Foreclosures and Short Sales Love them or Run Away Fast
A typical tale of foreclosure: I found the house on one of my regular searches for a very deliberate client. A grand dame Victorian in 16th Street Heights half a block from Carter Barron Amphitheater and Rock Creek Park with seven bedrooms and five baths fronted by unusual massive white columns. A beautiful carved staircase windowed in stained glass mounted between three levels of pristine oak floors but the original scrolled fireplaces had been replaced with rather ugly brick. Someone, probably a small-scale developer, bought the house in 2005 at the top of the market and began renovations. Brand new fixtures were placed but not attached in the bathrooms and the boiler was removed and ductwork installed but no furnace. Unfortunately he not only apparently ran out of money but neglected to get the necessary permits. He abandoned the shell to the bank with a $12,000 penalty from the DC government.
house next door, identical structurally but a true, minimally-altered
period piece with magnificent woodwork and five original fireplaces, was
listed at $1.3 million. So when I saw the shell listed at $664,000 I was
certain the agent had made a mistake and the house would sell immediately,
at an escalated price with multiple offers typical in DC for aggressively
priced houses of all sizes. Though the first several days on the market
heralded an uninterrupted river of showings, I was wrong. My client had
no competition for the several weeks it took us to ratify
Why several weeks? Once the investor who owned the property thought wed agreed on price, they hit us with reams of additional documents, their third party or REO (Real Estate Owned) addenda. All foreclosures are subject to third party approval. All have pages of third party addenda unique to the selling institution. In this case, among the 30 pages lurked one sentence stating that the purchaser would buy the property subject to any unresolved lawsuits. Was this tiny bombshell why my client had no competition? I wonder.
My client, of course, flatly refused, stating, truthfully, that the language opened him to limitless liability. He was told that if he didnt sign they wouldnt allow him to buy the property. So he signed. He had no choice. However, I added our own addendum to the contract stating that the seller (ie the investor whod bought the mortgage) was responsible for all penalties, liens, litigations and every other possible cost I could think of that could have accrued to the previous owner. Legally, these costs are the sellers obligation but the one sentence in the addenda left a huge loophole. We then told the investors agent repeatedly up to the day of settlement that if this document was not signed the client would not buy the property. Remarkably they signed.
So could we feel confident the deal was done? No, because the investor put the property on the market before they had clear title, ie they put it on and sold it before they actually owned it. To further complicate matters, despite and I do not exaggerate my continual reminders, the seller and the title company seemed to feel they had unlimited time to resolve the issue. The regional sales contract clearly states that if no clear title is given one month after the stated settlement date the contract becomes voidable. One week before that month was up, I informed the listing agent that my client would void the contract if the title issues were not resolved as per the contract. Given that the process had already taken more than two months no one wanted this to happen. Lo and behold all title issues were resolved and we went to settlement at the very last moment.
What is a foreclosure? Simply, a foreclosure means the owners did not pay their mortgage for enough months to cause the bank to take the property back. In other words, a foreclosure means the bank owns (or owned, see below) the property.
In this real estate climate, banks will bend over backwards to work with an owner to prevent foreclosure. If they take back a property it means either the owners decided to walk away which happens frequently when mortgages are more than property values or the situation is so dire the owners cannot perform. Over the years Ive seen clients deal with all variety of credit problems on the way to obtaining mortgages. The one constant a piece of advice Ive given to my own friends and relatives is that if you communicate with the bank, the credit card, the financing company, they will generally work with you. For example, if you only ask, many department stores will wipe a short stint of bad credit off your records as a one-time courtesy.
Since, in this marketplace, only small local banks keep loans in their portfolios, the loan is most likely owned by the investor to whom the bigger bank sold it. Sub-prime financing usually means that mortgages to individuals with marginal credit were bundled by banks and sold to major financial institutions, like the now defunct Bear Stearns, to sell to their clients. And now the institutions are stuck with the bad debt and hence the foreclosed properties. When you try to buy a foreclosure, on the other end is likely to be a division of a major financial institution but several times removed from the parent. GMAC and GE still have divisions that purchase foreclosed properties or theyre just still stuck with them thanks to unwise sub-prime investing.
Once small investors bought foreclosures. Ten years ago, the foreclosure market was inefficient. Banks held foreclosures in their portfolios. To get to them you had to, somehow, magically, find the right person. And then if he really liked you, he would let you buy some of his portfolio. And youd get a good, maybe great deal.
to the economists at the University of Chicago, an efficient market has
perfect information. Due to remarkable, some might say hideous, volume,
banks in our area now hire real estate agents to list their foreclosed
properties in our wonderful Multiple Regional Information System. The
information is now readily accessible to every one of thousands of Realtors,
rendering the foreclosure market as efficient as every other market sector.
