Distressed home: In by the back door
Purchasing distressed property presents different snags as path to owning home
Sunday, July 8, 2012
If you go
• What: Free workshop on buying distressed properties by Bill Black of Directors Mortgage.
• When: 7 p.m. Thursday. Call the telephone number below for other times.
• Where: Old Stewart Title Office, 2105 N.E. 129th St., Vancouver.
• Information: Register at 360-910-3290.
A glut of low-priced foreclosed and short sale properties have helped open the door to homeownership for many people who may have been unable to afford a house before the Great Recession.
But what buyers may save in money on a bank-owned property or short sale, they may pay in troubles. Learning about the process of buying bank-owned and short-sale properties can help buyers advocate for themselves and prepare for potential obstacles.
Here are some tips for navigating the complex market known as "distressed housing":
The best place to start is to understand the language and the rules of a market segment that scarcely existed when housing prices were on the rise.
"The most important thing to understand is, a short sale is all about education," said Bill Black, senior mortgage specialist at Vancouver's Directors Mortgage.
That begins with understanding the difference between buying a short sale and a foreclosure.
A foreclosure means a bank has reclaimed a property, and all other liens on it have been removed. Buying a foreclosed home is similar to a conventional sale except there isn't a homeowner to negotiate with, and the bank probably knows little to nothing about the house's history. Banks typically respond to offers in one to three business days.
The term "short sale" refers to an agreement between a lender and a borrower whose home is underwater -- worth less than the amount owed to the lender -- to sell a property for an amount short of what the borrower owes on the mortgage. An offer must be accepted by the borrower and the lender. In some cases, there are liens on the title. All parties with a financial interest in the property have to agree before an offer can be accepted.
Contrary to what the name suggests, short sales take longer than regular sales. The involvement of multiple parties means transactions average 75 to 120 days. But some short sales have dragged on for more than a year, said Milissa Ormiston, an agent with Keller
Williams in Vancouver. Some short sales are tangled in a quagmire of debts that may not be solved, and the home instead goes into foreclosure.
Two years ago, Maggie Gibson of Vancouver tried to buy a condo on the market as a short sale. She waited about six months before her cash offer was accepted. Then, she and Bank of America learned that the seller with the underwater mortgage owed thousands of dollars in back homeowners association fees.
The homeowners association agreed to halve the amount of the debt to help push forward the sale, and the seller agreed to pitch in for some of the remaining back dues, Gibson said. But Bank of America refused to make up the difference, she said. Instead, the bank put the property in foreclosure.
After six months of waiting, Gibson had to walk away.
"It was very discouraging," she said. "That kind of soured me."
Some have worked through such challenges to find good deals. Iain Brown and Adriana Antelo of Rose Village are among the Clark County homebuyers who have saved money by buying short sales and foreclosure resales.
"We think we got a better deal than we would have otherwise," said Antelo, who bought a foreclosed property with husband Brown. "We are thrilled. We love it."
In May, about 62 percent of sales in Clark County that month were conventional sales, 20 percent were foreclosed properties and 18 percent were short sales. While the inventory of distressed housing should last a long time, banks are holding back inventory to keep prices from dropping, Ormiston said. It's now common for a foreclosure or short sale to have several offers on it and to sell for 105 percent to 110 percent of listing price, Ormiston said.
Still, buyers pay less for distressed properties. Housing sold through conventional sales in May brought an average of $91.17 per square foot. Short-sale properties sold for an average of $75.51 per square foot and bank-owned for $72.87, according to CoreLogic data compiled by Cascade Title.
Budget for repairs
Foreclosed and short-sale properties are generally sold as-is. Foreclosures in particular often have fallen into disrepair due to neglect. When setting a budget for a home purchase, buyers should consider leaving room for possible repairs.
Adam and Carrie Beck of Vancouver bought a foreclosed house in February 2011.
"It wasn't much different than a regular sale other than the fact that the bank wasn't willing to make any repairs," said Adam Beck. "It kind of surprised me that a broken pipe running water in the front yard didn't concern them. They were pretty clear they don't do any repairs or discount the price for anything, and they stuck to it."
Those fix-it projects can cause a dilemma, as most lenders won't finance a property if it needs a new roof, has chipped paint or other problems.
Hans and Amy Vierck of Vancouver even had to install flooring in the short-sale property they wanted to buy in order to obtain financing.
"The family that lived there had been in the middle of a remodel and had all the floors torn up," Hans Vierck said. He and his father had to complete the flooring and the molding in order to win approval for a loan, he said.
"We had to have it done in three days," he said. "That was an ordeal because the family was still living there. We put in the cheapest stuff we could find because we weren't sure if we were going to get the house."
For the Viercks, making the repairs was worth the risk. But in some cases, the savings in the purchase price may not make sense if the house needs a new roof or another high-ticket repair. "It's kind of an oxymoron because the banks created the guidelines for financing, then offer properties for sale that aren't financeable," said Renee Surface, mortgage loan officer at Directors Mortgage.
Line up financing
Obtaining pre-approval from a lender is one of the first steps toward buying a home. The competitive nature of foreclosure and short sales means buyers can't wait to seek loan pre-approval until after they found the right house. Pre-approval doesn't commit a buyer to a lender, but it allows the buyer to make serious offers. Seeking pre-approval from a major lender is a good idea, and a borrower who has good credit should consider trying to obtain several lender offers.
There is more than one loan option for a foreclosure or short sale. Conventional and FHA loans both can work depending on the bank that's selling.
One less-used option that can be a good fit for a foreclosure or short sale in need of a lot of repairs is the FHA 203K rehabilitation loan, Surface said. The 203K loan allows a borrower to borrow money for the mortgage plus up to $35,000 for home improvements. Drawbacks are that not all banks will accept the loan program, and the program usually takes about 30 days longer to close, Surface said.
Choose a knowledgeable agent
Working with a real estate agent who has been trained in short sales and foreclosures can save time and provide another layer of protection, Black said.
"Your real estate broker should be able to answer who is the servicer for the loan (on a short sale)," Black said. "Who is the investor? Is there mortgage insurance? Are there additional liens? If the Realtor says, 'I don't know,' that worries me."
Prepare to negotiate
Before making an offer on a bank-owned property, talk to neighbors about what they know about the house. Neighbors may be able to shed light on recent upgrades or repairs in the house -- or mishaps, such as water pipe leaks. Ormiston advises against having an inspection before making an offer because of the cost and time involved. Wait until an offer is accepted. Buyers of older homes may want to consider a sewer scope in addition to an inspection, as a new sewer line can cost thousands of dollars.
Unlike in conventional sales, there is no meaningful information in disclosures about a foreclosure resale because the seller -- usually a bank -- may have never seen the property and has no knowledge of the history or condition of it, Ormiston said. With a short sale, a buyer will receive disclosures from the distressed homeowner.
The listing price is no indication of a bank's willingness to sell for that amount. Ormiston said buyers often mistakenly believe the bank sets the price, but in most cases, the bank's real estate agent decides the listing price. When a buyer offers listing price, it's possible the bank could reject it.
"Listing price is just a big fallacy," Black said.
Some banks may seem unresponsive to offers on short sales or foreclosure resales. That could be because a servicer, such as Bank of America, versus an investor such as Fannie Mae, is the negotiator, Black said. Mortgage servicers are paid regardless of whether the house is sold. That can drain a servicer's motivation to get the house sold.
Black advises real estate agents to contact Bank of America via Twitter to ask for a prompter response or to solve other problems.
"Bank of America has five to six people handling their Twitter account," Black said. "They will get a solution for you because Bank of America doesn't want a bad name on Twitter."