Short Sales, Foreclosures and Bank-Owned Properties – Part II

In Part I, I covered what the different types of ‘foreclosure’ properties are. Now let’s look at what you need to know about them if you’re thinking about venturing into this area.

The most difficult type to deal with at this point in time (in most cases) is a short sale. With a short sale, you will have to be prepared to wait weeks or even months to hear anything back on an offer. If your offer is at the asking price and 100% cash, then that may shorten the time period. But even in that situation there is no guarantee that it won’t take weeks or months.

As an example, I spoke with another realtor a few months ago whose client not only put in a full list price offer but also offered to pay for the title insurance that would normally be paid by the seller. It still took 3 weeks to get an answer and what came back from the bank was that they wouldn't consider the offer until they had a special disclosure signed by the buyer that is required on houses built before 1978. Only problem is that the house was built in the last 5 years and this disclosure isn't required. But the bank doesn't care and wants the disclosure before considering the offer. And it took 3 weeks to get even this ridiculous reply back!

One other case is a realtor that listed a short sale and got a very low offer which she submitted to the bank in November (this was even after the house was listed for $200,000 less than the current owner paid for it 2 years ago). As of February she still hadn't gotten a reply back from the bank. So that was 3 months with no reply.

So with short sale properties, you first need to find out if it is actually a good deal. I had one client recently looking at a townhouse that is a short sale and based on recent sales in the complex and comparing the condition of the properties this townhouse was priced at least $15,000 too high for even its market value.

If you do determine it is a good deal (especially when it is below market value) then it is best to offer a price that the bank will consider. This is especially true when the lender has already dropped the list price once or more. If you go too low, you may never hear back. And keep in mind that during the waiting period for a reply, other buyers can submit an offer and if the bank feels the other offer is better than yours – they can then accept it and reject yours.

It is actually fairly well known that short sale deals are often more difficult. An April 18, 2008 article said “The success rate for short-sale offers is low…20 percent of short-sale offers in the area [Las Vegas] lead to completed sales, compared with 85 percent for more traditional sales. Redfin, an online real-estate brokerage based in Seattle, says it represented buyers on 65 short sale offers in the first quarter but expects only two or three to result in a completed sale.”

And the final insult with short sales is that even if the bank accepts your offer and things are proceeding along well, they can decide in the 11th hour to cancel the deal. This info was given to me by an attorney who works for our state Realtor association.

The easiest of all foreclosure properties to work with are bank-owned properties. This is where the bank has completed the foreclosure proceedings and now owns the property. In these cases the time frame for getting an answer back on an offer will be much quicker. However, in a high percentage of cases the property can be in very bad condition.

A very important point with any of these type of properties - you must have your financial arrangements taken care of before even bothering to look at any. In all cases that I have seen so far, an offer won't even be accepted in a short sale or bank-owned situation unless you submit a preapproval letter for financing or proof that you have the cash to buy it.

Bank-owned properties can be a good deal for you if they are in decent condition or if you are willing to do the work necessary to bring it up to the standard you want. But keep in mind that you will get very little or no information about the property from the bank so the risk of hidden problems is higher.

I only recommend short sales at this time for investors who are cash buyers and will have no problem with waiting an average of 60-90 days for the whole process. Many investors who have a lot of cash are buying up several of these type of properties with plans to hold on to them until the market goes up again.

In most cases, your best bet is finding a property that suits your needs and is a good value where the owner can sell for a good price without being in a short sale situation. Many of my clients have found this to be the best thing for them (and the least stressful and frustrating).

So there's a brief rundown of some information on foreclosure properties and how buying them differs from buying other properties. Please make sure you understand this if you plan to try to purchase any as if you aren't properly prepared or try to ignore the way these go, you'll just be wasting everyone's time.