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Short Sales, Foreclosures and Rent to OwnIf you are looking for a bargain price on your home, chances are you will come across a short sale or a foreclosure property. You may also be curious about rent-to-own properties and the process to purchase one.
What is the difference?
Short SalesA short sale is a property being sold for less money than is required to pay off all of the liens on the property. These properties are usually listed for less than comparable properties that are similar in size, style and located in the same neighborhood. The homes are listed lower to attract a buyer quickly and get the short sale process moving.
The home owner works with a Real Estate Broker to establish a sale price for the property that is close to, but usually below, market value. The Broker, sometimes with the aid of an attorney, will then negotiate a payoff with all of the lien holders of the property, meaning they will get each lien holder to agree to release the lien they hold on the property for less than the amount owed.
Why would a lien holder agree to accept less money than they are owed?
Well, banks are in the business of holding money, not assets. It is better for the bank to take a loss on the mortgage they hold and quickly move the property on to a new owner and quickly recoup the proceeds from the short sale, as opposed to holding the property, providing maintenance to the property such as winterizing, snow removal or grass cutting, and then proceeding with a foreclosure which will also cost the bank money. Also, short sale properties, especially if still occupied, tend to be in better condition than properties that have been foreclosed on. When a property is foreclosed on it is usually vacated. Once the property is vacant it becomes susceptible to vandalism, including theft of appliances, fixtures and plumbing. The property could become infested with pests and the property can deteriorate to the fact that no one is around. For example, if a toilet, roof or a sink develops a leak and no one observes it and stops it, it can leak for weeks or even months before anyone notices anything and significant damage will be caused.
Things to consider when buying a short sale:
Ironically, short sales are rarely short when it comes to turn around time. It takes the lender time to review all of the documentation and information sent in to them prior to approving the short sale. Also, the lender may not approve the short sale price negotiated between the seller and buyer. The lien holder(s) may counter offer raising the purchase price of the property. The lien holder(s) may also refuse to pay certain bills and other liens associated with the property and the buyer may have to pay those, because the seller(s) usually do not have the money to pay for them.
Uncooperative Jr. Lien Holders-A Jr. Lien Holder is a 2nd or lower position lien holder on a property. In order for the property to be sold ALL lien holders must issue releases for the liens. Sometimes the Jr. Lien holders will request a significant amount of money that the first lender is unwilling to pay. The first lender must agree to the amount being paid toward any liens, and if the lenders cannot agree the short sale cannot proceed. Many short sales have fallen through and moved on to foreclosure because the first, second and sometimes there can be a third or fourth lien holder, that just will not come to an agreement on the terms. Keep in mind that a lien does not have to be a mortgage. Not paying income taxes, credit cards, personal loans and not paying contractors for work performed on the property can all turn into liens against the property that will have to be settled at closing.
If you are interested in purchasing a Condominium as a short sale you need to beware of outstanding Condominium fees. Condominium Liens are like tax liens, they have to be paid and satisfied for the property to have a clear title. Condominium associations know this and they usually do not negotiate outstanding Condominium Fees and sometimes the mortgage holders are unwilling to pay the condo fees, leaving the buyer or seller having to come up with the funds.
If you enter into an agreement to purchase a short sale property, be prepared to pay a higher price than what was originally accepted in the offer. If the lien holder(s) will not agree to pay the liens and bills associated with the property, the buyer will have to walk away or pay them.
ForeclosuresA foreclosed property is a property that has been repossessed by and is owned by a financial institution due to the borrower(s) non-payment of the mortgage on the property. Because financial institutions prefer to have money as opposed to assets, foreclosed properties usually are sold at below market values.
Foreclosed properties are typically easier to purchase than a short sale, because the bank has already taken possession of the property and has set a price at which to sell it. However, there are some difficulties that come with purchasing a foreclosed property.
Because the owner of the property is a financial institution, they have never lived in the property and do not know much about the property, and neither does the Listing Agent or Broker representing the bank for the sale. Many questions that you would ask a property owner will not be able to be answered because the parties involved just do not know.
Bank owned properties, for the most part, always are sold AS IS and the purchaser cannot ask for repairs or price reductions due to issues that come up in the inspection. Usually the only option is to back out, after a few hundred dollars are spent on the home inspection.
Foreclosed properties are usually in some state of disrepair. Think about it. If the owner of the property had difficulty paying their mortgage, it is unlikely that the owner was spending money to maintain and repair the property.
If the buyer is an FHA buyer putting down a payment of 3.5% of the purchase price, the buyer will most likely need a 203K Renovation Loan, which is a loan that lends the money to buy the property as well as money to repair the property. This process involves finding a contractor to look at the property and provide an estimate of the amount that it will cost to repair the property and at least at minimum, get the code violations fixed and get the property to state in which it can be safely occupied.
Rent To OwnA rent to own property is a property in which a buyer can pay a fixed amount of rent, and then later buy the property at a mutually agreed upon time by the renter and owner. It typically works by the buyer putting down a deposit of several thousand dollars, which applies as a down payment. Then a rental price is set in which a portion of the rent is applied toward the purchase price of the property. For example, if the rent were $1000, $700 of the rent may go in the pocket of the owner, while $300 will go towards the down payment for the purchase of the property. If the rent to own term is 2 years, then 24months multiplied by the $300 = $7200.00 and that balance as well as the initial down payment goes towards the purchase of the home.
A rent to own property is a plus for a buyer in a rising housing market. The agreed upon purchase price is the price that the seller is obligated to sell the property at, regardless of market changes. On the flip side, in a declining market, the buyer is stuck paying the agreed upon purchase price, or forfeits all deposit money.
Another benefit of the rent to own property is that buyer actually gets to test drive the property before actually buying it. The rent to own buyer is much more informed about the house that they purchase as opposed to the typical buyer, as they get to live in the property and test the plumbing, heating, and the electricity. By the end of the rent to own period the buyer will know if there are any pests in the house and most importantly if the property is worth buying.
The Rent to Own is an ideal situation for a buyer trying to build up a significant amount of money for a down payment, or a buyer who needs some time to work out some minor credit issues. But keep in mind that the issues and reasons for the buyer entering the rent own agreement must be worked out by the agreed upon purchase date. Otherwise the seller will have to grant the buyer an extension, or the buyer loses their down payment and all money that was intended to go towards the purchase of the property.
Still Have Questions?
Contact a Real Estate Broker!
Call-(774) 534-8277......Ask for Blanche Thomas
Contact a Real Estate Attorney!
Call-(617) 827-8614......Ask for Katie Sheehan
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