How To – Know The Differences & Danger – Foreclosure, Bank Owned, Short Sale

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    If you happen to be in the market for a new home or if you are thinking about investing in a property for potential income you should take your time and educate yourself about the different listing types you are likely to come into contact with when considering distressed sales.

    Although you have the potential to make a considerable amount of money lenders are less likely to provide you an investment loan when a property is distressed. Some lenders will not lend if the home can not pass an occupancy permit because the home will not be able to be covered under home owner insurance.  Additionally if your lender is providing a government backed mortgage even if you are purchasing a home for sale by the government you may not qualify for a loan unless the home is move in ready.

    So, up front you should know that any potential investment will have both lender and insurance problems that may limit your ability to even arrange the initial offer.

    Property Condition

    With all other things equal you are most likely to find a Short Sale property in better condition then a Bank Owned property.

    Property owners who are trying to stave off a foreclosure have most likely worked with a realtor for some time and have made improvements to the interior and exterior of the home to attract buyers that will give them the best price. When a seller is faced with a short sale the same is true. They will want to get the most they can to reduce the difference of the price they owe and the price they will get.

    Foreclosure is the next step when a Property can not be sold by its owner. The bank or lender will take posession of the home and either through their in-house staff or through a Realtor place the home up for auction or quick sale. The period of time between taking possession and your ability to bid or buy the home is when problems occur.  Normally homes are not occupied so there is a potential for property damage either through neglect or crime. Often access to a home prior to foreclosure auction is limited and do not expect to pay pennies on the dollar no matter what the condition so you will need to know the property before making a bid.

    Bank Owned or sometimes referred to as REO Properties are ones that have been repossessed by the lender and failed both a short sale and a foreclosure auction.  Properties in this category are likely to have considerable problems. They may have problems that have mounted up over time as the property aged or they may be ones due to crime.  As a potential buyer you must require a full disclosure of the condition of the property and remember that government sold homes almost always come with a disclaimer of liability or ASIS no matter what the condition or even prior knowledge of problems that are not disclosed.

    Current Occupancy

    In addition to understanding your potential Tax liability and any repairs you may need to make before you can move in or resell a property you are evaluating it is very important to understand if and who may occupy the home.  Many jurisdictions have placed some unreasonable eviction standards because of mass sales and foreclosures of multi-unit buildings but they can also be applied to single family homes.

    If the home you are looking at is occupied you may face an extremely long eviction process if the home is rented by someone other then the owner.  Additionally you may not even be compensated for their use of your property while you go through the eviction process. This is very often the case for Government owned property.

    Delays that can cost you a lot of money

    When dealing with a short sale home you may be asked to make an offer that the lender will have to evaluate prior to sale of the property.

    It is in the Lenders best interest to not assume ownership of the home and keep the title in the customers name but also it is their duty to their stock holders to get the best price for the home so they will want to delay the process as long as they can.

    They will tie persons with potential offers into the contract while having a release that allows them to cancel your offer at any time they can find a better customer or decided to push the property through foreclosure.

    Basically if you make an offer it should be low that way they will either address it or make a counter offer without wasting your time. If you come too close to a price they might accept they will shelve it rather then reject it as would happen on a standard sale of a non-distressed home.

    So, be careful and make sure your Realtor knows what they are doing or you might end up on the hook for three to six months only to find your offer rejected and many other potential homes lost.

    Final Note

    There is potential at any time to make or save money by buying a distressed property but you should fully understand all of the problems that are associated.

    Before you begin you should visit your local home insurance agent and ask them if they will offer insurance on the property that you want to purchase. Ask if they will insure a property that needs work before an occupancy permit can be obtained.

    Ask your lender if there are any problems in qualifying for distressed properties and the process you will need to follow to have that check ready if you want to attend an auction.

    Then fully understand your market are you purchasing a home in a neighborhood that has had many distressed properties and may be potential problems if you decide to sell your home either immediately or within the immediate future?

    And understand that assuming ownership of a property that could not be sold by a previous owner, an auction and a bank may not be the smartest thing you ever did.

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