Nolo's Essential Guide to Buying Your First Home (46 page)

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Authors: Ilona Bray,Alayna Schroeder,Marcia Stewart

Tags: #Law, #Business & Economics, #House buying, #Property, #Real Estate

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On the Auction Block: Buying Short Sale, Foreclosure, or Probate Properties
 
Particularly following a huge drop in house values, you may find the market littered with tempting real estate bargains. The lowest-priced homes are often short sales, foreclosures, or probate properties.
Purchasing one of these types of properties is not for the faint of heart. As we’ll explain, the already-stressful process of buying your first home can be exacerbated by complications in the process at every step.
Buying a Short Sale
 
A “short sale” is real estate lingo for a house that’s being put up for sale for less than the homeowner owes on the mortgage—usually, a homeowner in financial distress who is trying to avoid foreclosure. Sometimes, but not always, the seller has already defaulted on the loan.
A short sale may have an alluringly low price—especially in comparison to what the seller owes—but that doesn’t necessarily make it a good deal. The seller may have overpaid to begin with, or the market may have fallen significantly. And as we’ll explain below, as the buyer you may be responsible for significant additional costs that aren’t accounted for in the selling price.
The biggest problem with a short sale is that the seller’s lender must approve the sale, because it’s going to take a loss in the process. The lender must balance that loss against the anticipated loss (and cost and hassle) if the property continues on into foreclosure.
For this reason, short sales rarely happen quickly. Even after you put in an offer and the seller accepts it, the two of you could be waiting around for months for the lender to decide whether the deal is acceptable. And you run the very real risk that the lender will say no, particularly if the seller has advertised the property for much less than is owed on it, desperately fishing for any offer to take to the bank.
Making an Offer on a Short Sale
 
If you’re interested in a short sale property, choose an agent who’s dealt with them before. The agent should do some homework before you make an offer. You want to know how much the homeowner owes on the property; if it’s a lot more than you’re willing to pay, the lender is unlikely to approve the sale. You also want to know whether the homeowner has more than one loan.
If so, you’ll need the approval of all lenders to make the sale, and the more lenders there are, the harder that will be to get, because they must each agree to taking a smaller piece of the pie. In any case, this basic information is available just by looking at the deed, which your agent can do for you.
Also, make sure your agent talks with the seller’s agent about what kind of legwork has already been done. Banks will approve a short sale only if the seller is in financial distress. Even though you’re going to need the bank’s ultimate approval, you want to be sure the seller has at least contacted the bank and gotten confirmation that the bank will consider a short sale. Unless you’re not in any particularly hurry to buy a place, you don’t want to waste your time waiting for a bank to respond to an offer if you’re fairly certain it will just be rejected anyway.
What to Expect With a Short Sale
 
If you decide, after obtaining the information above, that you still want to buy a short sale, expect it to differ from a regular sale in a few different ways:
•
Lower commissions.
The lender, who is ultimately paying the real estate agent commissions, may negotiate them down with the seller’s agent, and your agent will get paid less as a result. If you agreed to pay your agent more in a buyer’s brokerage agreement, you’ll have to do so out of your own pocket.
•
The property will be sold “as is.”
Lenders offer the property in its present condition, with no reductions for repair needs. To make sure you know what state things are in, you should be certain you have an inspection contingency in the contract, allowing you to have the property professionally inspected and back out of the deal if you’re not satisfied with the results. (We discuss inspections in greater detail in Chapter 12.) Just don’t expect to negotiate any of the repairs with the bank.
•
You’ll pay all closing costs.
These fees are usually split with the seller, but the bank will likely refuse to pay any of them.
•
The transaction will take longer.
You may spend months waiting for your offer to be approved or rejected by the bank. Make sure your offer terminates at some realistic point in the future. A few short days probably won’t do it, but if you let the offer remain open-ended, it’s sure to end up parked on a desk somewhere.
 
As you can see, short sales are extra work and hassle. Unless you’re going to get a property at a deep discount—even after adding up the costs of your real estate agent’s commission, repairs, and closing costs—and you have enough time to wait around for the bank to respond to your offer, you’re probably better off buying a house that isn’t conditioned on bank approval.
Where Most Foreclosures Happen
 
The ten cities with the largest percentages of homes foreclosed upon in mid-2008 included:
• Stockton, CA
• Riverside/San Bernardino, CA
• Las Vegas/Paradise, NV
• Bakersfield, CA
• Sacramento, CA
• Ft. Lauderdale, FL
• Phoenix/Mesa, AZ
• Oakland, CA
• Fresno, CA
• Miami, FL
 
