With the majority of sales being Short Sales and Foreclosures in our current market I thought I’d explain a little about each one and some of the pros and cons.
There are upsides and downsides to each, for example:
Buying a Foreclosed home- (Bank owned, REO, etc)
When you are buying a foreclosure there are usually bank required addenda/contracts that will be utilized when buying which sometimes scare would be home buyers. They are not to be feared if you understand what is required of you, and the terms they contain, but if you are fearful it’s always good to have your attorney review them BEFORE you sign.
Most bank contracts don’t allow the contracts to be assignable, require the use of the bank’s/seller’s title company to handle the closing, and include per diem fees that are charged to the buyer for closing later than the date specified, or even limited to NO inspection period. You must also be aware of any code violations as these may be the responsibility of the buyer after closing.
In addition, mortgage backers like Fannie Mae and Freddie Mac have terms in their contracts where buyers are responsible for most or all of the seller’s closing costs. These can be significant depending on the purchase price of the home so make sure you plan for them.
The benefits of buying a foreclosed property are that they may be priced very low compared to other homes in the area and be good deals for investors and homeowners alike. You can also get a loan to buy them (as long as other restrictions don’t apply) although some banks are favoring cash offers a lot more these days financing is still a possibility, and they can be purchased in pretty much the same time frame as a person to person sale unlike short sales that may take months.
Buying a Short sale:
Short sales are properties that the homeowners NEED to sell and are worth less then the seller’s mortgage on the property. This will require the seller’s lender to approve the sale and loss.
A key benefit of buying in the Short sale stage is that you’re dealing with the Homeowner directly, and that the home may be in better condition than most foreclosures, but that is not always the case. It can be a very good opportunity to not only buy the property at a potentially good price, but also see that you really are helping someone out in the process. Contrary to some people’s beliefs this is the stage in the game where you can help save someone’s credit, self-esteem, and maybe give them a hope at a new start.
Since sellers owe more on their home than the it’s worth, they are going to either pay the difference or attempt a short sale. That means you and the seller would then have to try to get the short sale approved with the lender to purchase the property. It can take months to get a sale approved and that’s usually the least amount of time you’ll be looking at. There is also no guarantee that the lender will accept the short sale, or they may require the buyer to pay a higher sale price than originally agree upon to reduce their loss.
Some positive things about buying a home as a short sale is that you can still usually get a lower price than a lot of homes in the area, but not on every short sale. You also have a better chance of getting an offer that is contingent on financing accepted since many banks seem to be favoring cash offers for foreclosures.
Negatives are pretty much just the time you have to wait and not really knowing how if the short sale will be approved or for how much, until months down the road.
The bottom line is if you’re thinking about buying either a short sale or foreclosure you’d better know what to expect and what you are up against or it can be a long, hard road. If you need advice or have questions post them in the comments section below!