Pros & Cons To Purchasing Short Sale And Bank-Owned ( REO ) Properties In Arizona

By now you have probably heard and read about the distressed real estate market down here in Arizona. As a result of the mortgage meltdown of 2005-06 and rampant speculation that caused the meteoric rise in housing values, it was only a matter of when would the housing market correct and return to some semblance of normality.

It happened rather suddenly during 2006 and had been in a downward spiral ever since. As a result of this housing value correction, there is presently an abundance of opportunities to purchase distressed and devalued real estate assets near the bottom of the market.

BUT BEWARE!!!! All is not as it appears.....

Before we get into it, let's discuss what is a short-sale vs. bank-owned property.

SHORT SALE - A short sale is a property in which the owner is delinquent in paying their mortgage payments. It has not yet been foreclosed on by the bank, but it may be IN THE PROCESS of being foreclosed on. In this situation, the owner, many times through an agent (their real estate agent) will negotiate a stay of execution on the foreclosure and allow the owner to attempt to sell the property for a price that is typically BELOW the total mortgage amount on the property. The bank is basically agreeing to take a loss on their loan amount in the hopes of avoiding a foreclosure proceeding and having to take physical ownership of the property.

BANK-OWNED OR REO (real estate owned) - In this case, the bank has gone through the complete foreclosure process and actually taken title to the property and evicted the previous owner in order to sell the property.

So now that you have a clearer understanding on what these are,

Here are the pros and cons to purchasing short sales and bank-owned (REO) properties in Phoenix. This is what you need to know to decide whether this type of property purchase is for you.

PROS

There is one big pro - you are typically going to get a property below even current market value. Could be up to 10+% below current market value so there is the potential to get a great deal. Unfortunately, in this world you never get something for nothing. There are drawbacks for this 'smoking' deal

CONS

Short Sale
(1) While you are still dealing with the delinquent property owner, the contract will have to be approved and signed off on by the bank taking the loss. In some cases, the bank does not even know that a short sale is being attempted until they receive an offer. This means that the wait time when submitting an offer on a short sale could stretch from days to weeks to even MONTHS to get a reply. Not only that, but until the bank has accepted/counter the offer, the listing agent will leave the home showing as ACTIVE on the market and in the MLS soliciting other offers and will submit all received offers to the bank for approval. The bank can only pick on, of course. So you could be waiting for months and then get turned down and hear that the bank accepted an offer submitted weeks or months after your offer. This can be very frustrating, to say the least!

(2) Because of how the bank processes offers and the aggressive pricing of these properties, it is not uncommon for well-priced short sales to sell for the full list price OR MORE due to a bidding war between suitors.

(3) Banks want to avoid liability and will demand that the buyer submit offers with an AS-IS addendum basically stating that the buyer assumes all risk associated with the condition of the property from the time of the offer acceptance. Buyers will have the right to inspect the property, but if they miss something, the buyer - not seller - is responsible. This is one of the reasons these properties are discounted - to factor in the buyer's risk.

REOs
(1) AS-IS addendum. Same as above but even scarier. Once the bank has taken over, many times they shut off the utilities to reduce their costs. This makes it much harder to inspect the property properly - HVAC, electrical, plumbing systems.

(2) Remember, in this scenario, the bank has forcefully taken ownership and possession of the home before attempting to sell it. This means that the defaulting party was probably very upset prior to leaving the home. It is becoming more common to hear stories of how angry homeowners damaged/destroyed property in the home, removed appliances, plumbing fixtures, cabinets, light fixtures/ceiling fans and/or other home fixtures. I have even seen property with significant water damage, drywall damage and heard of stories of people throwing cement into the drains to cause future owners headaches. It is VERY IMPORTANT TO HAVE THROUGH INSPECTIONS OF THESE TYPES OF HOMES.

(3) Banks can take long periods of time to respond to offers, although response times are typically quicker than on short sales because the bank has already done the legwork up front to determine value and what they would be willing to accept.

As a result of these issues, Bank Owned and short sales should only be considered by buyers that:

(1) Aren't as concerned about finding the 'one' perfect home and are not the type of people to get attached to a home they absolutely have to have.

(2) Prepared to take on the risks associated with buying distressed properties for the reward of getting a below-market-value property

(3) prepared to get their hands dirty in making repairs and organizing the cleaning and trades to come in and refurbish damaged properties

(4) Are not concerned with long waits in getting replies from banks on properties they have submitted offers on.

THESE TYPES OF PROPERTIES ARE BEST SUITED FOR INVESTORS BUYING FOR VALUE RATHER THAN HOMEOWNERS BUYING FOR THEIR OWN USE.

An investor can form the strategy of putting in multiple offers on properties, not really caring which one(s) are accepted so long as they are getting that property for a great value in line with their investment objectives. Once they have an accepted contract, they can rescind their other open offers.

SO HOW DO I DETERMINE WHETHER A LISTING I AM LOOKING AT IS A SHORT SALE OR BANK OWNED?!?

Good Question.

Here's the short answer. Work with a professional and knowledgeable local-area Realtor (Hey! That's me!).

Why? In most cases, Listings do not openly disclose to the general public whether a property is distressed or not. A Listing agent must make this disclosure to other agents and specifically, Buyer's agents as it materially affects the buyer's decision to purchase the property and for how much. Your representative can very quickly inform you whether a property you are interested in is distressed or not and through a couple of phone calls can find out the status of the home (whether there are already submitted offers on the property awaiting acceptance).

ARE DISTRESSED PROPERTIES COMMON IN SOME AREAS MORE THAN OTHERS?!?

Absolutely. Some areas have been harder hit in this latest housing crisis. The hardest hit areas, in general, are father away from the city core where many new homes were purchased by speculators. With the speculators now in hot water and the cost of gas going through the roof, the outer rim areas are not as attractive as they used to be. Some areas like Surprise, Queen Creek, Anthem, Maricopa and Buckeye have a disproportionately high number of distressed properties to total listings - in some areas more than 50%. That is why some areas are seeing sharper drops in values than others. Keep this in mind when considering outer, fringe parts of the Valley.