If you’re in the market for a home or have simply been following recent real estate news, you u ndoubtedly are aware of the vast opportunities out there for buyers right now. The large inventory of homes and drop in prices coupled, of course, with the $8k first time homebuyer credit, makes this an excellent time to purchase a home. (Before continuing, a bit of a disclaimer – Purchasing a home is an incredible financial commitment that should only be undertaken by those who are ready for the risk and financial resources it requires, to be discussed further in a future post. Regardless of the amazing deal or tax credit available, it is never a good idea to buy if you’re not ready. After all, that’s how we got into this mess in the first place)
Ok, enough with the financial caveats, we’re back on track now. When Mr. Homeownerhelper and I were getting ready to look at houses, we were sure that we would find the deal of the century. We had heard so much about foreclosures coming on the market at a fraction of their peak value, and we felt like a couple of kids in a candy shop. What we didn’t realize until much later, however, was that not all sales are created equal, and the price on the house might not be at all near the true cost of homeownership.
We wanted to spend somewhere between $275k and $330k on our home. Imagine our excitement, then, when we found a three bedroom, two bath 2005 Colonial in our target area for $260k. The catch? It was an REO. A comparable home in the area that we looked at, which was a traditional sale, was on the market for about $330k. A $70k discount sounded amazing, so we began to research the different types of sales out there, and in the process, discovered that we knew very little about foreclosures, and their lesser known counterparts, short-sales and REOs.
Briefly, the process begins when a homeowner becomes delinquent on their mortgage. In an effort to save not only the homeowners credit but also the mortgage lender from a major headache, the home might go on the market as a short-sale. In this situation, the home will be listed for less than the balance owed on the loan. The lender will take all of the proceeds of the sale, and the now ex-homeowner will be able to walk away, avoiding foreclosure. This benefits the bank as well, because although they may be taking a loss, the house will not be languishing on their books until they can find a buyer. And, as we all know, some money is better than none at all.
If there is no buyer in the short sale and the homeowner remains delinquent, the house will eventually be seized by the lender and go into foreclosure. At this point, the home will most likely go to auction. This is what the late night get-rich-quick infomercials are probably referring to as they dangle the lure of financial freedom from behind the television’s glow. Don’t be fooled by them: while there are great deals to be found at auctions, there are also even bigger headaches. There are other catches too; some auctions may require immediate payment. In short, they are not for the faint of heart.
A great deal of houses leave the auction process unsold. In this event, the home goes back to the mortgage lender as a REO, or Real Estate Owned. This is where the deep discounts are to be found, much like the Colonial we were eyeing. Unfortunately, the foreclosure process is slow to begin with, and delayed even more by the large inventory of homes, so these houses will often sit vacant for months, if not over a year, before they are finally listed again. All while this process is going on, the house is decaying.
So, which type of property is the best bet, and which did we go with? The fact of the matter is that there is no easy way to say which type of sale is the best, because everyone’s needs and abilities are different. I will point out, though, that a non-traditional sale (foreclosure, etc.) may be for you if you are skilled in a trade such as carpentry or plumbing. If you can do much of the work yourself, there is excellent value to be found. If not, you will find yourself immediately laying out much of the cash you saved on the purchase price just to get it livable and up to code. So, if you went the foreclosure route because you were a little short on cash, you could find yourself in big trouble right from the get go.
Another place where there is value is in short sales. Many times, these homes are still owner occupied, and have not spent any time subject to the elements. In many cases, however, you will need to be approved by the current lending institution, a process which can be extremely discouraging and time consuming. It can be worth the wait, though, to get a deeply discounted home in livable condition.
So, which type of sale did we go with, the REO or traditional sale? In the end, despite the lure of the cheap deal, we spent the extra money and went with the more expensive, owner occupied home. And the other home? Its still vacant, decaying every day with a half fallen over “For Sale” sign stuck in the overgrown weeds. Not only did our home ace the inspection, where the other one clearly had visible issues, but we couldn’t have been happier walking in on the first day and being able to unpack and enjoy our home. Besides, we still have had to do our fair share and dump quite a bit of money into it anyway.
Whichever option you choose, your best bet is to make sure you do your homework and always look at the comparables. What’s wrong for me might be right for you, and vice versa, and the best decision is an informed one. One more thing: even if you choose the immaculate well kept home, take that carefully worked out budget and scrap it. Add an extra $500 to your home fund a month. You might not know it now, but you’ll need it, whether it be the foreclosure or owner occupied home.