House hunters are seeing some unfamiliar terms in the for-sale ads this spring. Some homes are listed as “short sales,” “foreclosures” or “bank owned.” And some ads carry ominous warnings about the listing price not being enough to cover all liens and debts.
Are these troubled properties bargains? Or ticking time bombs?
If you have plenty of time, market savvy and sound advice, you can find good deals in the most depressed parts of the real estate market, but bottom fishing is not for everyone.
A short sale means the current owner’s lender has agreed to retire the loan for less than is owed, allowing the homeowner to get out despite today’s low prices. A house that’s in foreclosure is being taken over by the lender after the owner has failed to make payments, and a bank-owned property has completed foreclosure and belongs to the lender.
In all these cases, the sales price might be attractive. Lenders often lose at least half of what they are owed when they take a property over and sell it, so they may be happy to settle for anything higher than that.
But there are lots of potential snags for would-be buyers.
In a short sale, for example, your offer must satisfy lender in addition to the owner, making negotiations trickier and slower. If there’s a second mortgage or home equity loan, you may have more than one lender to contend with.
Of course, the owners might be less than happy about the situation and may drag their feet if they don’t know where they are going to go. Compared to an ordinary sale, you may have less chance of getting the seller to do repairs.
You may not have to deal with an ordinary homeowner to buy a foreclosure or bank-owned property, but the lender may be slow to respond. Several bank officers may have to sign off on the deal, and in some troubled regions lenders are so swamped you may have to wait in line just to start talking.
Many ads insist these properties go “as is,” meaning you are not going to get a paint job or new roof as a condition of sale.
In all cases of troubled properties, keep several points in mind:
Market value counts. Just because the property is selling for less than it did before, it could still be overpriced in today’s market. Be sure to carefully study recent sales prices on comparable homes nearby.
Have a flexible schedule. If you absolutely most move in by Labor Day so your kids can start school, steer clear of these special properties. The process could drag on for months, only to result in snag that makes you walk away.
Build a contingency fund. Even if you’ve had a pro inspect the property, which you should, if you agree to an “as is” sale you could get stuck with unexpected expenses. No one knows exactly when the air conditioning system, furnace or water heater will conk out.
Prepare for the long haul. The current owner may have fallen into trouble because of his own mistakes or misfortune, like losing a job, and the rest of the neighborhood may be perfectly sound. But in many cases, a troubled property is surrounded by other troubled properties. If prices continue to fall after you buy, it could be many years before you can sell for enough to break even.
Get professional help. Even if you’ve purchased homes before and feel comfortable with the process, buying a troubled property could entail legal problems you’ve never faced. Have a real estate lawyer oversee all the paperwork. And think about hiring a buyer’s broker, a real estate agent who works exclusively for the buyer. A buyer’s broker has a legal obligation to look after your interests rather than the seller’s.
Line up your funding. Sellers’ lenders don’t want to waste time on offers from unqualified buyers. So be sure to have plenty of cash for a sizeable earnest deposit and down payment, and get your own lender to pre-qualify you for a loan big enough to buy the property. Use the Maximum Mortgage calculator to figure how much you can get. Use the Mortgage Points Calculator to decide whether to pay mortgage points.
Obviously, you should shop for the best mortgage deal. Use the BankingMyWay.com shopping tool to find a loan with an attractive rate. Right now, 30-year fixed-rate loans average just over 5 percent, according to the BankingMyWay.com survey. Bank of America (Stock Quote: BAC), for example, offers a 30-year fixed loan for 5 percent, while Wells Fargo (Stock Quote: WFC) has one at 4.875 percent.
—For more ways to save, spend, invest and borrow, visit MainStreet.com.