Buying Distressed Properties

Monica FlorioLong & Foster, Realtors

May 21, 2011

What is a distressed property?

• A property in any stage of the foreclosure process

• Foreclosure is a legal process by which a defaulted borrower is deprived of his interest in a mortgaged property

Stages of foreclosure

• Pre-foreclosure: begins at property default and ends when the property is sold

• Foreclosure sale: property sold to the highest bidder at auction

• Real Estate Owned (REO): the bank sets a reserve price at auction; if that price is not met, then the ownership reverts to the bank

What options does a distressed homeowner have?

What options does a distressed homeowner have?

• Refinance or modify existing loan• Offer deed in lieu of foreclosure• Sell and bring cash to closing• Request a short sale• Let the property go into foreclosure

What is a short sale?

• A short sale is a sale of real estate in which the sale proceeds fall short of the balance owed on the property's loan

Why a short sale?

• For buyers: may not damage distressed owner’s credit or ability to obtain financing in the future as much as a foreclosure – Can obtain a conventional mortgage after two

years• For lenders: it costs less than a foreclosure• For community: lessen impact that foreclosure

can have on surrounding community

How are short sales priced?

• Listed at the low end of fair market value• After buyer and seller agree on sales price, the

bank (the seller’s lender) must approve the sales price – Banks determine what they’ll accept for the

property based on a broker’s price opinion (BPO): an opinion of fair market value from an independent analyst

Buying opportunity: Low interest rates

18%

5%

Buyer and seller negotiation

Seller concerns• Price is too low – lender

might not approve• Possible deficiency that

the seller will have to pay

Buyer concerns• Price is too low – lender

might not approve• Wasted time and

possibly money

Both agents have a duty to negotiate the best price and terms for their clients before the contract goes to the lender for approval

Questions to ask before you write a contract

• How many liens are on the property?• If more than one lien, what are they? • Is the seller delinquent on condo dues? (Many

lenders will not pay these)• What is the status of the short sale package? • What is the plan to satisfy all the lien holders?

Timing

• How much time a seller has to accomplish a short sale is impacted by: – The seller’s lender’s process– How many liens are on the property– State foreclosure laws– Whether foreclosure date has been set

Short sale addendum

• As-is• Expiration date: allowing the buyer the option

to walk away after a certain date• Lender approves SHORT SALE, not contract

What does it mean to buy a property “As is”?

• What are the risks? • Property disclosures still in effect• Home inspection is VERY IMPORTANT• Is the cost to make the changes worth it?

Negotiation with seller

• Price• Timing of home inspection• Time for lender approval• Timing of mortgage application• Earnest money deposit amount

Your lender must understand the needs of a short sale buyer

• Because of the long time frame involved, consider locking in your interest rate.

• Costs money up front to lock in a rate.• Ask what your lender’s experience is with rate

locks and short sale properties.

Broker’s Price Opinion

• The mortgage lender will order what's called a "broker's price opinion," which gives the mortgage lender some idea of what the property is actually worth in the current market. A broker's price opinion will be based on:

• * the value of comparable properties in the same neighborhood

• * the general condition of the neighborhood• * the condition of the specific property in relation to

neighboring houses

Average approval time

• Wachovia 2-4 weeks• GMAC 4-8 weeks• Bank of America 8 weeks• Wells Fargo 8-12 weeks• E*Trade 8-12 weeks• CitiMortgage 8-12 weeks• SunTrust 8-16 weeks

Buying a bank-owned property

• Sold as is (an excellent home inspector is a MUST)

• Bank must approve sale – faster than short sale but more time than a normal resale property

• Property may be in poor condition

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Location:Long & Foster Fair Oaks13135 Lee Jackson HighwayFairfax, VA 22033703-651-2502

Monica Florio Long & Foster, Realtors 703-651-2502 monica@LNF.com www.urbanlivingintheburbs.com