Foreclosures and Short Sales: What’s Happening Right Now?

We sell plenty of foreclosures, so we’ve got nothing against them. But are they always the best deal? And are they right for you? I’ve had a lot of questions about this, so here’s my best advice at this point in the game.

First, there’s a big difference between foreclosures and short sales. The foreclosure sales we’ve been involved in have gone fairly smoothly. The bank has a list price, we make an offer, we negotiate, we agree on a price, and we close.

Our experience has been different with short sales. We’ve found that they can take six months or longer to complete, and that in many cases, the lending institution demands significantly more than the agreed upon price, just before the closing. Our recommendation based on this is pretty simple. If you have a choice between a foreclosure and a short sale, go with the foreclosure. If you don’t have the time and patience to deal with a short sale, don’t get involved in one.

Foreclosures are, by definition, bank or lender-owned property. You can buy them directly from the lender, or you can buy them through us. If you buy them through us, our role is to act as a buyer’s representative. In other words, our job is to advise you of the pros and cons of the neighborhood, local regulatory and governmental issues, access to recreational opportunities, due diligence issues that affect the property – wells, septics, road maintenance, construction issues, and restrictions – and contractual issues that need your consideration. Most lenders will pay us a commission if we bring them an offer.

Bear in mind that you will not be receiving either a seller’s disclosure or a General Warranty Deed on a foreclosure sale. It is very definitely a case of “buyer beware.” A good, trustworthy home inspector is a must. And understanding the contract is also a must.

To buy a foreclosure, you will have to sign an addendum to the contract that removes most or all of the consumer protections that we have put in the normal residential sale contract over the years. Buyers should carefully review this addendum and make sure they understand what it is saying, and how it will affect them. I have seen bank foreclosure addendums that give the buyer the right to inspect the house, but do not give them the right to terminate the contract if they find something bad during the inspection.

But aren’t foreclosures always better deals?

The short answer is that I’ve been involved in some great foreclosure purchases, ones where my buyers got a truly great deal … but they aren’t all that way. My advice is to shop both the foreclosures and the normal resale market, to be sure you are getting the best possible deal on the best possible cabin for you. I’ve seen very good deals in both places.

In my experience, the best foreclosure program by far – from the buyer’s point of view – is the Fannie Mae Homepath Program. I say that primarily because their addendum does give the buyer a meaningful right to inspect and a window of opportunity to get out of the deal if there are inspection issues.

However, buyers should not expect a big discount from list price on Homepath properties. The government has gotten smarter about how they do things, and their current practice is to put the property out at a given price and stand on that price for a certain period of time. Then, if they don’t get that price, they will reduce it. At a certain point, when the property gets to the point where everyone realizes it is a deal, we are apt to get multiple offers, and that can trigger a bidding war that results in the property selling for more than list price. The same thing can happen with local bank foreclosures.

What does it all mean? (1) Look before you leap. (2) Think carefully about whether you need the advice of a real estate professional who knows the local market. (3) Don’t just assume that a foreclosure is a smoking deal just because it’s a foreclosure. (4) Shop the conventional sales along with the foreclosures to be sure you’re getting the deal you deserve.

I’ll be glad to help if anyone is interested in seeing what’s out there.

12/12/12

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