» Foreclosures

Better Deal: Short Sale or Foreclosure?

Sarah Stelmok — Thu, 05 Feb 2009 22:12:37 +0000

I was asked a question today, while showing houses, that I get asked frequently, “What’s the better deal, a short sale or a foreclosure?” For the first time, I paused before answering. My answer used to be that buying a foreclosure was definitely a better deal; and for the most part I still thinks this is true. However, short sales have begun to morph themselves as banks reevaluate their short sale approval process. In the beginning of the short sale market, banks were not very good at negotiating the sale in a timely manner, if at all. There are horror stories of buyers waiting upwards of 9 months for a bank to come back with some sort of answer. (By the way, as a buyer, you should never wait 9 months for a house unless it is truly a one-of-a-kind special, special house). Most short sales that were entered into the regional MLS database did not sell. Some numbers I saw had only 5% of short sales escaping foreclosure.

Starting at the end of the summer 2008, the tides started to turn. This is about the point when the short sale and foreclosure market started setting the market price of all homes. This happens when there are more short sales and foreclosures than traditional sales in a marketplace. This is also the point when banks started seeking acquisition opportunities and bail out money, which spurred their interest in mitigating losses and facilitating short sales. All of the short sales I have closed in the last 6 months have settled within 60 days of ratification (one took 90 days because of an appraisal issue). With banks making the short sale process a bit more tolerable, short sales and foreclosures setting market prices, and low interest rates on mortgages, short sales are gaining ground on foreclosures as a viable option for some buyers.

Unfortunately, there is no clear answer for which one is a better deal. As I’ve stated in previous posts, there are no “deals” out there. The price is what the price is. Today it may look like a great deal, but tomorrow prices could plummet again and it doesn’t look like such a great deal anymore. It will only seem like a good deal when prices stop falling and homeowners can begin to build equity again. Buying a home should be a long term investment. Buyers should focus on the long term advantages of owning their own home and the long term possibility of building wealth in their home. The more important question in today’s market is – Are you the right buyer for a short sale or a foreclosure? (More on this soon!)

The Winterized Foreclosure

Sarah Stelmok — Sun, 01 Feb 2009 17:22:32 +0000

More and more consumers are asking about foreclosures and winterization. But, what exactly does winterization mean and what additional steps might a buyer have to take in order to purchase a winterized home?

What does “winterized” mean?

Technically it means that the home has been prepared for the winter season. However, we are seeing foreclosed homes being winterized throughout the year. When a bank or home owner gives notice to a prospective purchaser that the home has been winterized they are disclosing that water is not flowing through the pipes. And, that most likely, the home does not have all utilities in service. Many of these properties have the thermostat set at a very low temperature. There are different levels of winterization. Most banks require the highest level which includes draining the hot water tank and using a special type of antifreeze. If a home will be vacant in the winter, it is extremely important that there has been some sort of winterization to help decrease the chance of burst pipes and water damage.

What does this mean to a potential purchaser?

If a home you are interested in has been winterized, your agent needs to ask the Listing Agent who is responsible for a) hooking up utilities for inspections, b) paying for dewinterization, and c) paying for rewinterization.

Banks have started to leave the utilities in service, or the Listing Brokerage has left the utilities in service. However, if the bank has turned the utilities off at the property, the buyer may have to pay to activate utility service on a home they do not own. Some utility companies have a problem with this. The prospective purchaser will have to work through this if they want a complete inspection on a winterized home.

So, who pays for the dewinterization? I have never had a bank pay for the property to be dewinterized. The home inspector hired by the purchaser used to be able to do the dewinterization during the home inspection, but many banks were finding that not all home inspectors were qualified to complete this process. What I have seen recently is the buyer is charged for the dewinterization, but the Listing Brokerage hires the plumber. This means that the buyer can not shop around for the best price, but the Listing Brokerage is accepting more liability if the dewinterization goes wrong.

After the inspections are completed the property should be rewinterized. Many banks and Listing Brokerages will not require this if the inspection date is in close proximity to the settlement date. I, however, strongly recommend that the property get rewinterized. Water can cause catastophic damage in a limited amount of time. It is well worth the cost of rewinterization to have some piece of mind. I have seen banks pay for the rewinterization and I have also seen banks require the buyer to pay for the rewinterization.

What’s the bottom line?

Cost is a big issue for most purchasers these days. Your home inspection will run $200-$800 depending on the size of the house. Most plumbers charge $75-200 to dewinterize a home and $150-$300 to winterize. On average my clients have paid $670 to complete four steps: 1. Dewinterize property 2. Home inspection 3. Rewinterize property 4. Dewinterize property after settlement. Buyers need to be prepared for these additional costs.

Remember to always consult a local Realtor about the standard procedures in your area.

Where’s My Good Deal!?!

