Should I Consider Buying a Short-Sale or Bank-Owned Property?

You have probably heard and read about our distressed real estate market.  As a result of the mortgage meltdown of 2005-06 and rampant speculation that caused an extreme rise in housing values, it was only a matter of time that the housing market would make a correction, and begin the process of stabilizing. 

It happened rather suddenly during 2006 and has been in a downward spiral ever since.  As a result of this housing value correction, there is presently an abundance of opportunities to purchase distressed and devalued real estate assets at or near the bottom of the market.

Let's discuss what a short-sale is vs. a bank-owned property.

SHORT SALE - A short sale is a property in which the owner is delinquent in paying their mortgage payments.  It has not yet been foreclosed on by the bank, but it may be IN THE PROCESS of being foreclosed on.  In this situation, the owner, many times through an agent (their real estate agent) will negotiate a stay of execution on the foreclosure and allow the owner to attempt to sell the property for a price that is typically BELOW the total mortgage amount on the property.  The bank is basically agreeing to take a loss on their loan amount in the hopes of avoiding a foreclosure proceeding and having to take physical ownership of the property.

BANK-OWNED/REO (real estate owned)/FORECLOSURE - In this case, the bank has gone through the complete foreclosure process and has actually taken title to the property and evicted the previous owner in order to sell the property.

PROS

There is one big pro - you are typically going to get a property below even current market value.  Could be up to 10+% below current market value so there is the potential to get a great deal.  

CONS

Short-Sale

(1)  While you are still dealing with the delinquent property owner, the contract will have to be approved and signed off on by the bank taking the loss.  In some cases, the bank does not even know that a short sale is being attempted until they receive an offer.  This means that the wait time when submitting an offer on a short sale could stretch from days to weeks to even MONTHS to get a reply.  Not only that, but until the bank has accepted/countered the offer, the listing agent will leave the home showing as ACTIVE on the market and in the MLS soliciting other offers and will submit all received offers to the bank for approval.  The bank can only pick one, of course.  So you could be waiting for months and then get turned down and hear that the bank accepted an offer submitted weeks or months after your offer.  This can be very frustrating, to say the least!

(3)  Banks want to avoid liability and will demand that the buyer submit offers with an AS-IS addendum basically stating that the buyer assumes all risk associated with the condition of the property from the time of the offer acceptance.  Buyers will have the right to inspect the property, but if something goes wrong in the home up until the close, the buyer - not seller - is responsible.  This is one of the reasons these properties are discounted - to factor in the buyer's risk.

BANK OWNED/REO's/FORECLOSURES

(1)  AS-IS addendum. Same as above but even scarier.  Once the bank has taken over, many times they shut off the utilities to reduce their costs.  This makes it much harder to inspect the property properly - HVAC, electrical, plumbing systems.

(3)  Banks can take long periods of time to respond to offers, although response times are typically quicker than on short-sales.

As a result of these issues, bank owned and short sales should only be considered by buyers that:

(1) Aren't as concerned about finding the "one" perfect home and are not the type of people to get attached to a home they absolutely have to have.

(3) Prepared to get their hands dirty in making repairs and organizing the cleaning and trades to come in and refurbish damaged properties

(4) Are not concerned with the long response time from banks on properties they have submitted offers on.

THESE TYPES OF PROPERTIES ARE BEST SUITED FOR INVESTORS BUYING FOR VALUE RATHER THAN HOMEOWNERS BUYING FOR THEIR OWN USE. 

An investor can form the strategy of putting in multiple offers on properties, not really caring which one(s) are accepted, so long as they are getting the property for a great value in line with their investment objectives.  Once they have an accepted contract, they can rescind their other open offers. 

BOTTOM?

If you are considering making a 5 - 10 year investment, now is probably a good time to buy.  No one will know when the exact bottom has/will hit....until the market starts to climb again!   You will have missed it!  Also, this "bottom" will hit different areas at different times.

(2) Prepared to take on the risks associated with buying distressed properties for the reward of getting a below-market-value property

(2)  Remember, in this scenario, the bank has forcefully taken ownership and possession of the home before attempting to sell it.  This means that the defaulting party was probably very upset prior to leaving the home.  It is becoming more common to hear stories damaged/destroyed property in the home; i.e.  removed appliances, plumbing fixtures, cabinets, light fixtures/ceiling fans and/or other home fixtures.  It is VERY IMPORTANT TO HAVE THOROUGH INSPECTIONS OF THESE HOMES.  You may have to put the utilities in your name, so the home can be properly inspected.

(2)  Because of how the bank processes offers and the aggressive pricing of these properties, it is not uncommon for well-priced short sales to sell for the full list price OR MORE due to a bidding war between suitors.