Page or if you are planning to sell your home or property visit our Selling Page.
This is a stressful decision for many families; however, a short sale may be the best solution, short of foreclosure, for homeowners who owe more on their properties than they are worth. Technically, a homeowner is ‘short’ when the outstanding loan is more than the current market value of the property. A short sale occurs when the homeowner finds a willing buyer and then negotiates with the lender to accept less than the full balance of the loan at closing (typically to avoid foreclosure). Once the buyer closes on the property, the property is considered 'sold short' of the total value of the loan. The procedure requires stamina but it can yield favorable results for all. Organization and full disclosure will also help you manage through the process. In the past it was rare for lenders to accept short sale proposals. With overwhelming market shifts and changes in corporate policy, lenders have become much more willing to work with homeowners in distress. Since a short sale generally costs the lender less than a foreclosure, it can also be a way for the lender to reduce their losses.
- Financial Hardship - A situation is causing the borrower to have trouble affording their mortgage.
- Monthly Income Shortfall - Basically the borrower has more expenses than income, which will, or already is, preventing them from affording their mortgage.
- Insolvency - The borrower does not have significant liquid assets to allow them to pay down their delinquent mortgage.
Buying a property in short sale can be a big hassle, so why consider it? Basically it all boils down to the bottom line - you will usually get the property for a (substantial) discount. Lenders may even be willing to offer favorable financing terms in order to move the process along and secure their original investment. Additionally, the owner in default typically plays an active role in the short sale process, which means you will have their cooperation (unlike a foreclosure).
- All offers are subject to approval by the lender regardless of the homeowner’s acceptance.
- Lenders are likely to have their own appraisers evaluate the property, which may affect the potential bargain.
- Each lender follows its own set of (unique) procedures when it comes to short sales, which can make the process confusing and frustrating.
- Many lenders require short sales to be "as is" transactions, where credits for repairs are typically not negotiated or allowed.
- On average, short sales can take significantly more time to close than a traditional transaction, so patience with the process is absolutely essential.
Whether you are a first-time homebuyer or experienced investor, it is always wise to work with a REALTOR® when dealing with short sales. The right professional can move you through the process more efficiently, and guide you through the challenges that commonly accompany distressed sale transactions. When interviewing potential agents, be sure to inquire about their experience with short sales and find out if they hold any designations for buying and selling distressed properties.
- Request a written confirmation from the homeowner in default that the lender has received the hardship letter and documents required for a short sale application.
- Short sales are commonly multiple offer situations. Be sure to factor into your offer that there is likely to be more than just your offer up for consideration.
- Your offer should always be contingent upon the lenders approval within a set time frame.
- Use an addendum to outline any contingency terms and conditions. Remember that most short sales are “as is” and a lender will grant few, if any, repair requests.
- Even though most short sales are “as is”, it is still crucial to conduct a home inspection. You should assess the bargain potential of a property by adding the cost of repairs to your total offer.
- This information is meant as a guide. Although deemed reliable, information may not be accurate for your specific market or property type. Please consult
a REALTOR® professional for more information on making a written offer.
If you have any questions or would like more information about distressed homes & properties please Contact Us. If you are planning on buying your next dream home or property visit our Buying Page or if you are planning to sell your home or property visit our Selling Page.
Foreclosure is a process in which a lender attempts to recover the amount owed on an outstanding property loan once there is a default of payments. This is usually done by selling or taking ownership (repossession) of the property. The foreclosure process begins once the lender files a public notice of default (NOD), or in some states a lis pendens (LIS). Once an NOD is filed, the property officially enters a grace period known as pre-foreclosure (length determined depending on state). Pre-foreclosure offers the borrower an opportunity to do several things before the property is repossessed and/or sold, and ultimately reported on their credit history.
- The borrower can reinstate the loan by paying off the default amount plus fees.
- The borrower may negotiate a Loan Modification with the existing lender.
- The borrower can sell the property to a third party and pay off the outstanding loan(s).
Should a loan remain outstanding once the pre-foreclosure period has ended, the bank then repossess the property to secure the loan. Usually, the lender takes ownership of the property with the intent to re-sell. Good foreclosure deals are available, however buyers need to be cautious. Tax or mechanic’s liens placed on a property can drive up the purchase price. Once you have located a property you are interested in purchasing, it is important to have your REALTOR® check the property records for these kinds of contingencies. It is also crucial for buyers to come educated about local state foreclosure laws, which differ from state to state. Some states follow non-judicial foreclosure procedures and others require the lender to sue the borrower before taking ownership of a property in default.
