When Considering Foreclosures…….
Foreclosed (lender owned, REO) properties may offer a significant value to the home buyer, however, these properties require different process and procedure, as well as, greater patience, tenacity, and greater scrutiny than traditional home purchases. Also, due to the nature of the property being foreclosed, the condition of the property varies widely from location to location. This is truly a “buyer beware” situation”.
Foreclosures are NOT short sales. Foreclosures are properties that are owned by a lender and usually listed through a real estate broker as “for sale by the lender”.
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- A SHORT SALE property is offered for sale by the current owner at a price less than the mortgage payoff. Short Sale opportunities must be negotiated with the mortgage holding lender by the current owner to obtain a short sale approval. However, properties are often placed on the market by the current owner prior to short sale approval by the lender. Any offers on a short sale property must be approved both by the current owner/seller and the lender. Offers on these properties usually take considerable time while waiting for the lender’s short sale approval to take place and an asset manager to be assigned by the lender to negotiate any incoming offers on the property.
- NOTE: Lender approval for an NON Pre-approved Short Sale may take a considerable long time. (it may take weeks to months to receive a positive or negative reply to an offer) Offers on a Pre-approved Short Sale are usually responded to more quickly, but it can still take days to weeks for the lender to gather offers review and select a process to move forward.
- Foreclosures are sold AS-IS in their present condition. The seller will NOT make any repairs or physical changes to the property unless material property defects are found, and then they still may not. It is highly unlikely that sellers will negotiate any contract terms that mitigate the AS-IS condition.
- Buyers are NOT provided a Standard Property Disclosure Statement (SPUDS) OR insurance claims report (CLUE) as is normal for traditional property. It is up to the buyer to determine property condition, environmental and legal status and ascertain the impact of any prior insurance claims that may impact property value.
- Buyers may present an offer to purchase a foreclosure using a standard real estate purchase contract (with appropriate addendums) or, if seller requires, an offer worksheet, followed by a standard purchase contract if the offer is accepted. It may take from 2 – 20 days (or more) for an initial offer response (accept, reject, counter) from the seller (bank or lender). Buyer Realtor® Representatives have no impact on the time it takes the seller to respond to an offer. Buyer and seller Realtors® are at the mercy of bank/lender policy and procedure which trumps normal real estate procedures, regulations and time lines.
- Offers on lender owned properties must include a completed, lender endorsed Loan Status Report (LSR). This equates to a buyer’s loan pre-approval for the purchase of a particular property and is originated by a lender or mortgage broker. Offers must also include a refundable earnest money deposit.
- Multiple offers are common on well priced properties in good condition. Often lenders will counter all offers with a request for “your last and best offer”. With foreclosed properties it is advisable to make your first offer, your last and best offer to try to avoid this process. Traditional contract negotiation opportunities are very uncommon.
- Accepted offers on foreclosures will be followed by a comprehensive bank addendum that must be completed and returned in a short period of time. Once all documents, agreements and addendums are signed by both buyer and seller, the buyer’s ten day review period begins.
- Buyers are entitled to the normal ten day period to review their property and the purchase agreement. During this time buyers are encouraged to carry out a professionally conducted home inspection (at buyer’s expense) and any other property inspection deemed necessary by the buyer to determine if any unacceptable property defects are found. This inspection is for buyer’s information only and has no impact on the seller’s responsibilities. The buyer may withdraw their offer during this ten day period if an unacceptable material property defect or contractual provision is found. (see AZ Purchase Agreement Para. 6 a-j)
- The buyer is expected to apply for a mortgage loan during the first 5 days of the review period and obtain a certificate of homeowners insurance (effective on COE) before the end of the review period, as is normal with traditional purchases.
- Be aware, foreclosed properties may have title problems that may take weeks to fix. Also other seller or lender related issues may delay the projected Close of Escrow date, often by weeks. There is often only a few days notice of these delays. Buyers should have contingency living plans in case these delays happen.
- Buyers take possession of foreclosed property on the date of closing. Buyers must arrange for transfer of utilities to their name as of the day of closing. Pre-possession or preparation of the property prior to closing is not an option.
- As access to these properties have been provided to many persons during the sale period, it is strongly advised that new homeowners change all property locks.
This document is provided as an overview of the process and issues involved in purchasing a foreclosed property. It is not intended to provide all information necessary or every issue involved. Contact your Realtor® for further assistance in purchasing a foreclosed or short sale property. |