Provided by Craig Curreri
When looking at the ups and downs of the real estate market over the last 50 years, a market peak in median price is higher than the previous market peak… therefore it is reasonable to believe that our next market peak will well exceed ’05-06 prices. This is the time to buy a home or investment property at a fantastic discount and a bank owned home may be the way to go. Here is a brief overview of some things you might not know about buying a bank owned home.
Listing Agents: The listing agent doesn’t set the price of a bank owned home…they do provide a market analysis but, often times the bank does not list at that price. This is why some bank owned homes are overpriced and have been on the market for 200+ days. Sometimes though, the bank does list at the agents suggested price or lower just to get the property sold. A “bank owned” listing agent may have between 25-500 active listings at any given time. Banks like to list in bulk so, a big bank may give a package of 10-100 properties to their top agent at one time to get a discount on the commission. A traditional seller may pay their agent 3% to list a home plus 3% to the buyer’s agent… a bank may pay the listing agent between 1-2% plus the buyer’s agent commission. Therefore, the listing agents have to work on many listings to make the same salary… usually providing fewer services (less photos, no advertising, no virtual tour, etc). Bank owned agents typically don’t represent buyers or return sign calls themselves and have staff do that. You may have called on a bank owned listing and not received a return call (we hear this all the time) and this is why… they are too busy. If you have not heard from the listing agent, it is probably because he/she has not heard from the bank.
Asset Managers: In addition to the agent representing the bank, the bank often has an “asset manager” taking care of the sale for them… usually these are third party companies hired by the bank. The agent who represents the buyer of a bank owned listing doesn’t talk to the asset manager. These asset managers are always swamped and it is not uncommon for them to have 100-300 files on their desk. They are the decision makers and are the folks who set the price of a bank owned home, not the listing agent. They also make decisions about what price will be accepted and when to take price reductions, etc.
Writing an Offer: You may need to have your offer written on a form other than the standard California contract. If the bank accepts an offer on the standard California contract, you will probably need to sign a series of addendums that obligate you to certain things and “modify” the contract. These addendums usually contain 30+ points and can be 4-20 pages long. Some examples of things that the addendums may address are: the current “as is” condition of the property, that you agree to pay a “per diem” charge for each day you close late at no fault of the bank, that you agree to accept a warranty deed vs. a grant deed, that you acknowledge this is a foreclosed home, that you agree to the banks timeframes and conditions. Keep in mind, this addendum will supersede the contract and if you agree to the addendum and there is a difference between the original contract and this bank addendum… the bank addendum will prevail. For example, if you wrote in the contract that the seller is to pay for the escrow fee and the addendum says that you, the buyer are to pay for the escrow fee… you will be paying for the escrow fee.
Pre-Qualifying: If you are buying a bank owned home, the bank may require you to qualify with their company or their preferred lender. They do this because they know that many loan officers give out bogus pre-approval letters and they don’t want to waste time in escrow with a buyer who may not actually get a loan. If you do have your offer accepted… you do not have to use that lender, you can use any bank or loan officer you like. The bank simply wants to know that you meet general credit worthiness standards.
Differences in time-frames: The response time to hear back from a bank regarding your offer varies from bank to bank. We have had banks respond within 24 hours and some take 10 days to get back to us. It’s the same with receiving a signed contract or other paperwork. Having a signed contract is a term of sale. You can’t have a valid closing without your contract being signed by an official bank officer. Some banks can get this done in 2-3 business days… other banks take 2-3 weeks. This can hold up your transaction. We have had escrows held up because the bank didn’t sign the closing paperwork quickly enough… so, with a bank owned home… plan to be flexible.
As-Is Sales: Just about every bank owned property is sold in its present condition, with no warranties of condition. An “as-is” clause in a listing does not necessarily mean it is in bad condition. Bank’s don’t have the time, nor want to invest the money to make minor repairs so, when you look at a bank owned home, don’t expect them to fix missing fence posts, chipped tile or replace a garbage disposal that turns up on the home inspection as non functional. Write an offer that you feel is fair based on what you know about the home and what you can see needs to be fixed. Also, expect a bunch of home owner maintenance items to come up on the inspection. Consider those the “joy of home ownership” and plan on taking care of those yourself. If it turns out that there is a major repair that you wouldn’t have know about i.e. the air conditioning is completely shot or the foundation is sinking you may be able to re-negotiate the price… but, please don’t count on it. If there is a repair that you cannot overlook on the home inspection and you are within your contingency period, you should be able to cancel and get your deposit back if they are not willing to renegotiate.
