Should you buy a Short-Sale or a Foreclosure?

Bargain-hunting is the name of the game in free market capitalism.

We hear so much today about the number of short sales and foreclosures that it’s natural to wonder if this is where the bargains are.  Are these areas that we should be pursuing?  Will we get a “great deal”?

First, let’s go over the difference between a short-sale and a foreclosure.

A short-sale simply means that a seller is offering his home for sale – and that he owes an amount greater than the current value.  So if the value of a home is currently $100 and the seller owes $105 – he will, upon the closing of the sale, come up five dollars short – hence the term short sale.

Contrary to what you read, being in a short sale position does not always mean that the seller is in danger of having the bank take his home away.  It could simply mean that the owner wants to sell his home for a new job, or because of a growing family or other reasons. He may indeed have the five dollars he needs to make up his shortage and thereby can pay all that is owed at the time of the sale – even though he will be taking  a loss.

The short-sales that we hear most about in the news are the homes where the owner owes more than the value of the house and is being forced to choose between selling and having the bank take the house away because he is behind on his payments with no resolution in sight.

These sales are very cumbersome and time consuming.  If you need to purchase a house because you have a need to move into it quickly, you should probably not consider this option.  The sale price must first be negotiated with the seller – and then, if the price is less than the mortgage amount, it must also then sit subject the approval of the lending institution.  The lender may not only want to recoup the amount that they are owed on the mortgage but also any late fees and penalties that have accrued.  So once you bid, you simply have to wait- and wait – and wait.  The time frame before the offer is approved can run into months.

Aside from the monetary approval, during the course of the sale, other liens may surface. If there are other debts on the property that have had liens taken out – the additional amount of these debts must be paid off before title can pass to a new owner.

This is not to say that there aren’t some bargains in short sales but if you choose to pursue this avenue you need to go into it with your expectations set accordingly.

Foreclosures are typically a cleaner transaction.  Once a home has gone through the foreclosure process, the original home-owner is not involved. The bank now owns the property and only their approval is necessary.  The listing Realtor, represents the bank – not the original homeowner. So should you choose to make an offer, the listing Realtor will present the offer and the bank will respond.  It can still take a bit of time – but we’re usually talking weeks as opposed to months as can happen with short-sales.

The question is – how much of a bargain will you get on a foreclosure?  Here are some of the things to consider.

If the original amount of the mortgage was 90-100% of the value of the home – at the time it was purchased – and that value has declined by 20% in the last few years – the bank could be looking to collect an amount that far exceeds the current value. PLUS, in addition to late fees and penalties (the same as with short sales) there will be administrative costs and legal fees that the bank incurred during the foreclosure process.

If the home was foreclosed on more than a few months before you are making a offer – the bank also has been paying land taxes as well as  utilities, in some cases. They will likely want to recoup that money as well.

Also – depending on how long the house has been vacant, the condition of the home may not be tip-top.   There are cases where frustrated homeowners on the verge of losing their house, abandon it  – even before the foreclosure.  If the house was abandoned, for a lengthy period of time , there could be freeze damage, burst pipes, ruined floors,  vandalism and a host of other issues. Remember, if they abandoned the house before they were forced out, the house could have been vacant for some time without the bank knowing so they would not be protecting the property by keeping utilities connected or “winterizing” a vacant home.

So if you do ultimately purchase the foreclosed home, you have to mentally add the cost of making the home habitable to what you paid.  Whether you are buying it to live in or as  investment, you still must being the house up to a certain condition.  So if you could save 50K by purchasing a foreclosure and you have to put 40K into it, you’re savings is 10K.   Still a deal, but is it enough of a deal to make you happy.

Lastly, keep in mind that unless you are paying cash, you’ll have to get your own lender to approve you for a loan to buy the house. You may have great credit but remember that a lender looks at your credit and also at the value of the home you want to buy.  When they do an appraisal – it has to present at the value you are buying the house for.  Otherwise, they’ll be lending you more than the value of the house and you will instantly be “upside-down” – the bank won’t do that.

Seeking to buy foreclosures and short sales is becoming more popular for folks looking to get a great deal.  It certainly is possible to accomplish this but it’s important to educate yourself on this issue in detail as to what is a great deal and what is not.

So, talk this over with your  Realtor who can give you some specifics on what properties are available in your area and how best or proceed.

Home prices will stabilize in 2009 and then rise – or they won’t!

Recently the number of times people ask me what the housing market is going to do in 2009 has increased.  It seems that is the number one thing to ask when speaking with a Realtor these days.

It’s no secret that if more people get mortgages they can afford and purchase houses, it could be the beginning of the fix for all things economic.

It’s also no secret that a lot of potential home buyers are waiting – for that single moment when prices have fallen to the lowest possible level so that they won’t buy a home only to have the value go down.

It’s also no secret that prices will stabilize when the home buyers start buying homes because inventory will go down, reversing the supply and demand direction.

So what’s going to happen?