Most of these listing agents only handle foreclosed properties. In my
experience, many, though definitely not all, are just a pain in the you-know-what
to deal with.
|But the bottom line is that these properties are listed in the multiple listing service just like non-foreclosures and sell based on their attributes at the market just like every other property. With the possible exception of the house in the story above, every foreclosure or short sale Ive pursued for a client was priced exactly in accord with the comparables. One, a one bedroom in the very popular Logan condo, the Radius, sold squarely at market price despite layers of dirt and damaged walls. Thus, in the DC area, in my obviously very strongly held opinion, there are no advantages to buying foreclosures and many disadvantages including but not limited to more complexity.|
What should you expect when you write an offer on a foreclosure? You will find, to your amazement, that the bank/investor seems to believe that they are doing you a favor selling you the property. All the rules are theirs and if you dont play by them they wont sell to you. That means, aside from the often onerous addenda, you meet whatever obstacles to communication they impose. It is often impossible to get much or maybe any information from a bank or investor. Sometimes, if the seller is a large institution, even the listing agent doesnt know the correct contact person. It truly is like screaming into the void. You can expect to wait endlessly and then have answers and demands pop up with unexpected and apparently irrational suddenness.. Once, late one Friday afternoon, I had to make my client delay departure on a business trip while I rushed downtown, rewrote a contract and overnighted it to California or wed be too late.
Financing can also be tricky. Foreclosures are more likely to have major damage or missing parts, such as appliances, than other properties. Already skittish mortgage lenders are reluctant to provide financing for properties missing even one appliance or with even one hole in the wall except with a great deal of money down and at very high interest rates. For the bigger, more conservative banks to finance a shell, the borrowers or their agents really do have to know someone, ie have a relationship with the bank and/or be able to go to bat for their clients. Plus the clients better have good credit AND be able to convince the bank that they will live in the property, that it will be their primary residence. Thats the easy part of the job.
The hard part is convincing the bank/investor to either remedy a problem prior to settlement stick in a fridge or fix a hole as required by the lender to complete the loan (common with FHA) or to allow the purchaser to do so. Even if the purchaser cannot buy the property otherwise and is willing to put in appliances at their own risk prior to settlement, most institutional sellers apparently feel to allow them to do so creates too much liability.
The view from our listing in the Radius
A short sale means that the mortgage exceeds the price the owners would receive from the home sale and the owners cannot or will not make up cash at settlement. Because the bank must take a loss, to make the sale the bank must give the owners permission to begin the process of selling short. The bank does not yet own the property and, probably, the owners are current on their mortgage.
My opinion is that short sales are really the only consistent way to buy a property below the market price. However, a short sale can have all the problems of a foreclosure plus one (well, at least one) thats even worse perhaps WHY one can buy them for less.
These days in certain neighborhoods, particularly Virginia Springfield is one remarkable example short sales comprise as much as ¾ of the properties on the market. A purchaser simply cannot avoid them.
Know also that a short sales listed price now bears no relation to the propertys eventual sales price. Listed prices for short sales look absolutely amazing to the unsuspecting buyer. But the current convention is to list the property far below market price in order to quickly generate multiple offers. One Virginia agent told me he had 30 offers on one of his listings, a lovely house in McLean. These offers are presented to the seller who chooses the best, ratifies the contract and sends it to the bank. As with foreclosures, all contracts are subject to third party approval, ie the banks.
Our evolving market has realized that drastically dropping the price is actually an efficient way to rapidly turn over short sales as it is, I might add, with all other sales. I applaud this realization since Id love to see our marketplace absorb all short sales and other remnants of subprime.
For the most part, its also impossible to tell if theres a ratified contract on a short sale without speaking with the listing agent. Generally banks require that the listing remain active in MRIS until they approve the contract AND the short sale itself. One Virginia agent is attempting to gain general acceptance of changing the status to under contract with a kickout, the same designation used for purchasers home sale contingencies. In other words, the bank can kick the contract out by not approving it. Personally Id like to see this happen so I dont have to continue chasing down agents who dont return phone calls a notorious trait of agents who specialize in foreclosures and short sales.
If youre contemplating writing an offer on a short sale you must first ask one question: Has the short sale already been executed? In other words, did the bank have a previous offer with which they went through their short sale approval process and that then fell through for some reason? If the answer is no, Id strongly advise not writing the offer unless you have unlimited time and a saints patience AND you REALLY want the property OR if you simply dont have another choice. A bank can take months contemplating a short sales execution. I had one client give up on a rowhouse in Columbia Heights after several months of repeated inquiries re his offer, each one of which was met by the statement that the bank would do it soon.
If the short sale is already done, you can expect the same problems youd find with a foreclosure. Its a bank, after all.
So my best advice re foreclosures and short sales: If you love the property or dont have another choice, go for it. Otherwise, forget it.