The distressed home marketplace follows its own rules and motivations, but Christine Groves explains in 5 steps how to qualify your buyers for the market.
Because no two buyer clients are the same, and no two short sale or REO transactions are the same, the majority of traditional buyers are not cut out for this process. The topic of short sale and foreclosure listings is one that I discuss with new clients immediately upon discussing their search criteria. Even buyers that have an idea of what “distressed properties” are still usually do not know what is truly involved. When screening whether a prospective buyer would benefit from considering these options, it is most important to determine the following five factors:
1. Time Flexibility – Buyers must have patience and time. If a buyer has to sell another property or move within the next couple months of their search, these would not be good options. The best potential buyers are those that either are renting month-to-month or have flexibility with their lease, are living with family or friends, or have at least a few months before they have to move but can move at any time.
Especially with short sales, buyers may not hear back from banks regarding acceptance or counteroffer to their offer for months. If offer acceptance is granted, then time is still needed to process a buyer’s mortgage and for the seller to prepare for closing. And if a transaction falls apart months later, a buyer can be left to start all over in the search to find their next home. These sales can take anywhere from a couple months to more than a year, so there are no certainties.
2. Open to Distressed Condition – Most, if not all, short sales and foreclosures are sold “as-is” and do not have any warranties or even disclosures on a property’s condition. A buyer should always conduct a home inspection to help determine property issues, severity and whether or not to proceed with the purchase. In most cases, prior owners of the property did not maintain or update a home’s condition due to lack of funds, hence the loss of their home.
The negotiated sale price of the property should reflect the home’s condition, or it is not worth the time and purchase. Buyers must consider the cost to purchase plus the cost to make the home updated, and compare that to what the value of the home will be, to determine cost versus benefit. Buyers looking for move-in ready homes may have a hard time finding a good home in the distressed market.
3. Strong Financial Approval – A bank will only consider offers from buyers that are already pre-approved with a mortgage lender or can provide proof of funds for a cash deal. Most banks will not consider offers with contingencies such as a home sale or home close.
An offer should include a buyer’s “highest and best” purchase price and terms. An offer with a fair price, good earnest deposit, downpayment and flexibility with approval and closing is considered more heavily. The stronger the offer, the better chance of bank approval, as well as holding ground against multiple offers.
4. Able to Cover Additional Costs – Costs that are normally paid for by a seller in a traditional sale may be the buyer’s responsibility in a short sale or foreclosure purchase. Surveys, transfer taxes, homeowner association (HOA) dues and fees, city inspection fees and penalties, environmental inspections, etc., may be the responsibility of the buyer in addition to the usual costs a buyer must already bear.
5. Risk Tolerance – Short sales and foreclosures are not for the faint of heart. This can be tough because most buyers, especially those that will actually occupy the home, get emotionally invested on a particular home as they go through a home purchase. At any time, the banks that decides the fate of a transaction can decline the purchase, change terms or cancel the sale altogether. A buyer will have already invested their time, money for a home inspection, preparation for a move, etc. The property should be one worth the wait, and the buyer should be prepared in case the deal falls apart.
There is a large inventory of distressed homes at good deals. With an investment of patience and flexibility, short sales and foreclosures can be a great option. Do your due diligence with your buyer clients to educate them on the pros and cons. A pound of preparation can equal of ton of success.
Christine Groves is a licensed broker with Coldwell Banker Residential Brokerage in Wheaton.
She can be reached at 630.346.3272 or Christine.Groves@CBexchange.com.