Limited Disclosures: Because the bank that owns the home you intend to buy, they are exempt from many California required disclosures that you would get from a regular seller. The bank and its agents usually know very little about the home and many of the disclosures you receive from the bank will be market “seller exempt” with no information on them. Many of the questions on the disclosures are intended to be answered by someone who has actually lived in the home. Because of this limited disclosure, you are strongly advised to inspect the home with a home inspector and any other professionals that are necessary to assure you of the condition of the home.
Inspection Periods: Banks will typically shorten the inspection period on your home. The contract standard is 17 days and a bank will shorten that to 5-10 days. This is really no big deal. It just means you have to order your home inspection, pest inspection, appraisal and everything else right away. You also must make sure you are fully approved for your loan, as a last minute failure of the loan officer to complete your transaction can cause you to lose your deposit. We have had many cancellations due to loan officers not being able to complete your loan as promised. We are now requiring clients to qualify with someone from our “trusted lender” list. These are folks we know can get the job done.
“Highest and Best Offer”: We see this phrase on counter offers from banks all of the time. When there are multiple offers on well-priced properties, multiple offers are the rule. Sometimes price is not the only consideration. Deposit, down payment and contingencies can weigh heavily on an asset manager’s decision. The cleaner, the better.
Home Warranties: Typically a bank will not pay for you to have a one year home warranty like a regular seller or builder might provide. However, you can purchase one of these on your own… and you can renew it annually if you would like. We have been happy with CB home warranty for our clients. For a regular home between 1200-1700 sq/ft with no pool, a home warranty including heat and air would cost around $350. You can add extra features like a pool, spa, refrigerator, washer and dryer for an extra fee. Keep in mind a home warranty will not cover any item that is not functional at the time of purchase. You should have a home inspection done at the time of sale that will evidence the working condition of your appliances and systems, especially the heat and air.
Fees and Closing Costs: Banks will try to get you to pay most or all closing costs. If you write a low-ish offer, you may be ok with paying all of the closing costs as a negotiating tool. If your offer is a good one, you may feel it is fair to go with the normal division or have the bank pay some of yours too. Some banks are willing to credit up to 3% for closing costs, but make sure you know what closing costs you are paying.
The Title Company Choice: As much as we love to recommend our trusted Title Companies, banks don’t usually let the buyer choose the escrow company. Like the agent, they choose to sell the home, banks choose the Title Company based on who gives them a bulk deal. Banks usually hold firm on their choice of Title Company. Right now we are seeing a lot of bank owned sales handled by Southern California Title Companies.
Questions we are frequently asked about bank owned properties:
I heard about a friend who bought a house and it had a bunch of back taxes owed on it (or utility liens). Will I have to pay unpaid bills from the previous owner? This usually happens to folks who purchase a bank owned home at an auction or through a private seller without the assistance of a Realtor. When you purchase a bank owned property (through me) the title will be transferred through a title company who will make sure the property is free and clear of all liens and delinquent taxes.
Will I get a discount on my loan if I use the preferred lender or bank that owns the Property? Well, sometimes if you use the bank recommended lender they will throw in some “extras” like a free appraisal or title insurance policy. Be sure to do a detailed comparison with a trusted lender to determine if it is actually a “better” deal.
Can I have a home inspection? Yes, if you buy a bank owned home through me and not at an auction, you may have a home inspection. If you would like a home inspection you must have an inspection period in the contract. If the home is in a condition you feel is acceptable for the price and would like to waive a home inspection, they are not required however are strongly recommended. If items come up on the home inspection that you didn’t expect, the bank will typically not repair these items. Remember it is the home inspector’s job to find a lot of issues or repair items. A good home inspector will find 15+ items of note on a NEW home and 30-60 on a resale home depending on the overall condition. This is normal.
