Understanding foreclosures and short sales

describe the image

People are often intrigued with the idea of buying foreclosed properties or “short sales” to get a home at below market price. However, the process of buying these homes can be complex. Here’s a quick primer on what to know about the foreclosure or short sale process.


Foreclosures

There are currently 19 single family homes in the Metrowest suburbs listed in the MLS as foreclosed properties. That is, homes that have been taken over by the lender because the homeowner defaulted on their loan. Buying a home that’s been foreclosed on is very different from buying a home from an individual.

* Buyer beware. First, most lenders have very little information about the home’s history and are selling the property without providing any warranties or disclosures about the home’s condition. They do not know the age of the roof or furnace, for example, or have knowledge of other issues that affect the home’s material value. It’s entirely up to you and your advisors (buyer’s agent, home inspector, etc.) to determine the condition of the home.

* As-is condition. Although banks will allow you to conduct a home inspection on a foreclosed property, they usually will not provide credits for inspection items uncovered. In other words, you’re entitled to conduct an inspection and back out of the purchase if your inspector uncovers major problems in the home. However, the lender will not make repairs or provide any credits for the inspection items found. Your choice at that point is to go forward or back out of the purchase.

* Deferred maintenance. Since foreclosed properties have often been vacant for awhile, small repair issues tend to go unnoticed and can easily become bigger concerns. While some foreclosed homes are in good condition, we’ve seen plenty that are suffering from pest infestations, mold, or other problems because normal maintenance has not been done.

* One-sided agreements. “Most P&S agreements involving bank owned properties are one sided in favor of the lender and buyers are not allowed to make changes,” says Attorney Julie Picardi. “It is important that a buyer hire an attorney to review the agreements and explain the provisions so they know exactly what they are getting into. For example, there are generally provisions in these agreements that result in a daily penalty amount if the buyer is unable to close as scheduled, yet the seller is not penalized for any delays.”

Short sales

According to the Pew Research Center, nearly one in five U.S. homeowners owes more on their home than what it’s currently worth. That’s why we’re seeing more short sales occur. Essentially, a short sale is when the lender agrees to allow the homeowner to sell the home for less than what they currently owe on their loan. This enables the bank to recoup most of their money while avoiding the time and expense of foreclosing on the property. Buying a short sales can be a rather trying process for a number of reasons.

* As-is condition. Like with foreclosures, short sale properties are typically sold in as-is condition. Additionally, you’re often required to proceed with the home inspection and apply for a mortgage before you receive final approval from the lender(s). Thus, you may be investing money in home inspection and mortgage application fees before you even know if the lender will agree to the offer.

* Short sale approval. When buying a home that’s a short sale, you first need to get the homeowner’s approval of your offer to purchase, and then need to get the lender’s approval. Obtaining lender approval can be time-consuming. It’s not uncommon for it to take weeks or months before hearing back from the lender involved in the deal. In some cases the lender will never respond.

If the current homeowner owes money to more than one lender or creditor, this can make the process more complicated, since the various lienholders need to come to an agreement about how to apportion the home sale proceeds. Since all of the lienholders are getting less money than what they’re owed, getting them to come to an agreement is not an easy process. “These are complex transactions and professional assistance is a must,” says Attorney Picardi.

* Home purchase timeline. If the lender does agree to your offer to purchase, you’ll typically have a short window of time to close on the home. Many agreements require that the buyer close within 30 days of receiving final lender approval. If you need more notice to close on the home, a short sale may not be the best choice for you.Buying a short sale or foreclosed property can be worthwhile, but it’s a complex process. Be sure to have a real estate attorney working on your behalf to protect your interests. Having an attorney on your side who understands these situations will help make the home buying process a smooth one.

Have a real estate question? Contact Kyle Mann to learn more about buying or selling your home in the Boston suburbs. Mann is a Realtor with Gibson Sotheby's International Realty.