Everyone loves a bargain, and in the current climate of deflated prices and historically low interest rates, today's housing market offers plenty of them. However, when you consider purchasing any property either as an investment, starter home or the oft elusive "dream home," it can be difficult to know what type of home is most suitable.
Therefore, this month I am providing a brief description of several types of distressed properties along with some drawbacks and incentives offered from each.
Buying Properties at Foreclosure or "Auction"
Lots of clients ask if it is a good idea to purchase property at a foreclosure auction. Unless you're an experienced real estate investor or developer, the answer is "no". While foreclosure auctions may offer the deepest discounts, they are also riddled with potential pitfalls and typically not for the faint of heart or the shallow wallet.
A foreclosure is a legal process that allows a lender to sell a mortgaged property to recover losses when the owner defaults on their mortgage. Notices containing the auction date and property address are published in local newspapers and a public auction is held. A non-refundable cash deposit, which could be upwards of $5,000.00, will be required at the auction if you are the winning bidder. Additionally, if you are not prepared to purchase in cash, there is a very short time frame, usually 30 days, to secure financing and close. With the banks being slower to approve loans than in the past, such financing may prove difficult to obtain in the necessary time frame and could place your deposit at risk.
Additionally, you may find yourself inheriting a variety of other problems, including: costly repairs, evicting prior tenants, potential defects in the title which may affect your ability to re-sell, and inheriting responsibility for certain types of liens incurred by the prior owner.
Buying Short Sales
In a short sale, a Seller owes more than the home is currently worth and may be behind in mortgage payments. The lender who holds the current mortgage is presented with a signed offer. Of course, any offer is contingent upon the current lender agreeing to its terms and purchase price. The bank will accept, reject or counter on the offer presented, but their response time varies greatly. Typically these types of transactions average 2-6 months from an offer as terms continue to be negotiated. For someone not married to a specific date to be in a home, or who is comfortable knowing the bank may not approve their offer, short sales can provide a good value. Based upon my experience, if your offer is within 10% of what the bank appraises the property for, a deal is likely to be struck. Additionally, buyers are entitled to all home inspections and marketable title, so they are able to resell the property at a later date without prior owner liens or issues.
Two components for a successful short sale are to know where the lender is in the foreclosure process because an auction date may not allow for enough time to negotiate a deal and to utilize a Real Estate Attorney, Realtor and Mortgage Specialist familiar with such transactions.
Buying Bank Owned Property a/k/a REO Property
Bank owned or "Real Estate Owned" property is property that has been to foreclosure auction and failed to sell. There's lots of inventory currently available in most cites and towns, and the financing contingencies are more forgiving, so there should be ample time to secure a mortgage from your lender. Additionally, bank owned property offers purchasers the opportunity to inspect the property and its physical condition; the bank is required to provide you marketable title and to remove any tenants who may be holding over. Yet another benefit is that the bank is responsible for paying any back taxes and liens at closing. As a potential buyer of a bank owned property, always utilize an experienced real estate attorney to thoroughly review the title. Otherwise, if the bank did not foreclose properly, you may find you have wasted valuable time and resources looking at a property that is not marketable.
Over the coming months I believe there will continue to be unique opportunities within the real estate market. As always, the key to capitalizing will be to, be bold, be brave and be smart. Remember that huge inventory and low rates make this a true buyer's market in which you call the shots.
For more information about any of the types of property described above or assistance with your next home purchase or sale, please feel free to contact me by phone or e-mail.
-Andrew R. Martignetti, Esq.
Information in the above article is for educational purposes only and does not create an attorney-client relationship. You should not construe this to be a legal opinion on any specific facts or circumstances, and you should not act upon this information without seeking professional counsel.
