The Real Deal / Foreclosure fantasy often just that
Media hype about houses going into foreclosure has buyers believing that it's easy to pick off great properties at bargain-basement rates in the current soft market.
However, as with most things, buying distressed properties is not as simple as it may sound. And the deals usually aren't as great as you may imagine. So as a buyer, what do you need to know about properties facing foreclosure.
For starters, there's a big difference between properties that are "in foreclosure" and those that have been foreclosed and are bank-owned. The main difference is that it's very 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 now worth -- and they don't have the funds to make up the difference at closing. Therefore a potential sale would come up short -- otherwise known as a "short sale."
Short sales are subject to lender approval -- or in cases where there is a first mortgage and a home equity line of credit (or HELOC) -- subject to the 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.
As you can imagine, this situation is beyond difficult 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 with one another or even litigate.
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 lenders are unwilling to accept offers that may reflect fair-market value but are lower than the amount they are owed.
Eventually -- and this may take a year or more -- most properties in this situation will progress to the status of "short sale approved." Although this means the lenders are now on board, they are rarely negotiable off the list price, which may still 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, which may easily be four to six weeks or even 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 afford to own homes usually can also afford to take care of them.
When this is not the case -- especially in the unforeseen circumstances of divorce, job loss or medical crisis -- people 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 of the house. Eventually, most properties on their way to foreclosure tend to become very run down.
Once foreclosure has taken place, there's good news and bad news for a buyer. The good news is that prior bureaucratic obstacles to purchase are removed, and that the bank is usually very motivated to sell and get the property off its books.
The bad news is that by the time this happens, properties are usually 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. Many are not even habitable.
What the media doesn't tell you is that 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. She may be reached by calling 203-247-6691, emailing email@example.com or visiting her website www.evicoghlan.com.