Distress Sales: The Earliest Opportunities
In the first post of the Distress Sales series, we discovered how buyers can still find good deals in distressed and foreclosed properties despite the end of the 2009 foreclosure crisis
When homeowners fall behind in their loan payments, they can escape foreclosure by selling the home. If its value has dropped below the amount of mortgage balance owed, it is known as a short sale, the first opportunity to buy a foreclosure. Lenders must approve short sales since some of the loan will not be repaid. The lenders absorb losses.
These days, short sales offer very little in the way of a bargain, according to Daren Blomquist, who has been analyzing the distressed property market for many years as a vice president with RealtyTrac. They went for only about 6% less than comparable regular homes sold during the second quarter of 2017.
A big advantage to short sales is, however, that the sellers usually stay in the home until the closing, according to Christina Griffin, a Coldwell Banker Residential Real Estate agent in Tampa, Fla.
“Most are not vacant so they tend to be in great condition,” she said.
But trying to buy a short sale can be frustrating for buyers, according to Lisa Thomson, a Coldwell Banker Residential Real Estate agent in Miami.
In the first place, lenders have veto power over any deal. If the price negotiated with the seller is much lower than what is owed to them, and if it falls short of appraised value of the property, lenders will often withhold approval. Buyers can spend time shopping for the property, scrutinizing the home, and coming up with an offer, only to have it shot down by the mortgage lender.
Too, many short sales come with more than one loan. If there’s a home equity loan involved, the second lien holder may prove uncooperative. Since this lender only gets paid after the first loan is fully paid off, these lenders in the secondary position may hold up the sale until buyers sweeten the deal for them by paying off some of what’s owed.
But there’s an additional uncertainty in many markets, said Thomson. Sometimes, the seller is not making a bonafide offer of sale.
“Some short sellers are trying to renegotiate their loans,” she said. “They put their home on the market for show, to demonstrate that they’re trying to cooperate with their banks.”
In doing so, they price the homes unrealistically so it stays on the market. What they’re really doing is hoping their lenders will lower their interest rate so they can afford to stay. Plus, home prices are rising, which can take owners out of a short sale situation by hiking the price of the home up to the value of the mortgage balance. Meantime, buyers may get shafted.
Phoebe Nikolakakis, an agent with Coldwell Banker Pacific Properties in Oahu, Hawaii, said short sale buyers have to be patient and prepared to overcome obstacles since these sales are sometimes not as clean as regular transactions. Buyers should, for example, try to have a cash cushion to meet unexpected expenses, such as paying off a mechanic’s lien.
“I’m working on a short sale now where the lender is pushing the buyer to pay off the delinquent maintenance and property association fees,” she said.
One tip from Thomson is that buyers should work with an agent used to handling short sales and REOs. She claimed to have been involved in 3,000 distressed property sales over the past 10 years. Agents like her have experienced the ins and outs of distressed property sales. They can guide buyers to deals more likely to close.
Griffin said they also have a more nuanced understanding of the policies and proclivities of different lenders. They can tailor bids to make them more attractive to the asset managers of lenders, who have the authority to approve sales.
Many homes go into foreclosure without ever getting listed as short sales. Instead, lenders force them into auctions, the second buying opportunity. These deals, which often take place on the county courthouse steps, are the cheapest way to buy foreclosures — and the most risky. Often, the only bidders are experienced real estate investors, who buy lots of properties and are willing to take their losses as well as their wins in stride.
For ordinary buyers looking to become owner-occupiers, there are many potential pitfalls. Condition is a big concern. Many of these homes are not available for inspection before the auction. Buyers may only be able to look at the house from the street. That can be informative — if a house is rundown from the outside it usually is equally bad inside — but often it is not. There could be hidden defects like bad plumbing or cracked foundations that can cost a lot to fix, wiping away any of the advantage of a low selling price.
Many auction sales also come with a reserve price set by the lender, which often comes up close to the market value. That lowers the odds of finding a bargain on the courthouse steps. Many sales that don’t have reserve prices are in very bad condition and few buyers, other than contractors looking for buy-and-flips and investors seeking tear-downs, would be interested in them.
Add in that buyers usually can’t get mortgages to finance their auction bids and you can see why most foreclosure buyers opt to wait until after the auction to purchase houses as bank owned properties, called REOs in industry parlance.