I’ve been getting a lot of people, lately, wondering about buying foreclosures. Sometimes, good deals are available, but for most people most of the time, short sales may be a better option.
More and more, lenders (read: servicers) have determined that they are like to recover more funds from a short sale than if they take the house back in foreclosure. In fact, a spokesperson for Wells Fargo recently told a group of us that Wells lost, on average, 34% of the mortgage value on homes it took back through foreclosure. That’s a big number–a $34,000 loss on a $100,000 mortgage.
For that reason, expect to see servicers (lenders) get more aggressive with short sales. And not just with price, either, but with terms–easier lending rules, seller-paid closing costs, etc. Why is this good for a buyer?
When you buy a short sale, the owner has to disclose everything about the property. The owners of foreclosed homes do not, so if there’s known water damage, for example, buyer beware. A foreclosed home will have sat there for months, unoccupied, often through the winter. If the owner had pets, expect the flea popuation to have thrived. If water is seeping in, dry rot will occur.
Investors can make a good risk analysis on a foreclosed home. Traditional buyers, for the most part, cannot. Moreover, the pricing on bank-owned homes may not be all that great. It’s determined by a broker price opinion (BPO), which balances recently sold similar homes and those currently listed, and reduced by estimated repair costs. Unless the former owner had significant equity in the property–and most do not–the bank-owned home will be priced similarly to its neighbors and discounted for repairs.
Thus, once you make the repairs, you haven’t gotten that great of a deal after all. If you buy a $200,000 home in a $200,000 neighborhood for $150,000, and you make, say, $40,000 in repairs, wouldn’t you have been better off to have bought the place on a short sale for $190,000 when the place was still in good condition and you knew what you were getting?
That’s an oversimplification, but it makes the point.
That said, our main site at Terradigm Real Estate published a post on how to buy foreclosed homes and make some money. It’s worth a read.