From what I can see, the dam of people who need to buy homes has to start flowing soon.  After all, people who started shopping for homes did so for a reason.  At some point that reason becomes more urgent.  Maybe it’s a growing family – or a longer commute, or the waste of renting for those who qualify for mortgages.

At some point, folks who have been waiting – will make the decision that they’ve waited long enough and they will then make the decision to move ahead.  That will start the flow, and the cycle will be back in the direction we all love – up!

Prices are low, mortgage rates are low, selection is large, this is the time to buy.

SHOW ME THE MONEY

So there’s this article on Fox News this morning asking the question that everyone seems to be asking. How are the banks spending the money that they’ve been given so far from TARP. Keep in mind that TARP stands for Troubled Asset Relief Program. The idea is that the banks would use the money to somehow offset the bad loans they made, giving the debt holders some relief – the plan being to get the money back into the economy so things will pick up all over.

Until the banks are given some relief and then pass it along to homeowners in trouble, we will still have a glut of housing inventory which continues to push prices down and causes the housing market to stay stalled – which, of course, stalls the entire economy.

According to this article, some of the banks won’t answer (or don’t know) where the money went. Interesting reading.

I hope that the new administration demands answers and takes the money back if it’s not being used the way it’s supposed be used.

Movers Do Not Take Off Their Shoes.

There could be, I suppose, some very affable movers who will take off their muddy, slush-covered boots each time they carry a piece of furniture in to your new home, but I’ve never met one. Not that I blame them – time is money. 20 – 30 trips in and out, removing shoes and putting them on again would take a lot of time.

People don’t want to buy in the winter because they may not be able to test out some of the home systems until spring, such as septics, or A/C, or take a good look at the roof.

People don’t want to buy in the winter because the sun sets pretty early and they may not have time to shop for homes between 10 and 3:30 – which is really all the usable daylight in a New England winter.

People don’t want to buy in the winter because they want to see what the property and landscaping looks like in the spring or summer.

People don’t want to buy in the winter because it’s cold out, and they’d rather be at home instead of trekking about with a Realtor.

The point is this. A lot of people who want to buy houses, stop shopping in the winter. That means that the people who continue to shop have less “competition” in bidding on the best houses.

The people who shop in the winter have a good chance of getting a better deal than those who hibernate until spring.

Which group do you want to be in?

All Home Prices Decline at the Same Pace – NOT!!

Aside from the credit crunch,  the biggest challenge that most home buyers face today is to determine what they should pay for a specific house. There is no question that housing prices are still falling in most markets across the country.  Read almost any local newspaper and you’ll see the evidence.  How to apply that fact to the house that you are considering is a conundrum (I’ve been dying to use that word in blog post).

Let’s take a hypothetical.

The house you’re looking at sold 2 years ago for $100,000 and local housing data says that home prices in that town have dropped 5% a year for the last 2 years.  Strictly speaking that makes the house you are looking at worth $90,250.  The asking price is $95,000.  So you tell your Realtor that you’ve done your homework and you want to bid $90,000 to open and you’ll negotiate up by $250 but not a penny more because you don’t want to overpay.

Your Realtor, who is legally obliged to present all offers, explains to you, that this house is worth more than $90,250.  You pull out your research and show him that he’s wrong. You begin to question the Realtor’s motives or, at the very least, his competency.

The fact is, that this particular house has not depreciated as much as some of the other in town.  It is close enough to the interstate to enable a good commute while being far enough away from the interstate to avoid noise and neighborhood congestion.   It has a great, level lot and driveway. Several other features make this house a good value.  The fact that you have selected to try and purchase it from among all the houses in town, should immediately tell you that it is more desirable – that’s why you desire it.

Local housing data is about averages – there is really no such thing as average.  I think it was the late George Carlin who use to refer to the national census data stating that the average American family had 1.6 children and he wanted to see the .6 child.  (It sounded funny when he said it – trust me)

The point is that when you are deciding what a house is worth – you need to look beyond stats and determine what it is worth to you. After all – that’s all that really matters.

When I Was Seventeen, It Was a Very Good Year?

OK – so I’m showing my age with that quote from a Frank Sinatra song circa 1965 or so but I got to thinking a lot about this year and was it a good year or a bad year in the Real Estate business.

There are some terrible things going on in our economy which spill over big-time into the housing market.

Buyers are out there.  I’m out showing homes several times a week,  I currently am bidding on two different homes for clients. There is still activity and this is a good thing.  While some folks are scared or hesitant (which is understandable) they have  a reason they decided to shop for a house and that reason is still there regardless of any economic downturn.

Seller’s are having a harder time than in the past because there is so much inventory available it has driven the prices down.  Some cannot sell because they bought at the height of the market and the current pricing is signifcantly less than they paid. Those who are able and willing to lower their prices to the market are selling.

Some of the national economic pundits feel we’re at the worst point right now and that thing will start to turn around as we move into the new year.

So, while I can’t say it was a great year, it certainly could have been worse and I’m looking forward to a much better 2009