What should I offer? How much less will a bank take? Your offer is your own, and you need to decide what the home is worth to you… and how upset you will be if you don’t get it because your offer was too low. Also, keep in mind your time is worth money and it may not be worth losing a home you really like over a couple of bucks. If you have seen several properties, you will be able to tell if the home you want to buy is well priced or priced too high. We always recommend that if the property is priced well; write a very strong offer as there may be competition. If the property is not well priced and you decide to write a low offer, understand that the list price is an indication of the expectations of the seller. They may be delusional with the list price but, keep in mind that is what they think it is worth. Also, we have found that if you hard ball the bank, they will hard ball you. If you write a very poor offer, the listing agent may feel your offer is a waste of time and put it at the bottom of a stack of papers on their desk. Basically, banks aren’t as desperate as the news portrays and they have to justify to their investors a fair market sales price for these properties. They don’t let properties go for below current market value because they will lose investor support in the future. In some cases it is easier to spend a lot of time looking, find a home that is well priced already and then write a good offer. If the property is a hot property and is priced well, you should see multiple offers and will have competition.
What about auctions. Can I get a better deal there? Maybe you can. The concern we have with auctions is that you are buying the home without a contingency period (in most cases) and cannot do inspections. If you get a property that has a cracked foundation or a non functioning air conditioning system… it’s your problem now. Folks get caught up in the hype of auctions and may actually pay more for a home than they would on the open market. Also, keep in mind.., the auction fees may be very high for buyers… there can be an additional 1-7% added to the final bid price for auction fees.
Provided by Craig Curreri of Coldwell Banker 707.477.5120
Provided by Craig Curreri
A short sale occurs when the outstanding loans and/or obligations of the homeowner are greater than the current value of the property and the lender(s) accept(s) a discounted payoff.
Why would a lender be willing to do that? A little history will help your understanding. In the 1990s, there was a decline in property values and many homeowners who had bought with little or no down or refinanced pulling all their equity out, found themselves facing possible foreclosure. Some lenders discovered it was better to accept a short payoff as opposed to foreclosure. Foreclosures are notorious for running up expenses for repairs, sales commissions and taking plenty of time. Today, the average savings to a lender with a short sales is $14,000 per property when compared to a foreclosure.
The benefits of the short sale for the lender are the cost savings, as mentioned above, and the fact that lenders aren’t property managers, especially for vacant, non-income producing ones. Short sales are desired by homeowners to avoid the stigma and damages of a foreclosure. The benefit to the buyer would be the potential to purchase a property at a very competitive price. Indeed, short sales can be a win-win-win for lender, buyer and seller.
The real crux of these transactions is negotiation with the lender. And interestingly enough, it’s not always the listing agent doing the negotiations; very often it is the buying or selling agent. These transactions can take three to six months to close. Here is an idea of some of the steps and documentation that may be required by the lender.
First, because of the privacy laws, the lender will require an authorization to release information form signed by the homeowner, giving the party that will be doing the negotiation authorization to discuss the loan with the lender.
Second, and possibly the most challenging, is locating the correct lender representative who has authority to accept a discount. This is usually someone in the loss mitigation department.
Once you have the correct contact, you’ll need to find out what documentation the lender would like to support the offer. This may vary with different lenders but expect them to request the following:
A firm market-value offer and/or contract Local comps appraisal (be sure to ask the lender if they prefer to arrange it themselves). Estimated closing statement (your title company should be able to assist you).
In many short sales, the buyer pays the closing costs and the agent may be asked to cut their commission to help. If applicable, there is a need for an estimate of cost of repairs or a contractor’s bid for items that would normally be part of a seller’s costs. Most importantly, a hardship letter from the homeowner, including as much support documentation as possible that details the seller’s lack of resources to repay the loan.
Be prepared for the lender to ask for more documentation. We have been told that under the Real Estate Settlement and Procedures Act (RESPA) a lender may not file a deficiency judgment for the unpaid portion of the loan and that if they have agreed to and accepted a lesser amount as payment in full, a deficiency judgment would, in effect, negate the short sale agreement.
It may be prudent to inquire what the intent and/or practice of your lender is in case further negotiation is needed on this matter. The lender may also be able to take other legal action to collect, such as garnishing wages. Be sure it’s very clear what, if any, other action the lender may take, so that this, too, can be negotiated.
Some lenders may write off the unpaid portion of the loan. If the lender forgives a portion of the debt, the homeowner may be subject to a 1099 and hence taxed under ordinary income rules.
The lender will provide a demand to the title company for no less than the negotiated amount and will require it approve and estimated closing statements.
Short sales are no picnics, but knowing more about them, especially in today’s market, is crucial.
Provided by Craig Curreri of Coldwell Banker 707.477.5120
Source: Broker/Agent Magazine, July 2007