Things to be aware of with short sales and foreclosures/REO properties

 

There are some great deals out there when it comes to short sales and foreclosures.  However, there are some things you should be aware of when considering them as an option.  

 

Short Sales:

1.      The price advertised is the price the seller will accept but the bank normally still needs to approve the sales price.  They can approve a higher sales price than your contract price during the short sale approval process but we normally won’t know until we get to that point in the short sale approval, which can be several months into the process. 

 

2.      The short sale approval process will take an unknown amount of time once you are under contract.  This process will take 3 weeks on the shorter side but I have waited over a year with buyers before and we still didn’t have an approved short sale.  That buyer had to move on and find another home after waiting all that time.  However, most average 90 days or so for approval and then they will want you to settle 30 to 45 days after the approval.

 

3.      If the bank approves a higher sales price, it is normally a “take it or leave it” situation at that sales price because the banks normally do not negotiate once they approve the short sale price. 

 

4.      These houses are normally in “AS IS” condition because the sellers have no money for repairs and the banks normally won’t spend any money on repairs.  Depending on the condition your lender requires the house to be in (which the appraiser determines), the house might not be able to get standard FHA or VA financing. If the appraiser flags any repairs, you (the buyer) may need to make the repairs before settlement on a house that you don’t own yet or do a 203k loan.  The short sale bank could still back out of the sale after you make the repairs, FYI.  The FHA and VA loans are pickier about the condition so it is best to plan on doing a conventional loan or a renovation/203k loan (see details below) if you want to pursue a short sale or foreclosure.  

 

 

Foreclosures/REO properties:

1.      Just like with short sales, these houses are normally in “AS IS” condition because the sellers have no money for repairs and the banks normally won’t spend any money on repairs.  Depending on the condition your lender requires the house to be in (which the appraiser determines), the house might not be able to get standard FHA or VA financing. If the appraiser flags any repairs, you (the buyer) may need to make the repairs before settlement on a house that you don’t own yet or do a 203k loan.  The short sale bank could still back out of the sale after you make the repairs, FYI.  The FHA and VA loans are pickier about the condition so it is best to plan on doing a conventional loan or a renovation/203k loan (see details below) if you want to pursue a short sale or foreclosure.  

 

2.      After you reach an agreement on the contract terms with the bank, the bank will send you a “bank addendum” which can be a little scary.  These addendums are normally drafted by the bank’s attorneys to protect them from different situations they might run into across the country.  Since I’m not an attorney, the NAR, MAR, my broker and all the real estate associations don’t want me explaining exactly how these bank addendums can affect the purchase because I am not an expert on these addendums.  Each bank has a slightly different version and I am supposed to advise a buyer to seek legal counsel (which I can refer you to, if needed) to go over these addendums so you fully understand it.  The banks only give you a few days to review the addendum so it is best to plan ahead and have an attorney ready when the bank sends the addendum.  I have some older versions of these addendum I can send you to give you an idea of what it might have in it. 

 

3.      Once under contract, the bank will normally need to look over all the foreclosure processes and make sure all the correct steps were followed.  This process can take 15 to 45 days before they commit to the sale and a settlement date.  They will also need to look over the title for the property so the bank can confirm they can legally convey the property.  Once they commit to the sale, they normally want you to settle within 30 to 45 days.

 

203k Loans

1.      These loans are an FHA loan product where the bank gives you on loan to purchase the home and another loan to make approved renovations within a certain period of time.  These 2 loans are then rolled into one loan at the end which ends up being a slightly higher (normally ½%) than the standard rate. 

 

2.      The renovations need to be completed by an FHA approved contractor that is NOT related to the buyer.  The renovations also need to be approved by the lender and appraiser to make sure the condition will meet their standards and improve the value by at least what it is going to cost.  Once under contract, you will need to get contractor bids submitted to the bank to start the process. 

 

3.      Once the loan is approved, you will move forward with the initial purchase.  All the approved renovations will need to be completed within a certain time frame after the initial settlement date.