Dunedin Homes - Short Sales, Foreclosures and Bank-Owned Properties

There are many properties in some stage of foreclosure or taken back by lenders at this time and a lot of buyers ask about these because they've heard that this is where you can get an incredible deal. After more experience with these types of properties I've found that there is a lot of false information and hype out there and want to provide you with some more information that can help you understand this whole subject a little better.

During the boom years there were tons of seminars and books on how to make a fortune in real estate by buying and flipping houses. Though some people were able to make good money quickly that way during the period of about 2003 to mid-2005, many others are now part of the foreclosure statistics.

Similarly, there are now lots of websites, seminars, books, etc. on how to make your fortune buying foreclosure properties. They present stories of exceptionally good situations that make it sound like this is how every foreclosure situation goes even though it is really more of a rare occurrence for the average person. Maybe these are the same people who promoted the seminars and books on "flipping" (and maybe they are also the ones who email you about winning the UK lottery or about the $50Million they want to send you from Nigeria:).

That's not to say that there aren't good deals available in properties that are in some stage of foreclosure, there are. BUT - there are some things you'll need to understand because the process can be quite different from the normal.

First of all there are some different types of 'foreclosure' properties and I want to start off by clearing this up for you.

There is a 'pre-foreclosure'. This is a property where the owner has fallen behind on their payments to a point where the bank has begun the foreclosure proceedings (usually by filing a notice of pending legal action).

There is a 'short sale'. This generally means a pre-foreclosure property where the property is being listed at a price that is less than what is owed on the outstanding loans. You can recognize these in listings as it will either say "short sale" or "3rd party approval needed" or "list price may not be sufficient to cover all encumbrances" (meaning that the bank will have to approve it in addition to the seller accepting the offer).

One word of caution though, some realtors will list a property as a short sale or "possible" short sale without even having their client complete a "short sale package" (the paperwork that will have to be submitted to the bank with any contract) - avoid these as in most cases they end up going nowhere or take months to hear anything back.

There are also "bank-owned" properties. Bank-owned means the bank has completed the foreclosure proceedings and now owns the property fully. These are usually the easiest and quickest of the different types of foreclosure properties to deal with although they are often (not always) in pretty bad condition.

That gives you a basic overview of the types of "foreclosure" properties you may run into. Now let's look at what you need to know about them if you're thinking about venturing into this area.

The most difficult type of these to deal with at this point in time (in most cases) is a short sale. With a short sale, you will have to be prepared to wait weeks or even months to hear anything back on an offer. If your offer is at the asking price and 100% cash, then that may shorten the time period. But even in that situation there is no guarantee that it won't take weeks or months.

As an example, I spoke with another realtor a few months ago whose client not only put in a full list price offer but also offered to pay for the title insurance that would normally be paid by the seller. It still took 3 weeks to get an answer and what came back from the bank was that they wouldn't consider the offer until they had a special disclosure signed by the buyer that is required on houses built before 1978. Only problem is that the house was built in the last 5 years and this disclosure isn't required. But the bank doesn't care and wants the disclosure before considering the offer. And it took 3 weeks to get even this ridiculous reply back!

One other case is a realtor that listed a short sale and got a very low offer which she submitted to the bank in November (this was even after the house was listed for $200,000 less than the current owner paid for it 2 years ago). As of February she still hadn't gotten a reply back from the bank. So that was 3 months with no reply.

Recently I had a client put in an offer on a short sale that just came back on the market after the lender rejected the offer that had been submitted to them nearly 6 months ago. The offer was lower than they wanted but they rejected even doing a short sale because the owner had been continuing to pay their monthly loan payment - and it took them 6 months to let the owner's realtor know this.

So with short sale properties, you first need to find out if it is actually a good deal. I had one client recently looking at a townhouse that is a short sale and based on recent sales in the complex and comparing the condition of the properties this townhouse was priced at least $15,000 too high for even its market value.

