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  #1 (permalink)  
Old 02-03-2009, 03:56 PM
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Default Buying a Short Sale or Foreclosure

I started this thread to see if any of the IV members have any experience buying a short sale of foreclosure property.

If so please educate us on the process and downpayment etc.

Also please let us know if its different from buying from the market and in what ways.

I appreciate all your inputs in advance.

Thanks,
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Old 02-03-2009, 04:05 PM
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Default They are two different things

Foreclosure property is where the owner (previous owner) has already long ago stopped making payments and the lender/bank has taken possession of the property. The owner would either be leaving the house, or already left the house, or the bank would have the owner thrown out thru court-ordered eviction. That's foreclosure.

Short sale is very different. In short sale, the owner wants to sell the house because he/she cant afford it, but wants to sell it at a price lower than what his/her loan amount is (because the prices went lower and it can only be sold at lower price). So if the money left on the mortgage is 200,000 and if the house is put on sale for 180,000 due to bad market conditions, then its called a short sale. In such cases, the bank has to "eat" the loss of 20,000 that it does'nt get back on the loan. Why do banks do that? Because foreclosure process is more expensive for banks, as banks are not equipped to sell or rent properties that it re-possesses. So if the bank forecloses, then it has to protect the home from squatters and vandals, put it on auction, sell it, pay commissions to sell it, advertise it, etc. These things cost a lot of money. Commissions alone would be 4-6% between the seller and the buyer's real estate agent. So sometimes, it makes sense for banks to eat 20,000 now in losses than to foreclose and potentially lose more than that.

The difficulty in buying a short-sale property is that the final decision is of the bank. If you make an offer and the seller accepts it, it's not over yet. The bank has to decide and approve the short sale since the bank is the one eating the loss here. So you can get great deals in short-sale situations, but you have the spend money on inspections, attorney fees and appraisal (approx 500-1000 dollars) before you find out if you are going to get the house. If you are unlucky, or if the price is way too low, then the bank may slam the door in your face at the last minute and you would lose about 500-1000 dollars for home-inspection, appraisal, attorney fees etc.

In general, its a good idea to buy distressed properties, IF you get is inspected well and do your homework, because there may be tens of thousands of dollars that you save in buying a distressed property (Foreclosed, pre-foreclosed, bank-owned foreclosure or short sale).

Realtytrac.com is most popular website for distressed properties. However, they charge a membership fee for getting details on such homes in your area. It might be worth it if you save thousands of dollars by getting a good house for bargain prices.
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Last edited by logiclife; 02-03-2009 at 04:11 PM.
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Old 02-03-2009, 04:09 PM
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Default Downpayment

Thanks for the quick response...

What are the downpayment requirements on a short sale or a foreclosure property?

Is a bigger downpayment required to buy a foreclosure or a short sale property?
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  #4 (permalink)  
Old 02-03-2009, 04:18 PM
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Default

Quote:
Originally Posted by shree772000 View Post
Thanks for the quick response...

What are the downpayment requirements on a short sale or a foreclosure property?

Is a bigger downpayment required to buy a foreclosure or a short sale property?
The downpayment required for buying a house depends on the loan that you apply for and get approved. It can be anywhere from 3.5 % to as high as downpayment you want to make. If your downpayment is less than 22%, then you have to pay mortgage insurance per month. If its a regular traditional loan with less than 22% down, you have to pay PMI (private mortage insurance). If its an FHA loan (Federal housing authority), then you have to pay MI (Mortage insurance). FHA means that you are buying mortgage insurance from Federal govt. and the rate would be slightly lower. Also, with FHA, the minimum downpayment is 3.5%.

For making an offer on the house, whether its for sale under normal circumstances or under distress (foreclosure, short-sale), you have to put money in escrow (also known as earnest money). That money is kind of deposit that you put down so that if you suddenly change your mind at last minute, then they can take that money away from you. It basically ensures the sellers that you are serious about buying the house and its worth going thru trouble of selling process and the closing process. The Earnest money is escrow is variable. It could be as low as 2000 dollars or as high as 3% of the value of house. Depends on the seller. If the seller is stubborn or worried, they may ask for high earnest money. IN case of short-sale, the bank may ask for higher amount of earnest money so that they get offers only from serious buyers and not just trolls.
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  #5 (permalink)  
Old 02-03-2009, 04:35 PM
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Default

some times in Bank owed propery sell, i see words " Buyer Responsible for CCO and Smoke Cert.".
is this related to inspection or something else? why seller doesn't do it and sell it, because it is expensive and time consuming procedure?
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  #6 (permalink)  
Old 02-03-2009, 05:04 PM
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Default Seller may not be the home-owner.

