Use a Realtor: Although we are of course biased, the most important thing you can do when purchasing a foreclosed home is to make sure to use your own Realtor. A Realtor can guide you through the process of purchasing a foreclosure and help you know what is a fair value for the property. Don’t Overbid: Don’t get caught up in “auction mentality” when putting an offer in on a foreclosure. In many cases when offering on a foreclosure you’ll be told there are multiple offers. The definition of multiple offers for many banks is very loose. To them an offer submitted three weeks ago that hasn’t been accepted yet is still a standing offer. Set a firm price that you aren’t willing to go over and if you don’t get the home move on to another. Don’t Underbid: Keep in mind, while everyone knows there are deals to be had on foreclosures, offering $25,000 on a $100,000 home is probably not reasonable. While we regularly see banks accepting 10% below asking price, the max we usually see is about 75% of asking price. In fact underbidding too far can in many cases can cause more problems. Many times even if your offer is later brought up, the lender will still not accept it believing that your offer isn’t genuine. Remember although it is a bank that owns the home, there is still a human with emotions that makes the decisions. Don’t Indicate You Are Using Cash: Contrary to current perception, it’s actually better to indicate on your paperwork you are considering obtaining a loan even if you are not. Most lenders will require cash buyers to put down 10% of the purchase price in earnest money. Also, our empirical evidence has shown that banks will sell the home to a cash buyer for between 3-5% higher than a loan buyer. Know If A Municipal Inspection Is Required: The foreclosure company is selling the home in an as-is condition. They will not provide any required utility or municipal occupancy inspections required by law. This means that if you purchase a foreclosed home, you will not be able to move in until completing this inspection and getting correcting any required repairs. Keep this in mind when making an offer as often times there can be hundreds of dollars in repairs that are sometimes not easily identified. The easiest way to find out if an occupancy inspection is required is to talk to a Realtor or call City Hall. Get a Property Inspection: Most banks are great about allowing you 5-10 days to do an inspection on a foreclosed home. If you do find something they will usually try to deduct additional amounts off the purchase price or let you walk away from the agreement if you so desire. However, there are some companies out there right now that are so desperate to get every deal done possible, they attempt to sneak by language on an amendment that removes any inspection contingency you might have requested. Close On-time: Most every lender when selling a foreclosure will set a specific date that the Buyer must close by. If the Buyer does not close on or before that date, the lender will usually charge what’s known as a per diem fee for each day they don’t close. Typically this fee is between $50-150 per day.  Make Sure You Are Getting a Deal: Don’t bid on a short sale home unless you are getting a good deal. There will be many hoops to jump through and so you should make sure you’re getting the home for at least 5% below current market value to be worth the issues that will arise. Find Out If There Is One Loan or Two: It’s much easier for a short sale to be approved with only one bank involved. When there are two banks, time will be needed for them to negotiate who will take the loss or if they will split it. If the banks can’t agree, no short sale will be approved. Find Out If There Is A Pending Foreclosure: While some banks will stop a foreclosure if an offer is submitted, some will not. Be careful not to invest months in waiting to find out if an offer is accepted only to find out days before closing that the property has been foreclosed on. If there are two loans on the property it’s important to know that they can foreclose independent of the other. Therefore you might be working a short sale and have it approved with one bank while the other one forecloses. Be Prepared To Negotiate: Although it is Principal Realty Group’s policy to recommend the Seller not accept the contract until the lender approves, many other brokers do. In this case the Seller has agreed to a sale price however their lender must still approve. So if the Seller signs off, don’t think it’s a done deal at that price. Also be aware that the lender will not suggest what the Seller should list the property at. It’s possible they could list it at $200,000 and the bank would require a sales price of $210,000. Therefore, after the short sale is reviewed be prepared that the bank will more than likely try to negotiate to a higher price. Remember that it’s their job to lose as little money as possible for their investors. Also keep in mind that if the bank says they require an offer of $5000 higher you can suggest that the Seller pick up this bill. Many lenders will approve this and the Seller can then pay this amount back over 10-20 years at a very low interest rate. (This keeps the bank investors happy that even though in the short run they are losing, in the long run they are at least getting something.) Be Prepared To Wait: Due to the influx of requests by Sellers to obtain a short sale approval on their homes, some banks are taking an extended time to issue an approval. If it’s a smaller bank, it’s currently taking about 2-4 weeks to get an answer, a midsize bank is 4-6, and a large bank is taking as long as 3 months. Therefore if you must move quickly it’s probably not a good idea to purchase a short sale. Please also keep in mind that if you are told a date to have an answer there is a high likelihood that the date will come and go with no answer. Understand this is not the fault of the Realtor, but the bank issues deadlines that they simply don’t care if they keep. While a lender like Countrywide might have been the issuer of the loan, it’s probable that they sold the loan off in the secondary market. This means that when you offer on a short sale they must wait to get approval from the investor that bought the loan. This can also take some time. Have An Escape Clause: At Principal Realty Group, we have all Buyers writing offers on short sales include an amendment in the contract that allows them to get out of the agreement at anytime before the bank approves the offer. Therefore if the lender takes too long to approve the contract and the Buyer decides it’s time to move on, they can and not lose their earnest money. The same amendment also allows allows the Buyer’s inspection period to start only after the lender approves. That way the Buyer doesn’t have to spend money on inspections before finding out if the offer is approved. Don’t Expect To Ask For Repairs: In almost all cases a Buyer needs to be prepared that while they are allowed to do an inspection, if they accept the home they will be responsible for any repairs. Short Sale sellers are usually not in a position that allows them to do anything more than basic work to sell the home. Don’t Assume The Bank Will Act Rationally: In every short sale that Principal Realty Group has negotiated, we have witnessed irrational behavior by the bank. Most of this boils down to the fact that the employees in the loss mitigation departments are overwhelmed with work, haven’t been properly trained, and have no direct benefit in protecting the lender’s interest. While they follow the banks policies, because they haven’t been tested on this scale, they cause large delays.
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