Media hype about houses going into foreclosure has buyers believing that it's easy to pick off great properties at bargain basement rates.
However, buying distressed properties is not as simple as it may sound. And the deals usually aren't as great as you may imagine.
For starters, there's a big difference between properties that are "in foreclosure" and those that are "foreclosed" -- now owned by the bank.
The main difference is that it's difficult to buy a property that has not yet been foreclosed -- even if the owner wants to sell. The main reason is that the owners are behind on their payments, and/or they owe more than the property is currently worth. They don't have the money to make up the difference at closing, so a potential sale would come up short -- otherwise known as a "short sale."
Short sales are subject to lender approval. In cases where there is a first mortgage and a home equity line of credit (or HELOC), the sale would require approval of two lenders. Essentially, the homeowner no longer has the authority to sell the property, no matter how motivated he or she may be.
This situation is difficult even with only one bureaucratic institution being asked to forego repayment of tens or hundreds of thousands of dollars. It nears impossibility when there are two banks involved. Months can go by while the lenders negotiate, or even litigate, with one another. Meanwhile, buyers who make offers on short-sale properties may be rebuffed because a decision can't be made while the banks are fighting with one another -- or because the banks reject offers that may reflect fair market value but are lower than the amount they are owed.
Eventually -- and this may take many months, even a year -- most properties in this situation will progress to the status of "short sale approved." But while that means the lenders are now on board, they rarely budge from the list price, which still may be unrealistically higher than fair market value.
This further frustrates bargain-seeking buyers looking to take advantage of a desperate situation. But what's most frustrating of all is the time banks take to respond to an offer on a short-sale property -- perhaps four to six weeks or longer. Few serious buyers are willing or able to wait that long.
Meanwhile, short-sale properties on their way to foreclosure typically start to look shabbier every day. Think about it. People who can't afford to make their mortgage payments usually can't afford to maintain them, either. These owners tend to spend the money they do have on essentials such as food, clothing and gasoline rather than on cutting the lawn, fixing the plumbing, servicing the furnace or painting the exterior.
Eventually, most properties on their way to foreclosure become very run down.
Once foreclosure has taken place, there's good news and bad news for potential buyers. The good news is that prior bureaucratic obstacles to purchase have been removed, and the bank that now owns the property is motivated to sell and get the property off its books. The bad news is that by the time this happens, properties usually are not in very good condition. In the best case, they simply haven't been well maintained. In the worst case, they may have significant structural damage and/or fixtures stripped out. Some are barely habitable.
Because of all this, many -- if not most -- properties in foreclosure are not such bargains after all. Alas, for most buyers they are just a fantasy.
Evi Coghlan is a licensed real estate agent with Coldwell Banker's Riverside Avenue office and a former marketing consultant who advised Fortune 100 companies. To contact Evi, call 203-247-6691, e-mail her at email@example.com or visit her web site www.evicoghlan.com.