Buying Distressed Property

Data out yesterday from RealtyTrac, an online foreclosure tracking service, shows that foreclosures are on the decline rather dramatically.  They caution however that the cause is not an improving housing market but rather a slowdown do to a more cautious paperwork process by the lending industry.  In fact, they reported 1 in 240 California households received some form of foreclosure notice last month which would suggest the market is still soft.  But if foreclosures are on the decline, is it really a good time to buy and can you still buy a distressed property, and how do you go about it?  What about short sales?  Have I missed out and are distressed properties always the “best” deal?

There are several ways a buyer can acquire a distressed property. One way is at the Trust Deed auction on the courtroom steps.  In California we are a non-judicial state so foreclosure does not require a trip before a judge, but rather takes place as an auction at the courtroom steps.  The TD sale is really designed for investors however, since it’s an all cash purchase (no financing) and involves extensive research and time, and far more buyer risk.  This is due to the lack of warrant-able clear title and that the auction is very often postponed over and over again, costing lots of time.  But time aside, the title research should be reason enough to dissuade most would be buyers.  Why?  Imagine buying a home at auction and thinking you got a great deal, only to find out that there were other loans or liens on the property that you were unaware of.  Maybe you bought from 2nd lien holder and come to find out that there is still a first trust deed on the property.  Yikes!  Or maybe a Federal tax lien.  Uncle Sam always gets his.  At a trust deed auction, there are no warranties of any kind, so you better have done a lot of research before bidding.

The more common way to buy a foreclosure is through your Realtor and the Multiple Listing Service (MLS).  This property is known as an REO – Real Estate Owned (by the bank).  Under this type of sale, the bank does offer clear title and all encumbrances are paid off.  In this way it’s just like a regular sale but the home is sold “as is, where is”. This means that while you do get the warranty of clear title unlike the trust deed sale, you don’t get repairs.  The bank will not fix anything, do any termite work or offer you a home warranty.  Thus there are almost always additional costs that must be taken into account when buying an REO.  Further REO’s are seldom in excellent condition and in fact very often the trend has been that they are in some degree of disrepair and also in lousy locations.  Bad decisions by homeowners, beget bad decisions.  In other words, the guy that bought and subsequently lost his home, often  bought a poor location too, then maybe even tried to be Handy-Andy and fix the place up himself – without permits and the ability to do quality work… you get the picture, the house is a wreck.

Lastly there are short sales.  Short sales are a place that an average Joe can potentially get a really good deal by purchasing directly from a homeowner, but at an amount lower than the debt on the property.  To accomplish this, the homeowner has to get the lender or lenders approval to sell for less than owed.  I have described short sale process here in The Real Estate Conversation before, but suffice to say, there’s nothing short about a short sale.  A short sale can take many, many months and because the transaction requires all of the lenders approval, success is not guaranteed.  So short sales generally sell for a discount because of the time factor.   Time is money after all and short sales take a long time to complete.  Also like a foreclosure there are no repairs or home warranties, so the property condition on short sale homes tends to be inferior to regular equity sales, though usually better than REO’s.  As a result, there is still often some upside to the buyer in the form of sweat equity – you buy for less and fix it yourself.

Should everyone be looking for a distressed sale then?  Not necessarily.  In fact if you are on a schedule to move or have to sell a home and it’s under contract, but not yet closed, neither an REO nor a short sale are options because lenders will not allow any contingency on a successful closing of another home when selling or negotiating a distressed property.  So put simply, if you need to sell your current home to buy, you are not eligible to buy a distressed property.  If you are on a time sensitive schedule, short sales are out too.  Does the fact that you can’t buy a distressed property mean you shouldn’t buy at all?  Of course not.  You can still make an excellent purchase if the regular sale is priced correctly and in fact more often than not, the regular sale will be in far better condition than a distressed home and very often in a better location too.  You can also close when you want, a real advantage if you need to move quickly to get in before school starts etc.  So whether you are buying a regular sale, an REO or a short sale, as long as you’ve clearly identified your goals, wish list and priorities, you would be hard pressed to find a better time to buy than right now.

About Tim Freund

Tim Freund has been a licensed real estate agent/broker since 1990. He spent 14 years as a new home sales rep, ran his own boutique resale brokerage for 5 years and is currently an Estates Director for Dilbeck Estates/Christie's International Estates in Westlake Village, Ca. Tim is a Certified Residential Specialist (CRS), an Accredited Buyer's Representative (ABR), a Corporate Mobilty Specialist (CMS) and a Senior Real Estate Specialist (SRES). Tim has successfully negotiated a loan modification for a client and is a professional short sale negotiator. Tim has been married 28 years, has 2 children, is a native Californian and has been a resident of the Conejo Valley since 1991.
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