Inexperienced buyers over the years have been led to believe that foreclosures and short sales can provide large discounts over standard retail listings. While these may be opportunities to some, especially cash buyers, it can be a dead end for many other hopeful buyers.
As some may remember, here in Anchorage and the Valley, the late 1980’s created a tremendous opportunity for distressed property purchasing, but it also opened the eyes of lender experience. Nowadays, the opportunities of purchasing distressed properties at large discounted prices are seldom, especially through AHFC, FHA, conventional or VA financing. In Alaska as in other states, lenders have come to a best practices understanding in managing loss mitigation potential.
I would also like to add that the services of an experienced buyer’s representative will prove to be an advantage in any transaction, especially when you, the buyer, want to take the best advantage of a real estate buying opportunity, since the better your information the better informed you are when you finally decide to make an offer. Your Realtor will work diligently to protect your interests and watch over the transaction. As a buyer’s representative, typically, your Realtor will cost you nothing because they are paid out of the listing commission and only when the transaction has funded and recorded. This gives you, the buyer, unlimited access to the service, expertise and experience of a licensed Realtor at no cost.
So with that said, let me discuss with you what I believe are the three levels of distressed real estate buying opportunities.
The first and most advantageous to a ready willing and able buyer is when a willing and able seller is highly motivated and is willing to come to the table on a little gain, break even or out of pocket closing. This is perhaps the best opportunity for a buyer because the buyer is only dealing with the seller and the seller’s motivations to sell, especially when there is also property equity. The seller may be moving out of state, may be trying to purchase another home, or may even be in financial difficulty and needs to sell. There are many, many reasons that motivate a seller.
Emotions in a real estate transaction can both help and hinder the process. Place yourself in the shoes of the seller. What would you do if you received the kind of offer you want to make, if you were the seller? What would be your response to the negotiation? Be sure to consider things like condition, days on market, price reduction, seller’s mortgage information and whether it is vacant or occupied, among other facts. These may be clues that will assist you with the negotiations.
The next level of opportunity and motivation is a short sale. A short sale is a listing in which the seller is asking his/her lender to accept less than what is owed on the mortgage. This is usually the most difficult of sales since the seller steps out of the role as the decision maker and gives it to his/her lender. The lender now must first approve the short sale and any offer submitted. Often in short sales, there are multiple offers as buyers see an opportunity for a bargain. A short sale transaction requires patience, additional time, and potentially more out-of-pocket money from the buyer. There also may be no repairs allowed which may adversely affect the buyer’s financing of the property.
The approval is made by a lender that may be out of state and unaware of conditions in Alaska. The seller may be emotionally devastated, having gone through months of delinquent payments and negotiations with their lender. The lender may not be willing to review a short sale until there is an offer. Therefore, these transactions may take an unusual amount of time and sometimes end with no sale and disappointed buyers. This is not to say short sales cannot be advantageous, but a buyer must first consider carefully their time and money when entering into making an offer on a short sale.
The third is the actual foreclosure. As most know, a foreclosure is a legal process where the lender converts title over to itself through exercising requirements of the default provisions within the deed of trust and promissory note. In most cases, the first step the lender exercises once it has obtained a default judgment is to attempt to sell the foreclosed property on the local courthouse steps in a public outcry auction. These sales are almost always cash sales as traditional financing requires a longer duration as well as capacity and collateral requirements. The lender may do this a few times with the hope that the property will sell under the amount of the default judgment or whatever offer as discounted.
In some cases, the lender may also contract the services of a private auction company who will advertise the property and auction to the best offer. These can be a challenge since often times these are required cash sales. When the process does provide for traditional financing opportunities, it is usually “as is/where is”. There may be a short period for due diligence with no repair provisions.
When these fail, the lender works with a brokerage usually under a nationwide contract to sell the property through the Multiple Listings Service (MLS). The brokerage will evaluate the property and issue a broker opinion letter on the value of the property which is generally retail minus any location, condition and/or other considerations.
With the property listed for sale on the MLS, here is where you must be particularly cautious because in most cases foreclosures are sold “as is/where is” with the seller being unwilling to make any repairs. Additionally, in many cases, the foreclosure has been winterized, which means the plumbing has been evacuated and there is no running water. This then requires de-winterizing/re-winterizing/de-winterizing costs for due diligence purposes and usually at the buyer’s cost. In some cases, the foreclosure may also have both electricity and gas turned off. This may again require more due diligence costs to the buyer.
The foreclosure still may be an opportunity to a mortgage financed buyer, but care needs to be taken to prevent wasting time and money and worse unknowingly buying a property with a deep money pit.
For more information on this subject as well as other real estate topics, please call or text Michael Tavoliero at 907-230-1992907-230-1992. My direct email is firstname.lastname@example.org. Thank you.