11 December 2009

What about Foreclosures and Short Sales?

Even though the subject has been nearly beaten to death, I receive enough questions about short sales and foreclosures that a short primer seems a good idea.

Both Foreclosure and Short Sale are neither for the faint of heart or for those with little patience and time. They can be an opportunity, but also a money pit of the first order.

In a Foreclosure, a property gets sold off in an auction-type format. Commonly this happened on the steps of a courthouse, in Florida it increasingly takes place online to level the playing field for non-professional home-buyers. The largest of the 12 Florida counties to conduct online foreclosure auctions, Miami-Dade County as an example opened their foreclosure website on December 8.

A Short Sale is a real estate sale before a property goes into foreclosure, fetching a price below the current mortgage value. Contracting partner and seller is the current owner of the property, though the lender has to agree to the contract and is the de-facto negotiation partner. Because the bank hopes to minimize it’s loss, it will look for the best and highest offer as long as possible and even try to bid up offers. A short sale is anything but short: a time-frame between three and six months from submitting an offer to closing is typical.

Short sale asking prices are teaser prices; selling prices are almost always substantially higher. Cash offers with no contingencies get the nod, or put differently: if the buyer doesn’t have bullet-proof financing lined up and/or asks for inspection contingencies, s/he is wasting time.

A variation is the pre-approved short sale, where the bank has agreed to sell the property if a specific price is reached. This is not the norm though. Experience shows that the pre-approval should always be obtained from the bank in writing, otherwise it can be considered worthless.

Foreclosure- and Short Sale-properties are usually in some state of disrepair and may be uninhabitable (vandalism, mold, roof damage, missing toilets, sinks, pipes, etc.) A buyer can not expect any price concessions and has to deal with visible and hidden problems on his/her own. Repair costs, which can easily eat up the savings in buying the property, can not be financed. Some examples I recently encountered:

Liens, second mortgages, unpaid taxes, utility bills, homeowners or condominium dues and open judgements can significantly add to what originally looked like an attractive price.

At the end of the day, a Foreclosure or Short Sale may not turn out to be significantly cheaper than buying a non-distressed property that comes without excessive headaches, but whose price probably has been driven down considerably by the large foreclosure and short sale inventory.

(Above is an edited excerpt of my guide "Buying And Selling Florida Real Estate", which is available as a PDF in English and German and can be requested here.)

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