The Deal on Distress Sales and Foreclosures

It’s all over the news, the web, and probably even in your own neighborhood: foreclosures, pre-foreclosures, short sales, REO’s-bank-owned properties and sheriff sales. In a nutshell: Distress Sales. So, what’s the deal? Are they a good investment for a buyer? Should you be concerned about them? Are they affecting the value of YOUR home? The answer to all of the above is yes. However, it gets much more complicated.

Industry experts say that we are only about half way through the current foreclosure crisis. Close to half of all home sales are currently some type of distress sale.  We hope to outline and give you some basic information here on the deal with distress sales. 

A short sale is for homeowners in sincere financial hardship and must sell, but owe more on their home than it will sell for on the market.  If an owner qualifies and can provide all necessary documentation, they can have the difference between what they owe on their mortgage, and the sales price "forgiven" as per the Mortgage Forgiveness Debt Relief Act, if it is their primary residence.  In fact, the seller is not responsible for any of the costs associated with a short sale, but cannot take proceeds from the sale, either. There also are no adverse tax implications. The negative credit impact of a short sale can be turned around in 2 to 3 years, and a homeowner leaves the home on their own terms.  The negative impact of a foreclosure shows up for at least 7 to 10 years, and the owner gets evicted by the sheriffs department.

For short sales, a buyer must be willing to wait an average of 45 to 75 days for the lender to approve the sale, with no guarantee the lender will do so.  Once approved, the buyer must settle within 30 days, or the whole approval could be negated. However, their patience could be rewarded with a great deal. A buyer is well advised to work with a Real Estate agent who has experience with distress sales to maximize their chances for success.   

Pre-foreclosures are similar to short-sales if the seller owes more on their home than the home will sell for in the current market. If that's not the case, they can be purchased without the lengthy processing procedure from the lender. The other advantage is that there is a very good chance that the lender will permit the sale to take place.   

Sheriff sales are only for more experienced investors.  The day a home is getting foreclosed (taken back by the bank), the home is offered for auction at the county courthouse.  The bank is willing to sell the home to the highest bidder.  If the home does not sell at sheriff's auction, the home is then listed for sale on the open market as a "bank owned/REO" property.  Sheriff sales are more risky, time consuming and represent some of the largest down payment requirements.  But, they also can offer some of the best bargains.

Sellers who are not able to pay their mortgages for various reasons but want to keep their home, have the option of applying for a loan modification through their lender. If a homeowner qualifies, the lender will offer new terms to reduce monthly payments that could fit into their new monthly budget. Under no circumstance should a seller pay in advance for any servicing group that offers to help them with a loan modification, and there are many scams of which you should be aware.  

Always seek advice from a professional accountant and Real Estate attorney as well as a Real Estate agent who has lots of experience in short sales before making any decisions.

All of these situations must be handled expertly with strict confidentiality, by someone who has the proper training and experience. Furthermore, saving a home from foreclosure is a complicated and tedious process that, if handled improperly, can result in financial catastrophe for a homeowner.

So, how are distress sales affecting your home's value?  That's actually a complicated question.  A simple comparable market analysis no longer "cuts it" these days.  Depending on your location, the number of distress sales in your area, and the severity of those situations, your home's value may be anywhere from minimally to dramatically impacted.  You are best advised to seek the help of a local real estate agent when trying to determine your home's current value. 

Not to make light of the subject, but distress sales are here to stay, and not all real estate agents are capable of handling them. Don’t be fooled – distress sales are not handled in the same manner that traditional transactions are. Even when it comes to how foreclosures affect your home’s value, you need the right advice.

We’ve actually been receiving extensive training in the area of foreclosures and short sales and we’re proud to say that we’re ready to handle any distress sale situation. So, if you would like more information about distress sales, please feel free to get in touch with us. We are here to help!

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Article courtesy of Andrea Martin, Licensed Salesperson, RE/MAX Preferred