Roughly forty percent of the homes for sale on today's market are short sales and
foreclosures! Distressed properties are well known for their value (a
reputation which is sometimes accurate, and sometimes not), but they
also have a reputation for causing buyers to become distressed, too!
Transactional snafus, last-minute surprises and long, drawn-out escrows
that never close seem to be par for the course.
of avoiding these properties altogether, get educated about the most common dramas that go
down in these deals, and how you can avoid falling victim.
1. Â Run-on (and on, and on) escrows.
Â When youâ€™re buying a home (or selling one, for that matter), time is
absolutely of the essence. Â And buyers reasonably expect that the big
time suck in real estate is in the house hunting process itself; seems
like once you find a home you want to buy and the seller agrees to your
price and terms, things should move pretty quickly, right? Not
so much, when it comes to some distressed property sales. Iâ€™ve heard
tell of the occasional, swiftly-moving escrow on an REO (real estate
owned - by the bank). But for the most part, these transactions take
anywhere from a few days to a few weeks longer than â€œregularâ€ sales,
because of the extra signatures, supervisor-level approvals and
even investor involvement required to seal the deal. Â Banks
donâ€™t have the same sense of urgency individual home sellers do, and
itâ€™s not uncommon for the people who need to sign on the dotted line to
be on vacation or scattered across the country, adding daysâ€™ or weeksâ€™
worth of time to the escrow.
short sales are also an entirely different animal when it comes to
escrow timelines. While a standard sale from an individual seller to an
individual buyer might take 45 days from contract to closing, a short sale can take anywhere from 45 days to 6 or 8 months (!) to get the deal closed, after the seller has accepted the contract.
Avoid the drama by:
expecting your escrow to run long, and being pleasantly surprised if it
doesnâ€™t. Â Expectation management is everything.
Make sure you take these extended timelines into account when youâ€™re working with your mortgage broker on
the issue of when to lock your interest rate, and how long your rate locks will last. You might even need to plan on and/or set aside an
allowance for the cost of extending your low interest rate, if rates are
rising rapidly during the time youâ€™re waiting for the deal to be done.
2. Â Bank won't take lowball offer. Â If
I had a dollar for every time Iâ€™ve received a question from an outraged
reader to the effect that a buyer has had their short sale or REO offer
rejected on grounds that it was too low, Â even though the bank has no other offers, I
could buy a foreclosure myself (admittedly, itâ€™d be one of those $150
foreclosures in some blighted town with tax liens and no plumbing, but
owe their shareholders and investors a duty to get as much as they can
for these properties. Just because you see itâ€™s on the market and
listed as a short sale or a foreclosure doesnâ€™t mean theyâ€™re going to
give it to you for a fraction of its worth. The bankâ€™s goal is to get a purchase price as close as
possible to the homeâ€™s fair market value, as determined by the recent
sales prices of similar, nearby homes, with some adjustments made for
the propertyâ€™s condition. Â Fact is, many banks would rather see the
listing agent reduce the price by a moderate amount, and wait to see
what offers come in, than to accept an offer 30 percent below the asking
price just because there are no other offers on the table.
Avoid the drama by: Â working
with your agent to make a realistic offer, based on recent comparable
sales in the neighborhood, not just on what you think you can get away
with. Â You can waste a lot of time, spin a lot of wheels and lose out on
a lot of properties making lowball offer after lowball offer on
distressed homes. Sit down with your broker or agent, review the â€˜compsâ€™
and make a smart offer that reflects a good value for you, is within
your budget and is not bizarrely out of the realm of the fair market
value of the property.
3. Â Last minute postponements/cancellations. Â These
transactions have an uncanny way of being delayed at the last minute -
or never going through at all, through no fault of the wanna-be buyer. You signed docs yesterday, put your dog in the crate this morning and
just hopped in the moving truck, only to get a text from your broker
that the deal didnâ€™t close because the escrow company which was selected
by the bank flubbed the checkboxes on a single sheet of paper (it
happens). Or, youâ€™ve been in contract (with the seller) on a short sale
for four months, and the bank refuses the sale entirely because the
seller refuses to kick even $1 of their own cash into the deal, despite
having a flush savings account.
Avoid the drama by: Â staying
as flexible as possible with your moving plans as long as possible.
Â Best practice is to plan on some overlap between the time you can be in
your last place and your scheduled move-in date. Â Also, if youâ€™re in
contract on a short sale, you should take the point of view that you don't have a firm deal until you get the bankâ€™s approval of the
transaction. So donâ€™t even think about starting to make moving plans or
paying for home inspections and appraisals until you know the bank has
greenlit the deal and that the purchase price and terms theyâ€™ve approved
work for both you and the seller.
4. Â The bankâ€™s black box.
Â Â Make an offer on a normal home and youâ€™re likely to know what the
outcome will be within a few hours or a few days, at the outside. If
things take longer because the seller is out of town or some such, the
listing agent tells you that, and you at least know whatâ€™s going on.
an offer on a bank-owned property or a short sale? Â Itâ€™s a crap shoot -
could be days, but could also, easily, be weeks or months before you
know whatâ€™s going on. Â And no amount of calling, pleading, prodding or
nudging is likely to get you much information on how your offer or the
sellerâ€™s short sale application is being handled or what (if any)
progress is being made. Â And that â€œblack boxâ€ into which your offer
disappears at the benk level is very frustrating.
Avoid the drama by:
Â continuing your house hunt until you have an answer back. Â Maniacally
pestering the listing agent for answers or harrassing your buyerâ€™s
broker into spending hours on hold with the bank is highly unlikely to
get you any insight. (With that said, it does make sense for your agent
to check in regularly - sometimes even daily - Â with a short sale or REO
listing agent to stay updated on any developments with the property and
to make sure your offer/transaction stays in the front of their mind.) Â
of the angst in these situations arises when a buyer feels they passed
on properties that would have really worked for them when they pinned
their hopes on a distressed home. Â You can only control your efforts and
activities, not the bankâ€™s. Â So, consult with your own broker or agent
about staying proactive in viewing and even pursuing other properties
until you have a firm â€œyesâ€ from the bank on your short sale or REO
offer.Â Until that time, and usually for a short time after you get the bank's approval, you have the right to back out of the transaction if you need to (make sure your broker briefs you on precisely when your right to rescind your offer or exercise contingencies - i.e., bail - will expire).
5. Â Double standards.
In a â€œregularâ€ equity sale with no bank involvement, both buyer and
seller are obligated to meet various timelines. Â Seller has to provide
disclosures by X date, open the property to inspections - with utilities
on - by Y, and close and move out by Z. Â REO and short sale buyers, on
the other hand, are often dismayed to find that Â even though the bank
might take weeks or months to sign or handle its deliverables, the bank
will insist that the buyer show up, sign or send a check quick-like.
Avoid the drama by:
chalking it up to the (admittedly irritating) way things are - the
price you pay to buy from the bank. Â Realize that working with the bank
on the bankâ€™s terms is unavoidable when you buy a distressed property.
Then, go into the deal with realistic expectations - including the
expectation that the bank will drag its feet, despite expecting you to
keep every deadline - and youâ€™ll be less frustrated, and less likely to
make poor decisions out of frustration.
make sure you do respond in a timely manner to the bankâ€™s requests and
your obligations under the contract. Â Iâ€™ve seen banks capitalize on
buyer delays in returning signatures and removing contingencies to
accept higher offers they received in the interim. Â Donâ€™t lose your home
on a technicality because you assume that the bankâ€™s lackadaisacal
timelines apply to you as well.
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