A Home Buyer's Guide to Distressed Property

With so much of the current housing inventory now made up of distressed properties, I'm often asked by home buyers in Long Beach and surrounding communities, what's the difference between a short sale and a foreclosure? Doesn't the bank make the decision in both. Not exactly.

Here's a quick guide to who's who and what's what in the world of distressed properties:

Short sales - These are homes that are still owned by Jane and Joe Homeowner, regular people like you and me. Unfortunately, they are "upside down" on their mortgage (or mortgages), meaning that they are "short" on equity. Because of this, they need approval from their lender (or lenders) to sell the home for an amount that would result in paying back less than the full amount of the loan(s). With short sales, the seller has the right to list the home, choose a price, and accept an offer. Their agent then submits a package to the sellers' bank(s) that includes documentation on their financial situation (usually paycheck stubs, tax returns, bank statements, a financial budget worksheet and a letter of hardship). The package will also include listing paperwork, a contract and documentation on the buyer's ability to obtain a loan. The bank will then assess the value of the property, review the package and make a decision on whether to approve the short sale and whether the offered price is acceptable. This process can take several months. I've seen approvals in just a few weeks and have heard of them taking a year or more. Many short sales are never approved. Before my team and I show a short sale property to one of our clients, we do an assessment of the "short sale viability" to determine whether it's a situation our client would want to get involved in.

Sometimes people confuse short sales with foreclosures because short sale listings may (or may not) be in the process of foreclosure. If a Notice of Default or Notice of Trustee Sale has been recorded against the property, then time is of the essence.

Because the homeowner will get no money from a short sale, they will usually be selling the home "as is." As a homebuyer, you'll have the opportunity to do a home inspection and if you don't like what you find, you'll have a chance to back out. But you won't usually get a termite clearance and the seller won't usually do any repairs.

Foreclosures - These are also sometimes called bank-owned or REO properties. They may have even once-upon-a-time been short sales that were unsuccessful. In this case, the bank went through the process of taking the home back because the homeowner didn't pay their mortgage. In the case of bank owned properties, the transaction will be very much like a "regular sale" except that you're dealing with a bank instead of Jane and Joe Homeowner. Banks will almost always sell the property "as is" and they won't be able to disclose much about the properties because they've never lived there. In fact, they are exempt from some disclosures. Banks will frequently shorten the inspection contingency period from the usual 17 days to 7 or 10 days. In addition to the contract, you'll need to sign a bank addendum, which is usually filled with boilerplate legal language designed to protect the bank. The addendums may include terms such as per diem penalties if you're unable to close on time. Remember, you are dealing with a financial institution here and the bank is looking at the bottom line.

Probates - These are not as common in our current market as short sales or foreclosures but we do run across them sometimes. With a probate property, the owner has passed away. "Probate" is the legal process for distributing the assets. Depending on the heirs, the will, and the title, the probate property may either be sold with our without court confirmation. To buy a probate property, your agent will need to use a special probate purchase agreement and it will spell out the terms of whether or not that court confirmation is required. Your agent will check on that for you. If the court confirmation is NOT required, then the process won't be very different for you than a regular sale. You'll just need to keep in mind that again, the property will be sold in its present condition and the estate probably won't be making any repairs. If court confirmation is required, then you'll need to wait for a court date and then go to court to see if anyone comes to "overbid." You'll need to do all of your due diligence, including inspections and loan application/appraisal, prior to going to court because you'll be expected to close quickly once the court approves the sale.

If you have any questions about buying a home in Long Beach or surrounding communities, please give us a call. My team and I would be happy to help you with the process.