Buying Foreclosures
A BRIEF FORECLOSURE OVERVIEWREO property, bank owned homes, distressed property are all terms used to indicate FORECLOSURES. Whatever terminology is used, it all refers to real estate where the owner has defaulted on the Trust Deed/Mortgage and the primary lienholder (The Bank) has pursued legal avenues set forth in state law to collect on the indebtedness. Pre-foreclosure refers to the first steps in the process where the bank/lender has engaged the services of an attorney to handle the legal paperwork to NOD (notice of default), notice of sale, and finally the courthouse sale itself. The vast majority of property sold on courthouse steps are retained by the bank/lender, not the general public. WOW, that's a mouthful, isn't it.
Neither member of the DREAM TEAM is an attorney so we will not attempt to give you the details on how a property actually ends up in foreclosure, and we have found that the procedure varies somewhat from state to state so let's just jump ahead to our role as REALTORS in assisting our clients with the purchase of foreclosed properties in our area.
First of all, forget what you've seen on TV about buying foreclosed property for PENNIES on the dollar and with NO MONEY DOWN. That may work in some areas of the country, but not here. What you can find here are some very good deals and even a few great deals on cabins that can be used as either premament residences, vacation homes or investment property. Since the area is considered a vacation destination, a vast majority of the cabins purchased are used for income producing purposes. Buying these properties for 40% or 50% of their 2006 or 2007 value would not be unusual. While we do have some conventional homes in residential areas that are in foreclosure, the majority of distressed property sold is vacation related.
We are definitely in a buyers market in the Smoky Mountain area. Inventories are high, interest rates continue to be at historic lows and prices have come down. The foreclosure and short sale business accounts for 30% to 40% of total residential sales, which creates motivation among sellers in the retail market to lower prices. Couple that with the bargin hunters and we see that 72% of all residential sales for the first 4 months of 2010 are $200,000 and under.
We are also of the opinion that the supply of foreclosures will not end anytime soon. We will most likely see a steady level of these properties for the next couple of years.
LET'S CUT TO THE CHASE:
Condition of Foreclosures:
The condition of a foreclosed house will vary from lousy (I will define) and in need of much repair to pretty good and in need of only minor repair. Keep in mind that the foreclosure process in Tennessee takes a minimum of 30 days for publishing of legal notices and once the process is complete most lenders will give the owners time to get out any personal belongings and furniture. With that amount of time, owners have plenty of time to take out just about everything. Thus the definition of lousy. Where everything, including appliance, toilets, countertops, cabinets, light fixtures, etc, etc have been removed. I have even seen homes where interior doors have been taken out. On the other end of the spectrum are the pretty good ones. Those are the ones where none of the essential fixtures mentioned above have been removed and very few repairs need to be made to get the home in livable condition.
Regardless of the condition of the property, you will be buying it in "AS IS" condition. Most banks will have several disclosures and addendum to a purchase contract that will state the "AS IS" condition in several different ways so that there is no mistake in the buyer's mind. There are no expressed or implied warranties or guaranties. If there are any defects with the property that come to light after closing they are the sole responsibility of the buyer. IF YOU CAN'T LIVE WITH THIS TYPE OF RISK THEN DON'T GET IN THE FORECLOSURE MARKET. However, the buyer still has every right to make any and all kinds of inspections that they are willing to pay for. Again, scheduling and paying for inspections are totally the responsibility of the buyer.
Types of inspections:
1. Homes Inspection by a licensed and insured inspector
2. Septic systems
3. Boundry Line
4. Environmental
5. Radon Gas
6. Plumbing
7. Zoning
All of these and more fall under the inspection umbrella and if any condition is found, which is more than cosmetic in nature, the buyer has the right to void the purchase contract. So, although you are buying "AS IS" make very sure that you are given the right to make inspections. The cost for most of these is only a few hundred dollars and can save you from large repair bills.
Pricing of Foreclosures
The beginning list price will normally reflect the amount of money that the lender has tied up in the property and current market conditions in the immediate area. Lenders will try to minimize their loss. Many will set up a schedule of list price that automatically reduces every 30 days until an acceptable offers comes in. Keep in mind that lenders DO NOT want to sit on property for months and months, as that also represents a loss. Other cost to the lender are carrying costs and selling expense (i.e. commissions). All of this goes into the lenders final plan for list price.
Example: A home sold for $400,000 in 2005. The bank retained the property at auction in 2010 for $350,000. The home is in an area where there are few foreclosures. The bank's list price could very well be $350,000 or higher.
Take the same scenario as above except the house is located in a high foreclosure area and the initial list price could very well be $250,000. The exact number will be determined by what properties are selling for in the area and the opinion of real estate experts for that area.
The morale of the story is that buyers must research their purchases thoroughly in order to know if they are getting a good value in the property they are buying. Having a real estate expert on your side who knows these numbers, and knows the areas and trend will prove to be a valuable tool to most buyers.
What you need to do to buy a foreclosure:
1. First and foremost............you must be prepared. Whether you are paying cash or obtaining financing you will need a letter from your lender/banker/financial planner stating that you have the capacity to buy the property you are considering. If you are obtaining financing, have most of those details worked out ahead of time. Most banks will not accept an offer that does not have a pre-approval letter. If you are paying cash, will also need a letter from your banker stating that you have the funds to cover the purchase. Pre-approval letter.
2. Earnest Money: Another requirement to submit offers on 98% of the foreclosures on the market. Normally, that will be $1000 dollars and must be submitted to the REO agent along with the offer.
3. To get the best deals you must be ready to act. Foreclosures have become so popular that the really good agents are aware of the properties coming to the market before they actually get there. Some banks have many foreclosures and are waiting to release them to the market when conditions are more favorable. Know what's coming, preview it, and be ready to put in the HIGHEST AND BEST offer in the day it hits the market. Look at the overall picture. Don't fret that you had to go above list price to get the property.................did you still get a good deal??????
4. Have reasonable expectations on offered price. You can bet that if you know of really good property coming up you are not alone. There are others who also have this information. Do not expect to put in a LOW-BALL offer and get it accepted. LOW-BALL offers are the exception, not the norm. Again, foreclosures are priced to reflect the bank's exposure and market conditions. Most of the list prices already reflect a dramatic reduction. Only those that have been on the market for extended periods (greater than 90 days) will be primed for low offers. Again, a good buyer agent with experience in foreclosures should be able to assist you with this and avoid a lot of frustration.
5. Be patient. Banks are experiencing an unprecedented number of foreclosures and short sales. There is usually no one person who can accept or reject offers so the process may take several days. That is usually made worse if there are several offers involved. Also, it IS NOT first come, first serve. Just because you got your offer in first does not mean that you will get the deal. If the property is pretty hot, banks will wait several days for multiple offers and select the HIGHEST AND BEST.
6. HIGHEST AND BEST: Simply put.............it's the highest $ offer with the fewest number of contingencies. HIGHEST AND BEST EXAMPLE: Full price, cash, no home inspection, no appraisal, close in 1 week. Who wouldn't accept and offer like that? Truthfully, there are not many individuals who can make offers like that. LOWEST AND WORST EXAMPLE: 50% under list price, 100% financing, home inspection, septic inspection, survey, radon gas test, must appraise, close in 60 days. If you were the seller which offer would you accept. Of course these are somewhat exaggerated................but only somewhat.
The biggest part of dealing with foreclosures is finding the right property and getting an accepted offer and a binding contract. Once that has been accomplished the process proceeds pretty much as a normal transaction. Unless you have done several of these, it is in your best interest to solicit the assistance of an EXPERT Realtor who has done several of these.
Call the DREAM TEAM.
