What are the Differences Among Foreclosures, Bank Owned and Short Sale Properties

What are the differences among Foreclosures, Bank Owned and Short Sale properties you may see listed for sale? The differences are substantial and you should not underestimate the effort involved in bying a home under any of these processes.

Since I am frequently asked by prospective buyers the difference among these three different approaches to buying a home, I'll try here to answer that question as briefly as possible here.

Foreclosure Properties are property sold via an auction process. A foreclosure auction sale begins with a minimum bid that includes the loan balance, any accrued interest, plus attorney's fees and any costs associated with the foreclosure process. To bid at a foreclosure auction, you must have a cashier's check in your hand for the full amount of your bid. If you are the successful bidder, you receive the property in "as is" condition, which may include someone still residing in the property. There may also be other liens against the property. Since what is owed to the mortgage holder is almost always more than what the property is worth, very few foreclosure auctions result in a successful sale. Then the property "reverts" to the bank. It becomes an REO, or "real estate owned, REO or bank-owned property.

Bank Owned Properties are properties that have already gone through the foreclosure process without a successful bid being received and are now owned solely by the bank or other mortgage holder. The bank will handle the eviction of any people living in the property, if necessary, they and may or may not do any repairs. They most generally want to sell the property "as is" although that may be negotiable. The bank will also negotiate with the appropriate authorities to remove any tax liens and pay off any homeowner's association fees that are due. As the buyer of a bank-owned property, the buyer will receive a title insurance policy and the opportunity to investigate the property. The buyer's offer will be countered by the bank and it is typical for the buyer to re-counter that counteroffer.

Short Sales Properties are those homes that are still legally owned by the homeowner but the property is being listed for sale at a price that is less than the amount owed on the mortgage. Since both the seller and the mortgage holder are involved, once the seller accepts an offer, it must be submitted to the mortgage holder, who will frequently attempt to get a higher price before allowing the deal can be consummated. A home or condominium offered as a short sale may or may not already be in the foreclosure process. Short sale properties are generally sold "as is" with no allowance for inspections. The buyer may do any inspections they wish at their own expense but it is unlikely that the bank will agree to cover the cost of any deficiencies found during the inspection.

If the bank believes it can receive a higher price by taking the property through the foreclosure process, they will hold out for a higher price than the advertised short sale price and closer to what they believe to be the property's market value. Lenders generally accept short sales only when the price of the home is close to its market value. It is generally not the case that a buyer gets a significantly better deal on a short sale than on a typical purchase transaction, And, this process can take 90 - 120 days or even more.

The assistance of a professional Tampa Bay Realtor knowledgeable in the purchase of "distressed properties" will make buying a home as a short sale, at a foreclosure auction or as a bank-owned property a simpler, although surely not a trivial process. You should not attempt to procure a home by any of these three routes without the assistance of an experienced and knowledgeable professional like Cheryl Stimac, a Tampa Bay real estate expert trained and experienced at executing home purchases under these processes. Cheryl has earned the Certified Distressed Property Expert (CDPE) designation, having completed extensive training in foreclosure avoidance and short sales.

You may also want to read my earlier post on Foreclosures and Short Sales

The Seller Can Help You Buy Their Home

If you and your family are ready now to buy your first home, but you're not sure you have enough cash stashed away, there are ways in which a home seller can assist you in buying his home. A competent Tampa Bay Realtor can review all of your options but here are a few examples.

FHA MORTGAGE WITH SELLER FINANCED CLOSING COSTS
An FHA mortgage requires as little as 3.5% of the purchase price as a down payment. These mortgages have been available for years. Your Realtor, working with the home seller and an FHA-approved mortgage provider, can structure a mortgage loan so that the seller pays all or nearly all of your closing costs. The seller cannot assist you with the 3.5% down payment, but can pay just about everything else at your closing. In the current market environment, many home sellers are willing to participate in this type of arrangement to get their home sold.

SELLER-PAID BUY DOWNS
There are many variations of "Buy Downs," Some are permanent, where the interest rate is reduced over the full life of the loan. Other buy downs are temporary, reducing your interest rate, and therefore your monthly payment, for the first 1 - 3 years. The most popular is what's known as a "3-2-1 Buy Down." Here's how it works. For the first year your rate is 3% below the market interest rate; the second year 2% below, and for the third year the interest rate you pay is 1% below the agreed-upon interest rate. This allows you to grow into your loan payments over 3 years. If you expect your family income to grow over that period by enough to cover the eventual cost, this may be an attractive option for you. "Buying down" your first 3 years of loan payments in this manner will cost the seller about 4.5% of the loan amount. Here is an example on the purchase of a home with a $225,000 mortgage with a fixed rate of 6.5%. The full monthly rate on this mortgage would be $1,422.15/month. Using a 3-2-1- buy down, the first year's payments would be $1,010.35, the second year's is $1,140.04, the third year's - $1,277.53, and then for the remaining 27 years, $1,422.15. The "buy down" of the first 3 years payments saved you, the buyer, over $10,000 in mortgage payments in addition to making your payments more affordable for those first 3 years.

There are other buy-down processes your Realtor can discuss with you. Another popular one is a 2-1 buy-down which works like the 3-2-1 program but reduces the interest rate for only the first two years.

SELLER FINANCING
Less frequently, but occasionally, there are sellers who own their home outright (no mortgage on the property) who will agree to assist you by holding your mortgage. In this case, you do not have to qualify through the normal bank financing route. In effect the seller, instead of a bank or other mortgage company, becomes your mortgage provider. Such a mortgage can be written with essentially any terms and conditions that you and the seller agree upon ranging from financing 100% of the purchase price to requiring a minimal or larger down payment, with or without a "balloon payment" at some point in the future, and for a term of 10, 15, 25 or 30 years.

