Foreclosures and Short Sales

As a potential homebuyer, you may be tempted by the allure of lower prices and instant equity associated with short sales and foreclosures -- collectively known as "distressed properties".  To better understand the risks and opportunities here, let's discuss the basics.

Homeowners who can't or don't pay their mortgage are declared to be in "default" after a specified period -- usually 90 days.  If they want to sell but know their home won't sell for what they owe their lender, they can petition the lender to accept a short sale -- basically meaning the lender will allow the home to be sold for an amount "short" of what is owed.  Usually, homeowners who need to sell under these circumstances hire a Realtor who will assist them in petitioning the bank for the short sale, marketing the property and, hopefully, selling it.  More on this later.

If the homeowner does NOT attempt a short sale and simply remains in the home without paying the lender, the lender will initiate a foreclosure.  A foreclosure is a lawsuit which must proceed through the courts, and this process often takes a year or more in the Louisville, KY area.  The bank exercises its right to seize the home as per the mortgage signed when the home was purchased, and essentially takes possession of the home with intent to sell it and pay off the amount owed.  When a home becomes bank-owned, it's called Real Estate Owned, or an REO.  Banks don't want to flood the market with foreclosed homes, as to do so would drive prices down in neighborhoods where the bank has other loans -- perhaps resulting in more foreclosures! So, after the lender has taken the home and evicted the prior owner, these properties may sit vacant for many months.

What's it like to BUY a foreclosure or short sale?

Foreclosures are really not that difficult.  Banks don't work weekends, so an offer made over a weekend won't receive a response until the following business day (or maybe a couple of days later -- if a lot of offers were received over the weekend). So, you have to make an offer with a 72-hour response period, and be aware that you may not even hear from the Lender that quickly.  Instead of dealing with the owner of the home, you will be dealing with an asset manager at the lender.  These people are very objective about the price they will take for the home, and if it doesn't sell, it will usually be reduced periodically until it does.  Once a price is agreed to and lender-Buyer have a "deal", the lender will usually require the Buyer to sign the Lender's standard purchase contract -- used nationwide.  None of this is really difficult, or a big impediment to the purchase. Typically, it will only take a few extra days to "close" a sale of a foreclosure as compared to a privately-owned home.

Some foreclosures in Louisville, Ky. are in excellent condition and will sell very near market value -- in other words, the owner ran into financial difficulty and couldn't make payments, but didn't abuse or neglect the home.  However, most people stop doing maintenance or repairs before they stop paying their mortgage, so work is usually needed (driving the price down).  Some owners damage the home intentionally, and many of these require extensive work to return them to "neighborhood standards".  The price of a foreclosure will be from a little to a lot less than other homes in the neighborhood, due to the need for work on the home.

Short Sales are a different matter. When handling a short sale, Lenders want to closely examine the financial condition of the Sellers (to see if they COULD be paying the difference), which may take weeks or months.  Once this "preparation" is completed, the Lender will order a market value analysis from a local Realtor and often need to negotiate with the investor who currently owns the loan, or with the pseudo-government entity that bought it (Fannie Mae, Freddy Mac, etc.).  Homes purchased with FHA loans must be approved by FHA, which takes weeks if you are fortunate. So, short sales can be purchased under market value in most cases, but their purchase is usually accompanied by months of waiting for the deal to close.  In many cases, Buyers simply decide that they have to move on and cancel these contracts.  So, don't attempt to buy a short sale in Louisville, KY if you have a fixed timetable and need to get into the home.  The "best" short sale will involve only one Lender and no liens on the home; however, some involve first and second (or more) mortgages, many liens on the property from other unpaid obligations, etc.  The more of these there are, the longer the short sale will take -- if it "closes" at all.

In summary, buying a foreclosure is really not a big deal...but for short sales, Buyer Beware absolutely applies!  However, short sales may still make sense for the patient bargain hunter who understands the timetable.

For more information or to start the search for a "distressed property", contact us now...

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