Quote:
Originally Posted by Dipika View Post
some times in Bank owed propery sell, i see words " Buyer Responsible for CCO and Smoke Cert.".
is this related to inspection or something else? why seller doesn't do it and sell it, because it is expensive and time consuming procedure?
CCO is certificate of occupancy. Its a certificate that you may be required to get from the town or city (Municipality). This certificate would state that the property is up the to code (building code) of that city and there is no work done on the property without permit. If the house, for example, has broken plumbing, septic, or if it has bad paint, or unfinished exterior paint and looks bad from outside for the neighbourhood, then the town or city (municipality) may ask you to fix it before they issue you a CCO.

Sometimes, and most of the time in foreclosed properties that are bank-owned, the owner would have left the home already and it would be a vacant house. Some disgruntled owners would leave home even damaged. So there is no owner out there to get CCO for you. The banks are not really equipped to handle such things. So they ask prospective home buyers to do that legwork of getting CCO. If the house has nothing broken or illegal (like construction without permit, additional floor or room without permit) then CCO should be easy.

About smoke cert, I dont know. There is such a thing called Radon inspection - Its a part of home-owner inspection these days. Radon is a gas emitted from some polluted lands. Its rare but they check houses these days for that too since last few years. Your home inspector would take care of the Radon inspection as a part of overall inspection. I think that's what the smoke test means. He may also advise you on whether the House would easily get CCO or not.

The other reason why the BUYER should pay for inspection is that you want the inspector to be loyal and answerable to you. If you are paying the inspector, he will be faithful to you and tell you if there is something wrong in the house. If the seller gets it inspected, then the inspector has no incentive to look after your best interest and may not report on the hidden faults or defects in the house. That's why its a good idea to find your own home inspector and get it inspected.
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  #7 (permalink)  
Old 02-03-2009, 05:36 PM
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Default

logiclife, thanks for your inputs,

Even tough I dont have any plans to buy a house now, your comments and explanations are great.
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  #8 (permalink)  
Old 02-03-2009, 06:18 PM
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Default Conclusion

So here are my concluding remarks on this topic based on logic life's answers...

Short sale and foreclosures should be no different from buying a regular property, downpayment wise and loan wise.

But it could take longer to close and you may have to spend some money upfront for inspection which you may loose if the bank does not approve.

Do foreclosures have to be approved by bank too? I know the short sales have to be.
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  #9 (permalink)  
Old 02-03-2009, 06:50 PM
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Default REO property

I bought a REO (bank owned) property a few months ago. I made a 20% down payment. I paid for inspection, etc. myself. Banks usually won't pay for anything and would sell the property AS IS WHERE IS. I did a considerable amount of research ahead of time and my offer reflected it.

I would suggest to get a really good agent who knows the process and someone you trust to work in your interest. Many agents avoid foreclosures or REOs because it is more work for them and they do not get their full 3% in many cases. Make sure your contract reflects that you are not responsible for any past due taxes, HOA dues, if any, etc. Get the best title insurance that is out there. This is money well spend.

Unlike usual sales, chances are that you won't find a foreclosed property that is move-in-ready. I spend quite a bit of time before even making an offer. Do your research so that you make a well informed decision. Spend the time upfront so you don't have a "oh shit" moment after you have made an offer and you get the inspection.

Consider accounting for a seller subsidy in your offer. Usually banks can pay upto 3%, but they will have restrictions on how you can use it. You can make this work to your advantage.

Find out who the banks or lenders are and their contracts. Make sure you understand the clauses in the contract that will allow you to walk away or when you will lose your earnest money deposit. Typically banks will throw back their own addendum which supersedes everything you have in your contract/proposal, without any flexibility at all to change anything in it. It did not happen in my case, but I have heard that by the time you get their addendum, it is too late to walk away without losing your deposit.

Getting a loan was another ordeal. Many lenders flatly refused unless I am LPR (green card) or citizen despite having 800+ credit sore and credit history for 10+ years.

If you are hesitant to spend a few hundred dollars on a property before making an offer, walk away. You are either not serious about it or REO/foreclosures/short sales are not for you.

There are so many other things. I took me about 3 and a half months from the time I first saw the place and the day I settled. Every day it was a new challenge. Things that I found I have to spend for, hurdles getting a loan, issues with settlement company, things that the lender/settlement company required before settlement that bank won't pay, it went on. Anyway, now when I look back, it was worth it.

Ask me if you have any particular questions on REO sales.
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  #10 (permalink)  
Old 02-03-2009, 06:52 PM
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Default Closing Costs

Thanks for you simple explanation of the facts logiclife..