Such private lenders frequently charge a higher interest rate and may try to use this approach to get the highest possible price for their property. So protect yourself by working with a competent Realtor who can make certain that you are not over-paying for the home you want.

The point of this discussion is this. if you'd like to buy a home now, one of these seller-assisted approaches may work for you. Don't be scared off because you don't think you have enough saved up yet. The price of homes and the interest rates are as low right now as they have been in a long time. Meet and discuss your options with a competent Realtor like Cheryl Stimac, a Tampa Florida Real Estate professional. Got questions about all this? Call Cheryl Stimac today at 813-263-6808 or email her at cheryl@cherylstimac.com

You may be closer to your dream of home ownership than you have dared to hope.

More Federal Help for Tampa Bay Foreclosures May Be Coming

A number of U.S. government agencies are working together on a new plan that could help 3 million homeowners avoid foreclosures. These negotiations could still fail, but federal government agencies are contemplating using $50 billion of the recently-passed federal bailout plan to guarantee up to $500 billion of residential home mortgages. Florida, because of its enormous reliance on the real estate industry, could benefit greatly under this plan since the housing meltdown has had a major negative effect on the state's economy.

Under the plan, the government would agree to absorb half of the losses on home loans if the mortgage company agrees to lower the borrowers'
monthly payments for at least 5 years. Details f how the plan would work are still being negotiated but this is the cetnral concept of the plan at this point.

In another recent development, more than $540 million in federal funds is coming to Florida, earmarked to purchase foreclosed homes at a discount. “Florida has felt the sting of our nation’s housing market challenges, and these funds will provide a welcome boost to our state’s economy by helping Florida families stay in their homes,” said Gov. Charlie Crist.

Governor Crist credited Florida’s Congressional delegation with securing the support from the U.S. Department of Housing and Urban Development’s Community Development Block Grants under the Housing and Economic
Recovery Act of 2008 passed by Congress earlier this year. The funds will provide assistance to state and local governments to acquire and re-develop foreclosed properties that might otherwise be abandoned and blight their neighborhoods.

Florida had the nation's second-highest foreclosure rate in September, an ignominious record achieved by beating out depressed housing markets in California and Arizona, according to the firm RealtyTrac. Foreclosure filings last month afflicted 47,956 Florida properties, or one in every 178 homes. Only Nevada, with one in 82 properties facing foreclosure, is worse off. Hillsborough County showed the biggest monthly increase in Tampa Bay with 4,663 properties falling into foreclosure in the month. Pinellas County had 1,813 foreclosure cases, while Pasco and Hernando counties had 1,175 and 374 cases, respectively.

"Anything we can do to get foreclosure numbers down will quicken the stabilization of the market," said Ritch Workman, president of the 2100-member Florida Association of Mortgage Brokers.

The new federal government foreclosure-assistance program now being negotiated would be run by the Federal Deposit Insurance Corp (FDIC).

No one understands that process involved in short sales and foreclosure sales than an experienced Tampa Bay real estate professional like Cheryl Stimac. You can visit her Tampa Florida real estate website or call her directly at 813-263-6806 for further information.

How to get a good deal on a house! (but remember, good deals do not come perfect.)

If you want to get a great deal on a home, you must buy from a motivated seller. How do you find a motivated seller? Often, sellers that are going through a job relocation, a divorce, or some other life change are motivated. These sellers are likely to give away equity. And unlike a foreclosure, you get a property disclosure which will give you a history of any home repairs. Also, the seller warrants their statements about the condition of the property. These properties are often in better condition than a foreclosure because the sellers are keeping the properties in “marketing” condition. Your Realtor can help you locate motivated sellers and distressed properties.
Homes that are in the process of selling before foreclosure are often sold as “short sales”. A “Short sale” means that the bank or lender accepts less than the current mortgage balance for the property. Usually, before a lender will agree to a short sale, the seller must be in default (that is they must be behind in their payments, or have stopped making payments altogether.) In these situations, the seller is said to be “over-encumbered” and owing more than the home is worth. A short sale might bring the price in line with market value, but not below market value.
Speed is not a virtue of a mortgage company when they are dealing with short sales. These days, the bank mortgage representative has a stack of files with home sellers that are in the same situation. They are in no hurry to give you an answer as your contract is not on top of the pile. If you are patient, a purchase of a short sale can put you in a positive equity position but don’t make an offer on a short sale property if you need to move into a home quickly.
I have bought and sold many investment properties. My motto is “good deals do not come perfect”. You may not get the perfect floor plan. You may have to paint the interior. You will have to fix things and you will need to clean the carpet and chemically treat the “green” swimming pool. In the end, you will come out with a beautiful home and a strong equity position. This is the typical condition of a pre-foreclosure or newly foreclosured home. Neither the owner nor the bank wants to put money into a property that they are taking a loss on. It is on this type of home where you can get the strongest equity position.
When you buy the reduced price home for your primary residence, you will be able to make improvements and get a return on your hard work. Remember, the tax rules are now written that if a home is your primary home, in most cases, profit when you sell is not taxable. To maximize your profit, buy with the intent to stay in the home for a minimum of 3 to 5 years. This will allow time for the market to improve and for your investment to increase in value.
If buying homes that need work does not appeal to you, in our current market new home builders and sellers of existing homes are giving some wonderful deals. Many are paying all closing costs, and making changes to the home as requested by the buyers. To get a good deal, it is wise to buy when others do not want to. This is the kind of market where you will have them greatest power.