Pursuing Foreclosure Properties

Foreclosure properties, which is a non-technical term used by today's home buyers, are a very hot topic. As such, I wanted to address the two classifications and technical terms for foreclosure homes, and what each process entails if you were to pursue them as a home buyer.

There are two classifications of "foreclosure homes". The first is labeled "short sales". These are homes that are currently going through the foreclosure process, but have not become banked-owned yet. In this process, the homeowner has to classify for being in financial duress and can no longer make their mortgage payments. They approach their bank and a real estate agent and all three parties work to sell the home before it goes through foreclosure process and bank to the bank. These homes are sold for less that what is owed on the property, so not only is the homeowner losing all their equity, but the bank is also taking a major loss. Sometimes the bank is willing to do this though if they consider it the "lesser of two evils". Often times, if they take a property back in foreclosure, they have repair/maintenance costs, legal fees, marketing costs, etc. They also are severely limited in the amount of money they can lend out based on the dollar amount of real estate they are holding in their portfolio.

Short sales can be extremely frustrating for buyers, so I also caution my clients against moving forward on one of these properties. While the seller may approve the offer right away, the bank or banks may not give final approval until 8-10 weeks, or more! I had one recent client who waited 100 days for the Bank's final approval until they told us "no". It was an extremely frustrating process for all parties involved.

As to the owner foreclosure situation, these are classified as REO's or Real estate owned properties (Bank-owned properties). These are properties that have gone all the way through the foreclosure process and are currently owned by the bank and all their books. The banks are very motivated to sell them and as a homebuyer, the process of buying one of these homes is very similar to working with a typical seller. REO's are some of the best deals on the market in the under $1 million sector and if you contact me, I can put you on a list to receive all of the weekly REO's.

There are some caveats to working with a bank when buying an REO. One of these is that they will counter your offer with a standard, typically 8-page, counteroffer/addendum that basically states that they know nothing about the property and that they don't have to fill out the same disclosures as a typical seller. In addition, banks can be less flexible as far as creative offers and prefer "As-is" offers where items like repairs, pest work, etc. are already incorporated into a lower offered price by the buyers. They can also be less flexible during escrow if issues arise, you need to extend escrow, etc. All-in-all I highly recommend not pursuing short sales, but definitely pursuing bank-owned properties as well as properties listed by conventional motivated sellers.