Short sale, pre-foreclosure, foreclosure, bank-owned, in foreclosure, forbearance, oh my: so many terms!
Many people are wondering if foreclosure properties or short sales are the way to go in this market. I wanted to share some information with you about the sale process for these types of transactions.
Bank owned: these properties have already been foreclosed and are now owned by the banks. When purchased, clear and marketable title is conveyed; in fact you can probably get a break on the title search since the bank had so recently completed one. They have not had prior home inspections and are typically sold “as-is”. Often they are in deplorable condition and we can get no information from prior owners as they are completely out of the picture. Though you are able to perform a home inspection the results are for your knowledge only. Generally you will have the ability to back out of the contract after the home inspection if there were more troubles than you anticipated and you would get back any deposit monies. These properties are usually priced at or below market value and often have multiple offers; we are seeing them sell quickly and sometimes at or over asking price. (Keep in mind that if you pay list price on a perfectly or competitively priced property you are still getting a deal. Many people define a “deal” relative to list price when it should be defined relative to “market value”).
Short Sales and/or 3rd Party Approval required: These properties are not necessarily foreclosures; while they are still owned by the residents of the house, they might be in pre-foreclosure for failing to keep up with mortgage payments despite sufficient equity in the house, or it just might be that the owner while current on their mortgage payments is upside down – they owe more than the house is worth and are seeking a short sale rather than having to bring money to the table at closing. Getting short sale approval from the bank relieves the homeowner of the difference between market value and mortgage balance. The owner needs to get approval from the bank for the short sale and the buyer also needs to be approved by the same bank. Pricing is inconsistent on these properties because sellers and Realtors set the price, the banks do not. Often you can negotiate the price down from list on a short sale property as the owner has probably priced the property to cover the difference between market value and mortgage amount, but the banks are more concerned about NOT carrying inventory and will often negotiate further than the owner will; however, you do not get to negotiate directly with the bank.
When you purchase a short sale or pre-foreclosure property it is imperative to work with a real estate attorney who has experience in this type of transaction. There are a lot of unknowns – how many liens are there against the property? Is there a second mortgage with a different bank? An unpaid tax debt, contractor lien, or even an American Express bill? It is hard to tell if you will receive clear and marketable title and if you buy a house with a lien against it – it becomes your lien even if you were unaware of it at the time of closing.
Often pre-foreclosure properties are scheduled for sheriff sales – your attorney (or your Realtor) needs to ensure that delays are filed for – because if the property goes to sheriff sale and someone bids on it, you could lose it even if you have had an offer on the table for weeks already. I have seen short sale transactions go on for months and months without a set closing date.