Jul
28
Over the last several years, news about real estate market has saturated our lives. It remains a key component of the economic slump as homeowners, builders and even commercial property owners struggle to hang on. The bursting bubble has added new terms to our real estate vernacular; short sales, bank owned, distressed properties, foreclosures, REO’s and more have made their way into the mainstream.
The terms are familiar but many buyers don’t fully grasp the situation. A short sale is a home that sells for less than the outstanding debt; this can be due to a single mortgage or multiple liens. The homeowner cannot stay current and the lender or the lenders recognize that there will be a loss. Considerations for a successful short sale include estimated market value of the property, owner’s financial situation, area market trends and evaluating foreclosure against accepting a short sale. If it makes fiscal sense to the lender and the owner is legitimately unable to pay, they may accept a short sale. If the lender elects not to consider a short sale, the home typically moves into the foreclosure process and is auctioned on the courthouse steps.
As an owner, is it better to try for a short sale or just let the home go into foreclosure? The answer is that it depends. Under the new Home Affordable Foreclosure Alternatives program, borrowers will earn a $3,000 “relocation incentive” and servicers will get $1,500 for handling a short sale; the idea being to motivate owners to leave the home in decent condition so that lenders don’t have to factor in repairs. Credit-wise, owners will take significant hits either way but slightly less with a short sale. They also typically have a shorter negative impact than a foreclosure when it comes to getting another FHA backed mortgage. Owners have many other considerations as well, tax consequences and possible collection of portions of outstanding debt being two major ones. Those are unique to the situation and professionals in those specific fields should be consulted before making any decisions.
For buyers that are constantly inundated with media reports, infomercials and advertisements extolling the riches to be made with distressed properties, the reality is usually quite different. This is a lengthy process that is naturally complicated, no two situations are the same as owners and real estate are unique entities. Add to that the sheer volume of distressed properties and the limited staff of lenders and asset management firms, successfully completing a distressed home purchase is akin to running a marathon without training; few cross the finish line.
Do not consider a distressed property without setting realistic expectations, it is a time consuming process and one that may never reach the closing table. It is foolhardy to enter this arena without an experienced agent; the process is different than a traditional transaction. Listing agents are evaluated on their ability to deliver maximum sales prices in as short a time as possible; they are expected to generate interest and offers. Most homes are evaluated on a 90-120 day time frame so it is not unusual to have a listing agent immediately call for a “highest and best” offer. Experienced buyer agents frequently have this happen and there is a spirited debate as to just how often there are multiple bids or just a single buyer being pushed to essentially bid against themselves…it is all part of the mystique.
Homes are sold as is; there is no disclosure provided and buyers are responsible for completing any and all research during the “due diligence” period. From home inspections to surveys to termite inspections to area research…buyers should make good use of that period. This also includes finalizing financing options. It is critical to allow ample time for an appraisal; it’s wise to extend this period for as long as possible. If any issues are found that the buyer finds objectionable, the offer must be terminated during the due diligence. Once that time frame ends, buyers are expected to close. At this point most traditional transactions begin the march to the closing table, this is not necessarily the case with distressed sales.
Language is routinely inserted into contracts that allow sellers to reserve the right to cancel the deal before closing without penalty. It is possible that multiple debtors will need to approve the offer and it if one balks the deal can fall apart. There is also little sense of urgency by sellers, many times asset managers are working up to a hundred homes and they become desensitized to agent calls, many simply become unreachable. For them, it is simply a numbers game and one contract is no more important than another. Their objective, like that of the listing agent, is to maximize price and most work within defined sale to list price ratios.
Buyers that leave the closing table with keys to a distressed home share many traits, patience and determination being the primary ones. It is critical to understand that this is likely to be a lengthy and fluid process; there are often many unforeseen obstacles and these opportunities are not for every buyer. The need for proper and thorough research before and during the process is critical, successful buyers align themselves with experienced professionals and view this process as a business transaction. That can be difficult as real estate is often driven as much by the heart as it is by the head; this has to be carefully managed.
For those educated buyers privy to the challenges, the rewards can be many. Excellent opportunities can be found all over metro Atlanta and at all price points, buckle your chin strap and jump in the game….just watch out for that blind side hit.
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