Sarah Stelmok — Tue, 18 Nov 2008 17:31:16 +0000

It should be no surprise to anyone that this market is full of foreclosures. (Briefly – A FORECLOSURE is a situation where a homeowner can not make their monthly mortgage payments and the bank seizes the home and sells it as a stipulation in the mortgage documents). The question I get most is, “I can get a good deal in this market, right?” Well… it depends on how you define “good deal.” Most consumers are under the impression that they can get foreclosed homes for very little money. This just isn’t the case in our area. There are very few 100% loan programs for consumers. This means the potential buyer must have a down payment in order to purchase a home. The average sales price, in our area, is $253,063 (October 2008) that is a minimum down payment of $7592. Closing costs can range from 3%-4% of the sales price, so that is another $8900, on average, that the buyer needs to buy a house, if the Seller does not agree to pay the buyer’s closing costs. So, homeownership comes at a cost of $16,500, on average, in this area.

So, what about those mortgage foreclosures where your monthly mortgage payment would only be $300!?! Well, that house would have a sales price of about $20,000. There aren’t many of those around here and if there were, I’d hate to see its condition! Our local market does have foreclosures, and the foreclosures are in all price ranges. But the “good deal” isn’t looking so good anymore. And here’s why:

When foreclosures first started hitting our market place in late 2006 the market was still fairly strong. The areas average sales price in September 2006 was $369,088. Prices were still high and the average days on market were hovering around 3 months. There were not very many foreclosure homes on the market yet, so the majority of the comparable sales being used by appraisers to establish market value were still traditional resale homes, listed at higher prices than foreclosures. In the 2006 market, foreclosures were a great deal. For example, in a Staffordneighborhood, in 2006, there was a foreclosure that sold for $50,000 less than its comparables in the same neighborhood. Sounds like a good deal to me, even if the home did need some TLC. Comparing this to the market in 2008, in one Stafford neighborhood there is only a $5000 difference between the foreclosed home’s list price and a traditional sale home’s list price (when the traditional sale home is priced within reason of what the market will bare).

Why is this? As more low priced foreclosures came on the market and competed with traditional resales, prices began to drop. In order to remain competitive traditional Sellers had to make their home’s price more appealing than the foreclosure home’s price. Traditional Sellers also had to make sure their home was in better condition than their foreclosure competition. In return, banks started listing the foreclosed properties at lower prices. And thus the vicious cycle began. Foreclosures then became the predominant comparable that appraisers could use when establishing market value. So, market values dropped. And when the majority of homes that are selling are foreclosures, foreclosures start determining market value. Appraisals on foreclosed properties are no longer coming back higher than contract price, which would have been instant equity for the buyer. Some appraisals are coming back at even less than contract price causing the bank and the potential purchaser to renegotiate the sales price. And to add injury to insult many of the foreclosed properties are in dire need of repair. Many of them need much more than cosmetic work. What ever break you are getting on the price is being made up for in the amount of money that will be spent getting the house the attention that it needs. So where’s the deal? The deal is that the potential purchaser can get a home for hundreds of thousands less than their neighbors paid just 2 years ago. And if they stay in the home long enough and can tough out this market, they stand to make a nice profit if they sell during the next upswing. So, the deal isn’t necessarily a deal in today’s market, but rather a deal compared to the market in 2006 and the potential market in the years to come.

Short Sales and Foreclosures (a simple explanation)

Sarah Stelmok — Mon, 21 Jul 2008 20:04:48 +0000

What is the difference between a short sale and a foreclosure? I get this question at least twice a week, mostly from consumers, so I’ve decided to address it on my blog.

Let’s deal with foreclosures first, since most people are more familiar with these. There are several different types of foreclosures. For the most part, when people ask me foreclosure questions, they mean a mortgage foreclosure which is when a bank takes possession of a home from a defaulting borrower. These foreclosed homes can eventually end up in our MRIS (MLS) system with the bank hiring a Listing Agent. When a buyer writes an Offer to Purchase on a Foreclosure home they will be negotiating directly with the bank. Initial response times from the bank average about 10 days. These homes are sold “as-is” but most banks allow the buyer to conduct a home inspection for informational purposes.

Short Sales are a little bit of a different animal. A borrower who thinks they will default on their mortgage, or is defaulting on their mortgage, may decide to try to sell their home before the bank can foreclose. In a market that has a downturn, many of these homes can no longer sell for the current loan amount. In these cases, the owner of the home will seek a Short Sale. This is a sale where the sales price is not sufficient to erase the current lien and the bank will accept the deficiency and release the lien in order to offer the new owner clear title. When a perspective buyer writes an Offer to Purchase on a home that is a Short Sale they will be negotiating with the Seller first and then the bank that holds the mortgage will review what has been agreed to. The bank does not have to go through with the sale. It can take upwards of 60 days to hear an initial response from the bank. Homes in this situation will also be sold “as-is,” but home inspections are usually allowed for informational purposes.

This is by no means an in-depth explanation of these very complicated types of real estate sales. This is merely meant to offer a simple explanation. There are many pitfalls when trying to buy a Foreclosure and a Short Sale. It is very important that you hire a REALTOR who is familiar with the processes and that you close the transaction with an attorney who is familiar with the processes.

If you have any questions about short sales and foreclosures, please feel free to contact me! (I am not an attorney and can not give you legal advice.)