Foreclosures are still hitting the market in the East Texas area, not as bad as the beginning of 2009, but they are still appearing. Some forecasters are saying that about 20% of the mortgages are significantly behind and they believe there is another wave of foreclosures coming along this Spring.
Though there can be some bargains out there - the road to buying a foreclosure or distressed sale is pitted with potholes! There are a number of myths being propagated on television and other media that I want to address.
MYTH #1 - You need to subscribe (and by subscribe I mean pay for) to a foreclosure service to get the latest foreclosure listings. In our area, most all the foreclosures are listed with real estate agents and are on the MLS. So web sites such as mine, which updates each day, will show the newly listed foreclosed properties for free faster than any of the national aggregators who are only after your money.
MYTH #2 - I can get a good bargain! Well, the answer to this one is “It Depends”. There are a number of things to take into consideration. First, it might look clean and nice when you walk through it, but there is a higher potential for latent defects in a foreclosed property. We often never really know how long a property has sat vacant before the house comes on the market, sometimes it is several months. Homes are meant to be lived in with all utilities on. When the utilities are off and systems are not working, things begin to deteriorate. Gaskets dry out, freon leaks, things rust, interior cracks appear or paint starts peeling because of no climate control. The previous owners (the ones who lost the home to foreclosure) oftentimes sabotage the home by flushing rocks down the toilet, pouring caulk or mortar down the sinks as well as the more obvious vandalism of taking everything out that they can possibly resale. The list goes on and your imagination can run wild with things we see that have been done to foreclosed homes.
MYTH #3 - They will be so happy to get my offer they will jump right on it! Negotiations can take several days because there is usually no one person who has the authority to accept an offer. Getting a fully executed contract that your lender will accept can take 7-14 days so there are extended escrow periods. Some companies are also pricing their foreclosed properties significantly below market value to elicit multiple offers in the hopes of ending up with a pretty fair market price. It may take days for them to decide which offer they want to counter much less accept as written. I have not heard of any lenders accepting more than 15% off of the asking price - many go for pretty close to asking price if not more than the asking price!
MYTH #4 - Short sales can be a really good bargain! Short sales are when a buyer is underwater or upside down on their note. In other words, they owe more than the home is worth. Rather than walk away from it, they work with the negotiations department at their Lenders and they offer the home for sale at a reduced price. The Lender agrees to work with the prospective buyer and accept the lower price in lieu of foreclosing, which is a costly process to the Lender. What we are seeing happening, is the Seller and Buyer agree on a price, the Buyer gets inspections and starts their loan process and then the Seller’s Lender starts stalling. Best case scenario is the buyer could end up homeless if they sell their current home in anticipation of buying the Short Sale. Worse case is no closing at all. I have had it happen that we get almost to closing and someone further up the chain of command pulls out of the deal. The Buyer is left with all of the expenses they have already paid, usually upwards of $1000 and no house to buy! There is no one to appeal to - the deal is over. I don’t even get involved in short sales and will not allow any buyer to get involved in one if they will have no place to live if the deal falls out.
MYTH #5 - They will make repairs to the house! Most of the sales are “As Is”. The owners will often not do anything to the house other than basic cleaning or make ready. I have had clients have them under contract and them be in a condition that it won’t meet the Buyer’s Lender underwriting guidelines. In other words, they need too much work and the new Lender doesn’t feel comfortable lending on it. I even had one tell our client, “We know you are getting a good deal, and we know you will do the work to make it a great property and it will be worth way more than it’s worth now, but we don’t feel comfortable loaning money for it.” I have one now the septic system failed inspection and fortunately it will only be a couple hundred dollars to repair, so my client are paying for it because the Seller wouldn’t and their Lender requires it. We have to wait until all lending contingencies are met then schedule the repair right before closing because I don’t want my client spending money on a house that isn’t hers.
MYTH #6 - All Foreclosures are alike! This is the most frustrating thing about the whole foreclosure business - no two companies treat their foreclosures the same!! Every contract seems to be a different process. We just tell our clients to hang on for the ride! Some will make good deals, some will counter low offers and some won’t respond at all until you get close to their “magic” number. Then the actual escrow process differs for each one. Some will pay for a Seller’s Title Insurance Policy and some won’t, some dictate which Title Company to use, some will pay for Buyer’s closing costs and others won’t, some will provide a Home Buyers Warranty, some want you to do inspections before making an offer and some will automatically give your clients a 7 day inspection period. You definitely have to read the fine print of their special “Addendum” which overrides the Texas promulgated purchase contracts.
SUMMARY
Buying a foreclosed or distressed property can be a good deal if you go into it with your eyes wide open and you are not in a huge hurry. Expect the unexpected and know you are going to be getting a flawed property and oftentimes repair surprises for the first several months you own the home. For the latest information, a FREE list of the foreclosures in our area, or to consult with a professional, just give us a call!
You made some good points there. I did a search on the topic and found most people will agree with your blog.
I have seen some crappy posts but this one really impresses me. Good work!
Finally, some local information on what is actally going on with foreclosures in the Tyler/Smith County area. Some great warnings about the process. I’ve been watching the infomercials on tv and thought it was an easy thing to do. Thanks for the great article!
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