Great deals on foreclosures and short sales are definitely out there, but you may run into financing roadblocks when it comes time to buy. Here’s how to get the most for your money.
You probably hear it all of the time. “You should buy a short sale or foreclosure. There are some great deals out there!” Or, your friend tells you, “I paid 150 percent below market!” And, except for the “150 percent” part (which most math majors will know is not possible), these statements have merit.
The problem is that, practically speaking, many of these “deals” may not be available to you.
Remember, when we are talking about short sales (sales in which the seller’s proceeds will be less than his outstanding mortgage debt) and foreclosures (sales in which the lender is now the owner and seller), we are talking about banks in the position of ultimate authority. And, what I see buyers running into regularly is a kind of “discrimination” on the part of the lenders. It’s legal, but it is discrimination nonetheless, and it involves financing.
Supply and Demand
Short sales and foreclosure sales typically conjure images of the year-end clearance sale, and for good reason. These homes usually carry attractive (often, overly-attractive) price tags. Banks have to consider the costs of holding an unsold, non-income producing inventory or, in the case of the short sale, increasing this inventory through yet another foreclosure. So they are able to justify their low pricing strategies. Banks have no interest in becoming land barons; their goal is to move these properties swiftly.
The result is two-fold: Competition can be fierce for lender-controlled offerings; and prices which appear too good to be true usually are.
While many of these properties will in fact sell for less than what you might consider “market value,” a perceived under-priced offering in today’s market is like chum tossed into the shark tank; every would-be buyer on the sideline, including a lot of well-financed investors, is jockeying for a piece of the action. Prices often get bid far over asking price. When a seller has choices, it is survival of the fittest.
Another thing I am seeing more often, though, is that “fittest” doesn’t necessarily mean “richest.”
Not All Buyers are Created Equal
So, here’s the part that feels more than slightly unfair if you are the typical buyer. Where yesterday it was generally understood that sellers were concerned only with the bottom line — money — banks today are less concerned with the bottom line and more focused on speed. This is because, for lenders holding either a non-producing loan or a vacant property, time is money.
Consequently, we have been seeing restrictions attached to distress sale offerings. “No FHA or VA financing” is a common one. Government loans can be a hassle, and banks don’t want hassles. “Property sold as-is” and “No termite inspection or home warranty to be provided” are a couple of other popular disclaimers.
The zinger is “Only all-cash offers accepted.” Yes, we see this one a lot. We see it for the same reasons. Lenders don’t like hassles, and loans can spell trouble today.
When selling foreclosures, banks are often more concerned with making a fast sale than with getting the highest price possible.
Stricter Lending Guidelines
The same banks who are “sellers” today are also the lenders for the purchases. Their rules have changed. The appraisal of the property, which used to be a single event, is often a process involving a second appraisal review, and appraisals missing on the low side are all-too commonplace.
Strict policies for income and assets documentation can mean additional conditions of loan approval cropping up well into the process, and these additional conditions can significantly delay or entirely stall the transaction. So now, it is not uncommon to see a cash offer trump a higher-priced offer with a loan involved, which leaves the average buyer at a disadvantage.
In the case of condominiums, the biggest issue we are seeing with financing is the owner-occupancy dilemma. Most lenders will require that a minimum 51 percent of a project’s units to be owner-occupied as a condition of financing. With a less-than 20 percent down payment, this number can be much higher.
In the old days, this meant that a buyer needed only to watch out for projects with a bunch of renters on board. Today, a project built during the peak real estate market might not qualify because a majority of the units have been foreclosed on and are now vacant. In our downtown San Diego market, this is sadly not an uncommon situation, making many of the “deals” there available only to the cash buyers.
It’s Not All Bad News
After four or more years of declining home values in most areas of the country, prices are becoming very attractive in general, not just for distress sales. Further, not all distress sales will be off-limits to the traditional buyer needing to finance the purchase.
But, with attractive pricing comes competition. It helps to remember that a home purchase is a process, not an event, and that you won’t necessarily win them all. Armed with information, reasonable expectations, and knowledgeable and experienced representation, however, you will dramatically increase your chances of getting that “deal.” Worst case, you may have to settle for a really great home at a really fair price.