Can you tell me about closing costs? What is it exactly and how do they arrive at the costs.

Thanks!
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  #11 (permalink)  
Old 02-03-2009, 07:09 PM
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Default

Quote:
Originally Posted by logiclife View Post
The downpayment required for buying a house depends on the loan that you apply for and get approved. It can be anywhere from 3.5 % to as high as downpayment you want to make. If your downpayment is less than 22%, then you have to pay mortgage insurance per month. If its a regular traditional loan with less than 22% down, you have to pay PMI (private mortage insurance). If its an FHA loan (Federal housing authority), then you have to pay MI (Mortage insurance). FHA means that you are buying mortgage insurance from Federal govt. and the rate would be slightly lower. Also, with FHA, the minimum downpayment is 3.5%.

For making an offer on the house, whether its for sale under normal circumstances or under distress (foreclosure, short-sale), you have to put money in escrow (also known as earnest money). That money is kind of deposit that you put down so that if you suddenly change your mind at last minute, then they can take that money away from you. It basically ensures the sellers that you are serious about buying the house and its worth going thru trouble of selling process and the closing process. The Earnest money is escrow is variable. It could be as low as 2000 dollars or as high as 3% of the value of house. Depends on the seller. If the seller is stubborn or worried, they may ask for high earnest money. IN case of short-sale, the bank may ask for higher amount of earnest money so that they get offers only from serious buyers and not just trolls.
I closed escrow last month and already moved into new home. Here are the alternatives I got for financing:

#1. FHA loan 3.5% down, high interest rate, mortgage insurance, also high salary requirement.
#2. Bank loan 15% down, slightly lower interest rate, mortgage insurance till 22% payment is done 5-6 years, moderate salary requirement.
#3. Bank loan 20% down, lowest intesres rate, no mortgage insurance, lowest salary requirement.

(Please note that earlier loan refusal rates used to be 5% of loan application. Now, it seems, it has become higher. Came across people, who decided to buy, applied for loan, that got refused after 3-6 weeks. Banks are careful of property value, while giving loan)
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  #12 (permalink)  
Old 02-03-2009, 07:28 PM
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Default

If this is for your first home, I would say stay away from foreclosures and short sales, especially short sales.

For short sales, you should be prepared to wait, because it is a way for the seller to avoid a foreclosure, whereas for the foreclosure, the event has already happened.

A foreclosure or short sale may involve substantial money for upkeep or repairs. Remember the people selling had a bad experience, and are being forced out of their homes.... do you think they have any incentive to leave their home in pristine condition? What this means is you need to budget for amount over and above the down payment. Your mortgage loan may likely not cover the repairs.

Before you go to a realtor, go to a mortgage broker, and make sure your financial stuff is in order. referrals and references of the broker are very important.

I would recommend reading the mortgage blogs on zillow dot com. See what other guys are talking about and asking. And don't trust the recommendations that the brokers have allegedly received :-)

Simple logic for mortgages: the more your down payment, the lower your rate. Ideal scenario is full down payment, no mortgage. If ideal scenario not possible, you need to cost benefit analysis to see amount of down payment that works.

Another rule: never compare mortgage quotes obtained on different days. Because the rate fluctuates almost on a daily/hourly basis.

Most important rule: home buying requires time and research, especially because you are talking a big sum of money. due diligence does not hurt.

Quote:
Originally Posted by shree772000 View Post
I started this thread to see if any of the IV members have any experience buying a short sale of foreclosure property.

If so please educate us on the process and downpayment etc.

Also please let us know if its different from buying from the market and in what ways.

I appreciate all your inputs in advance.

Thanks,
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  #13 (permalink)  
Old 02-03-2009, 09:38 PM
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Default Steps to buy foreclosed house

Assuming house is attractive, you like it and love it "as it is".
1. Attempt to conduct "Short sale". Low chances unless price offered is closer to outstanding mortgage ( first as well as second)
2. Push realtor to remain in touch with sellers realtor to see if "short sale" can be worked
3. Contact bank appointed REO and ask for re-listing date and agent
4. Ask for showing and submit offer.
5. Press for acceptance or counter offer ASAP. As long as counter offer is going on, no-one else can enter into fray. They will have to wait. Else MSL happens and you are pitched against others
6. If offer/ counter-offer is accepted. Sign bank furnished contract. It's one sided contract i.e you wave off any and all legal rights. And unbelivably their is no point arguing or attempting to re-writting it. Bank will take lower offer from someone else than re-do it's system for you.
7. Work towards closing and walha .. your american dream or nightmare has come true.

More on this subject later!
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