Tips for Buying Distressed Real Estate
With many sales these days being "non-traditional," meaning that instead of working directly with sellers, buyers are now dealing with sellers and the lenders of those sellers. Often the lender is the seller, and the previous owner or owners are out of the picture completely.
These non-traditional deals, commonly referred to as “Distressed Property Transactions”, are often the result of the properties being foreclosures, short sales, or REO properties. They make up a good portion of the real estate transactions these days. In this article we'll cover what each is, and what it means to you as a buyer.
A foreclosure process is where the lender begins the process of taking a property back from an owner that has become delinquent on the payments.
This may work slightly different in different states, and the judicial system has different roles in the process in different states. With regard to foreclosures, states fall into two categories, judicial, and non-judicial.
Purchasing a home that is in foreclosure is more involved from a time perspective than one that isn’t in foreclosure, but if you have the patience to work through it, you may be well rewarded for your effort with a home that can be purchased well below market value.
A short sale is a situation where a lender agrees to sell a property for an amount that is less than what the existing homeowner owes on it.
In other words, they sell it for an amount that is lower than the amount the owner owes on the underlying mortgage.
This may at times be a better solution for a lender, as foreclosures are costly and time consuming for lenders. It is without exception a better solution for a home owner from a credit perspective.
REO stands for “Real Estate Owned”. This is the end of the line for a property, meaning that it has been through the foreclosure process and ownership has been surrendered to the lender. The lender may have attempted to sell it at auction, or via other means, but regardless, there is no more mortgage on it, as financing has been written off. The lender now needs to sell it in order to recoup as much of the balance as possible.
What does all of this mean for the buyer?
When you purchase a property that has been classified as either a foreclosure, short sale, or REO, you should have slightly different expectations as far as how the process will go. While some will move quickly, many will take months to complete.
The first step in the process is to have your real estate agent place an offer on the property. This offer gets routed through the listing agent, to the lender directly, or to a law firm that is representing the lender and handling their end of the transaction. At this point most, if not all of the transaction will be handled by the attorneys.
From a consumer’s point of view, you want to make sure that your attorney is well versed in handling these non-traditional transactions, and how to keep the often slow process moving.
The reason for this is that if communications, even very basic ones come in from the lender, they may sit for days on end before your attorney sees, and is able to respond to them. Some type of admin staff on hand will help tremendously.
Buying a distressed piece of real estate can be a time consuming process however, it is the best way to buy a discount home in 2012.
Some tips for the average homeowner seeking to buy distressed real estate:
- Expect the process to take 4-6 months
- Expect the property to be in slightly inferior condition to traditional sales
- Don’t put all your eggs in one basket, make a few offers and pay close attention to which listing agents and sellers are more proactive than others
- Do your research on the neighborhood and other possible foreclosures in that neighborhood
- Be absolutely positive your buyer’s agent is well versed in the process, you will need a lot of help moving through the process
- Be sure you walk through the home with an experienced contractor or home inspector when possible, many offers need to be submitted “as is”. This means you can’t ask the seller to make any improvements so, you want to make sure you know any potential issues
- Be patient with respect to finding and making offers on the right property. There is a lot of supply on the market and you should be able to find exactly what you would want in a traditional purchase
- Be sure to make your lender aware that you are buying a distressed property, you will want to be sure that you still qualify when the bank is ready to move
- As always, keep all of your financial matters in order during the process, a pre-approval today may not be valid in the future if things change.
- Report back to your lender often and be sure to disclose any potential job, income or down payment changes along the way
- Retain an attorney to represent you during the process, be sure that the Law Office you choose has deep experience representing Distressed Property Buyers
- MOST IMPORTANTLY, understand that the bank is just as motivated to sell the property as you are to buy it. Think with your head and not your heart, act as though you are a professional real estate investor. This mindset will help you remain calm and collected throughout the process!
Be sure to follow these simple steps and your home buying process will be free of surprises AND you will find a property that meets all of your expectations, at a deep discount!
At Poli Mortgage Group, we are here to advise on every aspect of your home buying endeavor, our experienced family of Mortgage Professionals have all the know how, experience and patience needed to walk you step by step down the road to home ownership.
Give is a call or visit us online, we’re here to help!