Foreclosures (REO’s) and Short Sales: A Cautionary Tale

October 14, 2009 at 8:01 pm Leave a comment

I frequently get an initial contact where someone is very emphatic about finding a foreclosure or maybe a short sale.  The assumption seems to be, a foreclosure or a short sales is by definition going to be the best deal out there.   This may be so, but it isn’t guaranteed to be so and in fact often a foreclosure or a short sale is worse for the Buyer than a well-priced sale by a regular Seller.

I just had a client cancel the escrow for the purchase of an REO property.   It’s only the third cancellation I’ve had in 19 years.    What went wrong?   You should understand that banks and other sellers of foreclosed properties are relieved of the burden that ordinary sellers have in making disclosures about the property.   Was there fire damage that was superficially repaired but left the building structurally weakened?   An indivdiual would have to disclose this.   A bank probably wouldn’t even know the repair history of a property but even if they did, they aren’t compelled to disclose what they know.

The entire burden of due diligence is upon the Buyer.    Has a leaking shower caused rot and let water seep into the walls?   Better have the best possible inspection because if the property is bank-owned, they won’t know anything.  Fire damage?  Ditto.   Termite damage?  Ditto.   Problems with electrical wiring or plumbing?  Ditto.    Furthermore, most banks are selling properties completely “As-Is” with no credits or repairs given once escrow is opened.  The result is that you can discover tens of thousands of dollars in repairs that need to be made to rectify conditions that weren’t obvious when you viewed the property prior to writing an offer.

As an alternative, you can have all your inspections up front before you negotiate a purchase price but you run the risk of paying hundreds of dollars, maybe more, in inspections without knowing if you and the bank can even agree upon a purchase price.    How many inspections are you willing to pay for before knowing whether or not you have a deal?

Short sales—where the Seller is selling the property for less than he owes his lenders—are another matter.   When you reach agreement on terms and conditions with the Seller, your journey has just begun.    The Seller’s lenders—banks in most cases—then have to agree to accept less than what they are owed in lieu of foreclosure.    Simply acknowledging that they have received your offer can take two weeks.   The total process can run months; one client told me that his recently completed short sale purchase was “nine months of horror.”    One might be encouraged to hang in for the duration if one was sure that one would get a good deal but statistics show that only about half of all attempts at short sales are completed.

Furthermore, the banks approving short sales can unilaterally impose changes to the terms and conditions prior to making a final acceptance.   Seller paying for termite work?  10 days before the close of escrow you might be told, “No, take it or leave it.”    You thought you had a sales price agreed to?  Six months after making your offer you might be told, “We’ll take your deal but you’ll have to come up with $25,000 more.”   The range of changes to a contract that a bank can impose as a condition is virtually without limit.   They can’t force you to accept but often the end result is a purchase that’s not nearly as attractive as what you contemplated when you wrote your offer.

The essence of making a good buy is still the same:  find a good property in a good location at a good price.  If it happens to be a foreclosure or a short sale, then go ahead and go into the transaction with your eyes wide open.   You may in fact make that golden purchase that many dream about.   But if the property is being sold by just an ordinary Seller, relax…you might have the better deal by the time escrow closes.

Entry filed under: Tips.

2009 versus 2008 Westside Market Report Q3 2008 versus Q3 2009 Westside statistics

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