If you do determine it is a good deal (especially when it is below market value) then it is best to offer a price that the bank will consider. This is especially true when the lender has already dropped the list price once or more. If you go too low, you may never hear back. And keep in mind that in some cases during the waiting period for a reply, other buyers can submit an offer and if the bank feels the other offer is better than yours - they can then accept it and reject yours. You can also miss out on a really good deal by playing the negotiating game - trying to get the price down even more when it is already priced really well.

I saw an example of this with a client who put in an offer on a townhouse directly on Tampa Bay. We found out they already had another offer in and I told my client to offer full list price (which was still a great deal). We found out after the deal closed that the other offer was $15,000 less - suggested to the buyer by his realtor. My client's offer was the one submitted to the bank with the other offer held as a backup. As we got closer to the closing we ran into some problems with my client's lender and the other buyer offered $30,000 more than my client and then $70,000 more than my client, both full cash offers. Fortunately we got the problems worked out quickly enough and closed the deal but the other buyer definitely regretted missing out on a great deal by trying to get the price down a little further.

It is also fairly well known that short sale deals are often more difficult. An April 18, 2008 article said "The success rate for short-sale offers is low...20 percent of short-sale offers in the area [Las Vegas] lead to completed sales, compared with 85 percent for more traditional sales. Redfin, an online real-estate brokerage based in Seattle, says it represented buyers on 65 short sale offers in the first quarter but expects only two or three to result in a completed sale."

And the final insult with short sales is that even if the bank accepts your offer and things are proceeding along well, they can decide in the 11th hour to cancel the deal. This info was given to me by an attorney who works for our state Realtor association.

I've found that the best short sales to work with are the ones that have already gone through the approval process and have just come back on the market. Usually this happens when the buyer just doesn't want to wait any longer and cancel their offer right before the lender comes back with an answer. The advantage here is that the lender has already done all of their work in processing the short sale and has approved it as a short sale and has normally stated what they will accept for a price. In addition, they often give a time period of about 30 days that this approval is good for so if you jump in at that point you will usually get a fast reply and can have the whole process take a much shorter time.

Other than recently approved short sales, the easiest of all foreclosure properties to work with are bank-owned properties. This is where the bank has completed the foreclosure proceedings and now owns the property. In these cases the time frame for getting an answer back on an offer will be much quicker. However, in a high percentage of cases the property can be in very bad condition.

One of my clients put in an offer on a foreclosed property after checking it out pretty thoroughly and providing a list of the problems they found (including mold and termite damage). The bank rejected the offer. Months later they came down in price and we looked at it again. The hole in the ceiling over the dining room where my client found some of the mold and termite damage was repaired and with no attic there would be no way for anyone to know what we had seen up there and I have found that some banks do not disclose these things (even when provided the information) and try to get away with that by stating they "never occupied the property". By the way, even if they did not occupy the property, if they are made aware of any problems or their realtor is they do need to disclose it.

Another client put in an offer on a foreclosed house but after we had an inspection done and found the house needed a new roof, new A/C system, new ducting, new appliances and there were settlement issues (possible sinkhole) she cancelled the contract. This was with Fannie Mae and it took 2 months to get them to send her deposit back. We checked the listing after she cancelled and noticed that nothing about the settlement issues was noted. So with foreclosed properties you must have a thorough inspection done because that is your only way to find out the true condition of the property.

Bank-owned properties can be a good deal for you if they are in decent condition or if you are willing to do the work necessary to bring it up to the standard you want. But keep in mind that you will get very little or no information about the property from the bank so the risk of hidden problems is higher.

A very important point with any of these type of properties - you must have your financial arrangements taken care of before even bothering to look at any. In all cases that I have seen so far, an offer won't even be accepted in a short sale or bank-owned situation unless you submit a preapproval letter for financing or proof that you have the cash to buy it.

I only recommend short sales at this time for investors who are cash buyers and will have no problem with waiting an average of 60-90 days for the whole process, or if they have been recently been approved by the lender.

In most cases, your best bet is finding a property that suits your needs and is a good value where the owner can sell for a good price without being in a short sale situation. Many of my clients have found this to be the best thing for them (and the least stressful and frustrating).