Given the current market, I get a lot of calls asking about foreclosures. If you listen to the news, you’d think that every other house on the market is in foreclosure or close to it. In fact, according to the Mortgage Banker’s Association, at the end of last year, just over 9 percent of all home loans in the United States were in arrears or already in foreclosure. That means that more than 9 out of 10 homes are NOT in foreclosure. However, if the current trends continue, the percentage of homes in foreclosure could rise to 16 percent by 2012 according to a report by Credit Suisse. Regardless of what the future holds, there are several key differences between a foreclosure sale and a market sale. They are:
- Homes that have been foreclosed on are now in the hands of the bank that made the primary loan. The owner is out of the picture (and hopefully out of the house).
- There may be an asset management company that is now managing the property and sales process. This adds additional layers of bureaucracy and communication to the process.
- The home is most likely listed with an REO or foreclosure broker. This adds another layer to the process but can a good REO broker will help the buyer and their agent make a good offer.
- There are typically no disclosures and the home is sold “as-is” with no repairs.
- The bank will often collect offers or bids and hold them until a time at which they want to respond. It is not uncommon to wait weeks before hearing of your offer is accepted, only to find out it wasn’t but someone else’s was.
- Most banks will choose the “best offer” as they see it and may or may not even give the buyer a chance to revise their offer. The “best” offer can be one with a quick close or less contingencies or stipulations. Of course, the higher the price offered is always a good way to get considered.
- Banks usually require several addenda be signed by the buyer and that the buyer closes at an attorney of the bank’s choosing. The addenda may not be available to review until after your offer is accepted. While there’s usually a period to review these documents before a “formal” acceptance is made, these documents can be lengthy and include key information that may change the affect the buyer. An experienced agent will know what information is critical and relevant to the buyer.
- Foreclosure is an expensive process and banks want to re-coup as much as they can. They are not in a rush to sell and will often refuse to negotiate in the beginning. These are not fire-sales.
So what does all of this mean? It means that when making an offer on a foreclosure, you are not dealing with a motivated owner who is looking to retire or downsize. You are dealing with a bank – a business entity – who is going to scrutinize every aspect of the transaction. If they have gone through the process of foreclosing, you can bet that they are going to want every last dime they can get.
Many buyers mistake a foreclosure as a sign of desperation. It’s not. A seller in pre-foreclosure may be desperate. A foreclosed on home is now an asset and not a home. It’s on the bank’s books. They probably have priced it below the market price of a typical home already but usually at or near the amount they are owed. Buyers often think they can get a foreclosure for 50%-60% of the list price. It’s not gonna happen, at least not usually.
Here are my tips for making a strong offer and increasing your chance to have your offer accepted.
- Be fully pre-approved by a lender and have a letter from them with your offer.
- Review the comps for houses that have sold and compare the subject to these adjusting for condition. Base your offer price on these factors, not what “you” think it is worth.
- Get a quote on all work that needs to be done on the house before you make the offer or be comfortable with the possible work to be done.
- Follow the submission guidelines carefully. Many offers are rejected due to incomplete paperwork or missing signatures.
- Be prepared to compete with other offers. Banks like to collect multiple offers and then have the buyers outbid each other.
- Understand that the bank doesn’t care why you want the house. They are looking at it from a financial perspective.
- CASH offers are usually more attractive. Most foreclosure deals fall apart because the buyer can’t get financing – even if they are fully approved before hand!
- Use a professional and experienced Realtor. All homes listed in the FMLS will include a commission to your agent. They’re paying for you to be represented – be represented!
- Make sure you want the house. Otherwise, this is a lot of effort for nothing.
- Don’t be afraid to make another offer if the house comes back on the market. It’s not personal. Just because they didn’t select your offer before doesn’t mean they won’t this time.
I have successfully closed several foreclosure deals. I worked on many more. Typically, if the buyer is realistic and follows these tips, there is a very good chance in getting the offer accepted. If they decide to “throw an offer out” and see what happens, it usually results in a rejection and a lot of wasted effort.
Please feel free to contact me with any questions you may have about this or any other real estate topic.