The Military Home Programs' Blog

If you are shopping for a new home, you may have noticed some advertisements with terms such as “subject to lender approval”, “foreclosure”, or “bank owned”. All of these phrases bring to mind a desperate seller and better yet, a great deal for you! But, like any other good deal in life, there can be a down side. So before you make an offer on one of these properties, make sure you understand exactly what a foreclosure is, the pitfalls when buying one and how to ensure you get the best deal possible.

Distressed Properties Defined

In real estate, the term foreclosure actually refers to the process a bank uses to repossess a property when the current home owner stops making the mortgage payments. There are three opportunities during the foreclosure process to buy the home, each one having its own advantages and disadvantages.

Opportunity #1: The Short Sale – “Subject to Lender Approval”

In the case of a short sale, the existing home owner not only owes more than the home is worth but they are also behind on their mortgage payments. Regardless of the reason for not making their mortgage payments, these home owners have taken a proactive step to try and sell their home. With a sale of the home, the seller is not going to make any money and the price will be set for a lesser amount of money than the bank is owed. Therefore, it is the bank, not the seller that makes the final decision on whether or not to accept incoming offers to purchase the property.

A short sales’ greatest benefit to the buyer is that it has the cooperation of the existing owner. This means the condition of the property is often much better than fully foreclosed properties. Another benefit, if the bank can agree to sell before finishing the foreclosure process, is that it may save significant legal and foreclosure processing fees. This also puts the buyer in the position to get a great deal.

Barbara Blakeley of RE/MAX Associates, a Realtor of 10 years, specializes in helping buyers and sellers of distressed properties. She agrees they are often in good condition and great deals but advises that the biggest problem she encounters is the amount of time they take. Contrary to the name, short sales are the slowest of all the options, sometimes taking so long that the bank ends up foreclosing on the property before they themselves can approve and complete the short sale.

If you are wondering how this can happen, you are not alone. The main cause - banks are simply overwhelmed with short sale offers and cannot handle the volume of offers they receive. Barbara cautions that from a buyer’s perspective, the waiting can be torture. She advises to find an area vs. a home you would like and keep your options open.

According to Ken Bates from Military Home Programs, there are several agents that won’t even make offers on short sales unless the client has no timeline and can wait up to several months for an answer. This is definitely not the ideal solution for most military members that need housing when their PCS orders are executed.

Opportunity #2: The Foreclosure:

The public auction is the least used method to buy a distressed home in the foreclosure process. The reason is simple. Purchases at an auction normally require an all cash deal, a quick closing timeframe, and a property sold in “as is” condition. To make matters worse, the “as is” condition of the property may not meet a bank’s standards to qualify for a loan. This poses a problem as there is often no opportunity to inspect the property and no time to secure a loan.

This option is most commonly used by professional investors with million dollar bank accounts and much expertise in rehabilitating properties.

Opportunity # 3: Bank or Real Estate Owned (REO)

Real Estate Owned (REO) is a fancy term for when the property was acquired by the bank through a foreclosure action. Banks end up owning the property when nobody at the public auction bids enough to cover the amount owed against the property.

According to Barbara, REOs offer a great opportunity because buyers can purchase in neighborhoods they may not have been able to afford under normal circumstances. And, they offer a quick close of escrow.

Of course with these benefits, there are some down sides. The property may be in less than ideal condition. The property may have been intentionally damaged by angry owners who were forced out, it may be vacant and vandalized, or just neglected for some time. Additionally, as the bank was not an “occupant” or resident of the property, it is not obligated to offer any disclosures. Barbara highly encourages her buyers to go the extra mile and not only get a home inspection, but also hire specialists to investigate anything even slightly questionable such as possible mold, roof issues, or termite damage.

Deal or No Deal?

You will find REO and Short Sale properties in many of the same places you’d find any other home for sale. The properties often have real estate agents representing them and will be listed on the regular web sites and Multiple Listing Services (MLS) available in an area. You do not need to go to special sites or pay for any lists. Actually, you might not even realize it’s an REO or short sale property unless you read the fine print or confidential remarks only available to real estate agents.

Do you have to work with an agent to find these properties? No, but unless you’re used to negotiating with banks, working with an expert is your best bet. The banks are currently overwhelmed with offers and require everything to be perfect before they’ll even consider reviewing yours. More importantly, an agent focused on REO’s and short sales will guide you on the best path to protect your interests and help you to avoid the pitfalls.

Conclusion

Foreclosures are some of the best deals on the market, many selling for significantly less than what they sold for just two or three years ago. With rates still very low, it’s an ideal time to jump into the market and take advantage of this unique win-win for buyers. Don’t let buying from the bank discourage you, get the best representation you can and go for it!

Barbara Blakeley is a Realtor working for RE/MAX in San Diego, California. She specializes in representing buyers and sellers with distressed properties. Barbara@bbsdhomes.com