If you’re a bargain hunter, there are a few off-the-beaten-path home buying options or alternatives that could put you in a great home for a lot less than you would have expected. The alternatives include property short sales, foreclosures, and real estate owned (REO).
The reason you may want to consider these types of properties is because the sellers are generally highly-motivated to get rid of them. That gives you the advantage when negotiating price. Below is a discussion about each of these real estate categories and how you can find properties.
Sometimes a homeowner will buy a house when the real estate market is hot and home prices are rising fast. But right after they purchase their castle, the market bursts and home prices begin to quickly fall. This is what happened in the great real estate bust that occurred beginning in 2006.
Many homeowner’s found themselves with a fat mortgage loan that was greater than the market value of their house. Just to be clear, the market value is the approximate amount that someone would pay for your home if you tried to sell it. So imagine a homeowner who is locked into a $250,000 loan, but the house is only worth $200,000 at best (and falling).
What would you do?
Yes, you could sit tight and hope that your home’s value will rise over the next 10 years or more to match the loan amount. And that’s just fine for many people who have no plans to ever move.
But what if you had to move to get a job in a new town? Now you’re in a pickle.
Well, one option is that you could contact the bank and ask them to approve a short sale for your home. Please note that you don’t have to be behind in your mortgage payments to have a short sale. If they say yes, what you’d be doing is selling your home for less than what is owed on the loan. So, it is the loan that is being “shorted”.
Now, just because the bank authorizes the short sale, that doesn’t mean the homeowner, would be off the hook. Let’s say, for example, that the loan amount is $250,000 and the homeowner was able to sell the home for $210,000, that leaves a difference of $40,000.
The bank could, and sometimes does, place a deficiency judgment against the homeowner and attempt to recover the difference. But in other instances the bank will simply absorb the loss. So that’s why the homeowner would definitely want to negotiate upfront with the bank to see what can be done to eliminate all of the loan with the least amount of hardship.
Finally, there are a couple of other things you need to know about short sales. First, it is best to contact a short sale specialist to get a list of available short sale properties. A regular real estate agent may or may not be fully in tune with this aspect of the real estate market. The specialist can also give advice about which properties may be worth pursuing.
Second, not all short sales represent great deals. Timing is important. If home prices are continuing to fall in a neighborhood, and you buy a short sale property while that’s happening, you could find yourself in the same position as the previous homeowner. In addition, the home could have damage that the seller won’t want to pay for.
So the bottom line is to pursue short sales as smartly as you would when evaluating any investment opportunity.
A home foreclosure is an action that the mortgage lender takes when a homeowner misses a number of payments. The bank is, in effect, yanking the home back from the homeowner.
Just like with short sales, many foreclosures occur because people experience a hardship. It could be that they lost their job and can no longer afford the payments. In other cases, they will literally walk away from the home because its market value is so low compared to the amount owed on the loan.
So, there are definitely deals to be had on foreclosed homes. But you have to proceed with caution. That’s because once an owner knows the house is being taken away, they will likely give up on maintaining the yard, pool, and other parts of the home. They just simply won’t care.
This could be an even bigger problem if the home is no longer occupied. In addition to being unkempt, the properly could be vandalized or stripped of fixtures and appliances.
Your real estate agent can point you to foreclosed properties. But depending on how far along the foreclosure process has gone, you can either buy it from the current homeowner or attend a foreclosure auction. Such auctions can occur at any number of places including the courthouse, hotel, etc. Again, your real estate agent or the bank can point you to the auction site.
Now, if you make an offer, be prepared to take the home as-is. You’ll be responsible for making any repairs. For some homes, you may not even be allowed to look inside it before buying.
You’ll also want to check to see if any liens have been placed against the property. A lien is a legal claim, and the property will serve as collateral. So if you buy a foreclosed home that has a lien attached, you’re agreeing to take responsibility for paying off the debt associated with the lien.
To determine if there are any liens on a property, you would have a title search performed. This review is part of the standard procedures when you’re buying a non-foreclosed property.
Finally, when you’re buying a house at auction, you’ll have to present a cashier’s check for the full amount of the winning bid’s price. Having a pre-approved mortgage loan would help here.
Real Estate Owned Homes
Unfortunately, not every foreclosed home is sold at auction. For any homes that are left over from this process, the bank assumes title and ownership. These properties are typically referred to as Real Estate Owned (REO) or bank owned homes.
By taking the title, the bank will have greater flexibility to repair the property, get rid of any liens, etc. They will also be able to assign a price for the home that will make it easier to sell.
Just keep in mind that banks are impatient and will only be interested in serious inquiries. So do your homework and make sure that your offering price is within the reasonable price range of comparable homes in the area. Also understand that the property will be “sold as-is”, so adjust your offer for damage.
And when you walk in the door to negotiate with them, at least make sure that you’ve been pre-approved for a loan with them or elsewhere.
You’ll find many REO properties listed in the Multi Listing System that your real estate agent will have access to. But if you contact any of the big banks directly, they will point you to their REO listings. Also, there are online sites, such as RealtyTrac.com, that you can use.
In conclusion, you have three great home buying options or alternatives. It doesn’t matter if you acquire a home through a short sale, foreclosure, or REO as long as you understand the market, don’t overpay or overbid, check for liens, and realize that you’ll probably have to accept the property as-is.
Dealing with banks can be a hassle, but they are definitely motivated to get the properties off of their books and into someone else’s hands. So if you’re patient, you may find an amazing deal.
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