 
Buying in Foreclosure
 
Even more challenging than buying a short sale is buying a foreclosure. Foreclosure occurs when a homeowner can’t pay back a mortgage loan, and the lender exercises its legal right to force a sale. But they’ve become especially common with recent meltdowns in the bank and mortgage industries, leading to renewed interest by bargain-hunting homebuyers. Foreclosures happen in every market, from the highest-end houses to the lowest. The bank or lender doesn’t usually foreclose right away—they give borrowers a grace period first. When a lender does move toward foreclosure it creates opportunities for new buyers at three stages of the process: preforeclosure, at a public sale or auction, and by buying directly from the bank (called real-estate-owned, or REO).
Regular Sellers Are Starting to Try Auctions
 
Some ordinary home sellers are deciding that auctions—either live or online—are the fastest, most profitable way to sell. This is most common on the East Coast, but catching on in the West.
Live auctions are usually handled by professionals who let potential buyers visit an open house first and hire inspectors before making a bid. The buyer pays the company a premium, usually 7%-10% of the house price.
The online auctions are usually handled on sites like eBay, and the procedures vary depending on the sellers: Horror stories are already emerging of naïve buyers who purchased houses sight unseen. The bottom line is you might get an auction bargain, but there are unusual up-front costs and risks.
 
The main advantage in buying a foreclosure is price—you’re likely to get some sort of a discount no matter what stage you buy at. The main disadvantages to buying foreclosure properties are:
•
Going without usual buyer protections.
As we’ll explain further below, at most stages in the foreclosure process you’ll forgo at least some of the normal protections available in a typical transaction; for example, you may not get to see the property before you buy, have to accept it “as is,” and have to go without title insurance.
•
Waiting to make sure the owner is protected.
Most states have laws to make sure banks can’t rip properties out from under late-paying owners on a moment’s notice. For buyers, that means deadlines, delays, court rules, and uncertainty—particularly in the many states that allow the former owner to “redeem” or buy back the property within a certain period of time after it was sold in foreclosure (usually from ten days to one year). Of course, if that happens, your money will be refunded. But as attorney Fred Steingold notes: “Do you really want to be held in limbo, unsure of whether you’ll ever be able to occupy the house?”
 
CHECK IT OUT
 
To find out your state’s redemption period and get other summaries of your state’s law regarding foreclosures, see:
 
 
•
Competition from experienced real estate investors.
If there are good deals to be had, you can bet real estate investors will be lined up in front of you.
•
Risks of undisclosed repair needs, tax liens, or other issues with the property.
Remember, these homeowners were probably financially stressed for a while. They may have held back on maintenance, gotten behind on their taxes, or used the house as collateral for other debts.
 
Still interested in pursuing foreclosed properties? Find an agent who specializes in them—most don’t handle them at all, while some go so far as to arrange bus tours of local foreclosures A good source is
www.reonetwork
com. If you still have a regular real estate agent, explain to both what you’re doing, so that you can agree on each agent’s limited role. You’d also be wise to hire a real estate attorney to help navigate this somewhat touchy area.
Buying a House in Preforeclosure
 
When a house is in preforeclosure, the owners have received a notice of default from their lender, saying they have a set period of time (depending on their state’s law) to either sell the house, pay all late mortgage payments and fees, or work out some other agreement.
Preforeclosure listings are publicly available even if the homeowner hasn’t listed the property for sale. Online services like
Foreclosures.com
or
RealtyTrac.com
compile this information from public records and members pay a modest monthly fee ($40-$50) to get the information. Some aggressive homebuyers or investors use this information to find homes in preforeclosure and then approach the defaulting homeowners to make an offer. Of course, they’ll be interested only in properties that are worth more than the homeowners owe, because they’ll be able to offer less than market value but still help the homeowners get out from under the mortgage. (If the seller owes more than the property is worth and can’t make up the difference or negotiate an agreement with the lender, the only alternative short of foreclosure is a short sale, discussed above.)
 
EXAMPLE:
Lucas wants to buy his first home, and is looking for a bargain. He uses an online service and finds a house in the neighborhood he wants to live in that is in preforeclosure. The owners, Jean and Greg, owed $155,000 on the house and Lucas thinks it’s worth about $180,000. Lucas approaches Jean and Greg and offers them $160,000: more than they owe on it, but less than it’s worth.
 
Whether a homeowner will appreciate this, if you attempt it, is questionable. Some may feel like you’re circling like a predator, waiting for misfortune to befall them. Others might be grateful that you’re helping them get out of a tough predicament. Either way, it’s a gamble, and the less experienced you are at it, the more likely you are to make mistakes.
If you do find a homeowner ready to sell, you can negotiate just as you would any other transaction. But you’ll probably be very pressed for time. Depending on the state you’re in, the homeowner could have as little as 30 days from the time the Notice of Default is filed to catch up on the mortgage (meaning you’ll have to close the deal by then), or the lender will put the house up for auction.

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