To be considered a serious buyer, sellers want to know that you are financially positioned to purchase the property. The best way to do this is to get pre-qualified before engaging in any negotiations. Work with a lender who has experience with the foreclosure process and who can guide you through the crucial steps of dealing with this kind of purchase (if you don’t have a trusted lender, your REALTOR® can recommend one). Your lender should provide you with a ‘loan pre-qualification letter’. Obtaining financing information helps you understand what you can afford, and enables you to move quickly once you find a property that you want to purchase.
Whether you are a first-time homebuyer or experienced investor, it is always wise to work with a REALTOR® when dealing with foreclosures. When interviewing potential agents, be sure to inquire about their experience with foreclosure properties and find out if they hold any designations for buying and selling distressed properties.
Depending on the progression of the foreclosure, the seller will either be: the property owner in default; the trustee; or the foreclosing lender.
Owner in Default - The seller will be the owner in default during pre-foreclosure. Pre-foreclosure typically offers investors and homebuyers the best bargains, but it can also be a difficult stage to purchase a distressed home, as the lender often has the final say. Buying a property during pre-foreclosure involves making an offer to buy directly to the owner in default. The owner may or may not know they are being foreclosed upon, and will undoubtedly be under a lot of stress, making negotiations difficult. If the purchase offer is less than the secured loan(s), then the lender(s) must also be included in the negotiations. It is important to remember that pre-foreclosure can last several months, so patience is essential when considering this purchase tactic. Aside from the challenges of pre-foreclosure, selling the property before foreclosure can offer the owner in default an opportunity to walk away with some of the equity in their property, and avoid damaging their credit history. The buyer may also benefit here, with more time to research the title and condition of the property, and often times realize good discounts below market value!
Trustee - If the loan is not reinstated by the end of the pre-foreclosure period, the property is sold at a public auction. Commonly, buyers are required to pay cash at auction and time is limited (if any), to research the title and condition of the property beforehand. Public auction can offer great bargains however, and buyers are able to avoid dealing directly with the owner in default. When bidding on a property at public auction, you should be aware that you are competing with seasoned investors. Remember that cash is typically required to buy, and if there are any money encumbrances (i.e. tax liens, mechanics liens or second or third mortgages) you will be responsible for paying them off in full as the new owner. You’ll want to evaluate a property’s value by checking for money encumbrances before auction whenever possible. Auctions can be postponed and/or canceled, so it is always a good idea to contact the trustee/attorney to confirm dates and times once you locate a property, as well as the day before the property is scheduled for auction. The trustee/attorney will always have the most accurate information concerning auction dates.
Foreclosing Lender - If the property is Bank Owned (REO – meaning “Real Estate Owned”), you will need to contact the lender directly through their REO or asset management department. You can then inquire about viewing and presenting offers on the property. With REO properties, the lender will usually clear the title, but the potential bargain is often less than pre-foreclosure and auction properties. Some homebuyers receive government-guaranteed financing, which includes loans guaranteed by the Federal Housing Administration (FHA) or Department of Veterans Affairs (VA). When these properties go into foreclosure, they are repossessed by the federal government and sold by real estate brokers who work for the government. Buyers interested in purchasing government-owned foreclosures must have a government-registered broker write the purchase agreement.
To gauge the potential bargain of any property, you need the property’s estimated market value, the amount of the outstanding loan, and the total of any other money encumbrances on the property. Add together the outstanding loans and encumbrances, plus any estimated repair costs, and subtract that total from the estimated market value of the property. You will be able to decide what you are willing to offer on the property based on your results from the bargain formula above, and your available cash and loan pre-qualification letter. An offer should fall somewhere below the market value of the property, but above the total outstanding loans and encumbrances. How you make an offer will depend on the status of the property and who is currently holding ownership. If the property is in pre-foreclosure, your offer will be presented directly to the owner in default and/or the foreclosing lender. If the property is selling at auction, your offer, or bid, will be made at the auction. If the property is bank owned, offers will be presented to the lender via their REALTOR® representative.
This information is meant as a guide. Although deemed reliable, information may not be accurate for your specific market or property type. Please consult a REALTOR® professional for more information on making a written offer.
Set aside 1-3% of your purchase price to cover unexpected fees and expenses.
Specialists recommend holding at least six mortgage payments in the bank in case of emergency.
Based on the inspection, you may want to buy the home as-is for a lower cost, then tackle projects later on your own timeline and budget.