Everyone loves a bargain, the bigger the better. And arguably the biggest bargains of all can be found with distressed real estate.
“There’s evidence that home values have begun to solidify in many local markets,” says Wendy Forsythe, executive vice president and head of global operations at Atlantic & Pacific Real Estate, a full-service real estate brokerage with offices in 22 states. “However, the marketplace remains saturated with distressed properties and such homes are routinely available at significant discounts.”
The National Association of REALTORS® reported that in May distressed properties represented a quarter of all existing homes sold. Fifteen percent were foreclosures and the typical discount was 19 percent. Short sales represented 10 percent of May existing sales and the usual discount was 14 percent.
Forsythe also points out that discounts are not the only factor to consider when looking at real estate.
“There’s no doubt that discounts are a big attraction,” she said. “But distressed properties are different when compared with homes which are not distressed. Condition can be an issue and distressed transactions are often complex. Atlantic & Pacific Real Estate sales professionals specialize in these properties and can help buyers understand the issues.”
Properties become “distressed” when owners fail to make their mortgage payments. Once payments are missed there are typically four stages of distress.
Delinquency: Here the owner has missed one or more payments but the lender has not foreclosed. Delinquencies can be “cured” by bringing mortgages current or modifying loan terms to make the property more affordable.
Short Sales: In a short sale the owner makes a deal to sell the property to a purchaser for less than the amount due on the home loan. Because of this, these sales require lender approval.
Foreclosures: Unless the loan is made current, or the property sold via short sale the home will be auctioned off. The lender will bid on the property to recover as much of the outstanding loan amount as possible. If no one outbids the lender then the lender will take title to the property.
REOs: Properties taken over by lenders after an auction are called REOs — “real estate owned” by the lender. Like short sales and traditional properties, these homes can be purchased through real estate brokers.
“In the past lenders were opposed to short sales because such transactions represented an automatic loss on the mortgage,” said Atlantic & Pacific Real Estate’s Forsythe. “Now lenders are more willing to go along with a short sale because it may be quicker and less costly than foreclosure, a process which can take a year or more in many states.”
How to Start
Over the past 20 years real estate transactions have become more complex. Sale agreements which used to run just a few pages are now lengthy documents in most jurisdictions. In a similar way, transactions involving distressed sales have also become more complex. It’s this complexity which explains the need for an experienced broker to navigate the process.
Investors and home buyers with an interest in distressed properties should begin by looking at the local inventory to see what purchase options are available. Atlantic and Pacific Real Estate sales professionals specialize in the distressed market and are familiar with local short sale, foreclosure, and REO opportunities.
Once you identify distressed properties which may be of interest to you, it’s time to examine some specifics. Major questions include:
How is the property being sold? Via short sale, foreclosure or REO? Each requires a different strategy — and each may be available at a different discount.
What’s the condition of the property? Some distressed properties are in good condition while others will need extensive — and sometimes expensive — repair work to bring them up to par.
Is the property occupied? Will an eviction be required? If so, how does one start an eviction in your jurisdiction and how long can such a process take?
What’s the market value of like properties which are not distressed? What about local vacancy levels and rental rates?
How many lenders have claims against the property? Is there a mortgage insurance program in the picture such as the VA, FHA or a private mortgage insurance company? If a distressed home has been financed with two or more loans then the sales process can be far more complex.
How will the purchase be financed? Many buyers pay cash but there’s also financing for qualified borrowers. Buyers who use financing must prepare in advance so they can act quickly when a distressed property becomes available as there are often multiple bids on an individual home.
“Distressed properties can have great appeal,” said Forsythe. “Discounted prices and historically low interest rates make these homes affordable to many families who might otherwise not be able to buy a property. But buyers also need to be selective because not every distressed property is a bargain. Real estate professionals like Atlantic and Pacific Real Estate agents can review local markets, discuss the available opportunities and explain why some properties may be more attractive than others for specific buyers.”
Originally posted July 15th, 2012 at http://rismedia.com/2012-07-15/buying-a-distressed-home-what-you-need-to-know/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+Rismedia+%28RISMedia+Real+Estate+News%29