Foreclosures Vs. Relocations, Vs. Shorts Sales and Approved Short Sales
As I meet with Buyers, especially new home Buyers I tend to relay this message over and over so I thought I would just blog it on here today. In this post, I am going to walk through the four kinds of “distressed sales”.
1.) Foreclosures
Foreclosures are historically one of my favorite kinds of Real Estate to help my Buyers purchase, and to purchase for my own portfolio. With a foreclosure, historically the price has often been below market and depending on how long the property has been on the market, considerable concessions could be had. Recently, one of my clients who closed on her place last week, bought a foreclosure. When putting together the offer for this FDIC owned (FDIC took it over from a failed GA Bank) she mentioned that her cousin had told her that foreclosures often sell for 40% less then the list price. I proceeded to explain to her that in today’s rising Real Estate market it is just as common to see foreclosed condos and homes selling for list price, or above the listed price as opposed to any kind of a discount.
Today’s foreclosure market is as close to market price as ever. New advances in technology including more consumer friendly foreclosure website platforms, as well as consumer website’s like zillow, redfin, and trulia have also leveled the playing field making it more consumer and investor friendly to quickly see everything that is out there. With this increase in potential Buyers large foreclosure institutions like Fannie Mae, Freddie Mac and HUD have notably increased their foreclosure pricing relative to the general market over the past year. In many cases, in both condos and various housing sub-divisions I have seen Fannie Mae price their foreclosure product at the very top of the market, above any other comparisons available.
There are still deals to be had foreclosure wise. The reason that I like foreclosures, and my clients tend to buy a lot of them, are two fold. Firstly, if a property is priced near the market price has been on the market a few weeks you often have more room to negotiate then a traditional sale. This room often includes up to 3% for closing costs (say $6000 on a $200k sale price), something that is often hard to get from a traditional seller. Second, I like foreclosures since “what you see is what you get”. Meaning there is not one living there, thus you see the condition that you will receive the property. Now that said, since someone who lived there went into foreclosure, they VERY likely did not maintain the property properly and thus it is likely in some state of disrepair. This is especially true of HUD properties. For the same reason that I rarely work with FHA Buyers, I also often steer my client’s away from HUD (former FHA homes) foreclosures. These homes were often purchased by people with only 3.5% down and from my experience these homes are often in a much greater state of disrepair. Lets face it, if you only had 3.5% to put down on a property, you likely don’t have the money allocated to properly maintain a property as someone who puts 20% down. This is just a correlation, by no means an absolute truth. That said, it is something that I am always quick to point out when someone expresses interest in an HUD owned property.
Overall I like foreclosures and my clients have bought nearly 100 of them. My investment arm has bought over 10 of them. I will always include them and promote them in all of my searches for clients.
2.) Relocation sales
Just this year, I have started to see many of these come back into play. Corporations when transferring Middle to upper tier managers will often make things easier on them and their family by offering a relocation package. As some who who was corporately relocated from the West Coast to NYC, NYC to Dallas, and lastly Dallas to Atlanta I am very familiar with an assortment of packages and deals that large organizations offer their top talent to move around. In the case of Real Estate companies will often take over some or most all of the liability of the closing of an executive’s current residence while they search for a new home in their next city. “Relo” deals as they are called often are priced a little below market, and can offer significant room below list price if they have been on the market more then 21-30 days.
I am currently in the process of buying a 3 story, 4400 sq foot, 6 bedroom, 4.5 bath home. It is a Relocation deal. The price was very attractive and like most relocation deals the terms were very agreeable. Relocation deals is the downward market were very rare. Companies were weary of stepping in and taking on the risk of Selling, or helping sell the property for the Seller. This has quickly changed this year. Relo deals, like foreclosures are more paperwork, but they tend to be good deals. Also, unlike foreclosures , these are properties often times that the Seller’s have taken great care in preserving.
3.) Short Sales (and why we don’t like them)
A Short Sale is a situation where the Seller would like to sell their home and they owe more then what the property is worth. Many of my first time home buyers come to me very enthusiastic with the thought of a Short Sale. Let me explain the problems with a regular short sale and how they prey on a novice agents and buyers.
In a short sale situation a Seller is not allowed to talk to the bank prior to having a signed sales contract. Thus, often times agents and Sellers will still a property at an unrealistic Sales Price. I get calls all the time on these unapproved short sales. Buyer’s call me and think that is the real price, and perhaps even they can negotiate a cheaper price on top of that. It takes a while to really explain that the bank is not going to take that low price, and the Seller and more specifically their agent are most likely fishing to use someone’s offer and executed contract to begin the negotiations with the bank.
My clients have purchased foreclosures in the market lows, when banks were more inclined to take these lower prices. But both my clients, and even I myself have made the mistake of trying to wait for a Short Sale at an unrealistic low price to come through. Often times banks will not even respond to the Seller’s request to allow for a cheaper sales price then what is owed on the mortgage. As an example, last year I made a cash offer for Windsor Over Peachtree large 1 bedroom. I made the offer and waited. In that time other deals became available, but I had to keep my cash set aside for this deal in case it came through. It never did come through. The bank about 6-7 months after my contract, the bank (or more likely the investors holding the note) decided to foreclose on the property. In doing so, they were able to sell the property as a foreclosure for 25% more then my contract offer price.
90% of the time regular short sales are a waste of everyone’s time. That said, as some point, when they become approved short sales they become highly viable options. That takes us to the next section. Approved Short Sales.
4.) Approved Short Sales
Approved Short Sales are the approved price when the bank does come back to the original offer with the number. After a novice agent and their novice buyer, wait and wait and wait for a reply one finally comes. Of course it is not at the unrealistic low price that was stated. In fact it is often 15-30% higher. The original Buyer almost always walks away from the deal as they had the unrealistic expectation of buying the property at the listed price. Their agent likely did them a real diservice by not fully explaining the more realistic outcome.
Now, depending on how low that unrealistic price was even 30% more, could still be a good deal. What is important is the number is now THE NUMBER. Thus this is a deal which can be done, and is fully approved by all parties. Thus, although myself and my clients don’t do many of them, I am keen on Approved foreclosures. You know the price, you can make a deal and close fairly quickly. There still are a few problems with these deals. One is that it is very rare you can obtain any additional dollars off the price. Also they rarely include much of any loan closing costs like a foreclosure or a normal sale usually would. Two is that the properties tend to be in better shape then a foreclosure since someone is living there, but nevertheless is someone is late on their mortgage they probably are not maintaining the property in an appropriate manor. The reason I like foreclosures, is that “what you see is what you get”. In short sales someone lives there, so when you end up getting the property in a few months will the condition be the same? Given the nature of the transaction, it is important to understand the added risk of Buyer from a Seller in distress who often still lives in the property. With a foreclosure if you find a major issue, sometimes the price can be negotiated down. With a Short Sale the Seller rarely makes any adjustments or fixes. They are simply tapped out.
Finding value in Real Estate and Understanding the Seller
Foreclosure, Relo, Short Sale or Approved Short Sale, it is important to understand the Seller’s rationale. ATL Condo Deals will do around 40 Real Estate sales transactions this year Couple this with a lot of experience investing through my investment arm, and ATL Condo Deals brings the experience needed to not make novice errors, and to capitalize on opportunities. For more information on how to grow your wealth through Real Estate please contact me.
