By Larry Hotz, All Denver Real Estate
“Can I get a good deal on a foreclosure or a short sale?”
By far, that is the most common question I am asked. People moving to Colorado have heard that we have a large number of foreclosures. They presume that the best deals must be in distressed properties like short sales and foreclosures. Sometimes they are! But, often the price that has to be paid outweighs the good deal.
Any private homeowner can offer a short sale listing to a prospective buyer when the seller believes there won’t be sufficient proceeds to pay off all of the debt. The seller can ask one of the lenders to take less than what is owed. Usually short sales occur on the second mortgage. That’s because many second mortgages were written over the last few years with no down payment. So, the borrower often cannot payoff the second mortgage with the proceeds from the sale.
Many lenders are compromising the amount of payment they will take on the debt. But, they will rarely if ever tell the homeowner how much less they will take. They require a contract be submitted from a buyer pending the approval of the short sale by the lender. In reality, the lender can accept a short sale, reject it or counter propose it. But the process takes many weeks and usually months.
For the average relocation buyer, the short sale presents a problem. The problem is time. Short sale approvals are taking extended periods of time for the lender to approve the short payoff. And, even if the short payoff is approved, it may be approved at a higher price or under terms that are not acceptable to the buyer. So, the buyer doesn’t really know whether or not he will be able to purchase a home for a long time.
As a result, many buyers who contract for a short sale pending the lender’s approval and up terminating the contract before they hear back from the lender. After all, if they’re moving to Colorado they have to know where they’re moving to. I have heard many buyers tell me “Just find me a home I know that I can buy.”
Another problem with both short sales and foreclosures is where most are located. Most are in the lower-end neighborhoods. It’s extremely rare, for example, to find foreclosures in the posh neighborhoods of Cherry Creek or Hilltop. The same is true in the better suburbs. Southern suburbs like Cherry Hills Village, Greenwood Village, Highlands Ranch and Lone Tree have very few foreclosures.
This map from The Denver Post shows foreclosure notices only in the city and county of Denver. Foreclosures in the suburbs are not included.
Foreclosures don’t present the same problems short sales do. Usually the bank can respond to an offer on a foreclosure within a few days. Of course the really good deals on foreclosures usually attract multiple offers. So the question then becomes how much to bid. It is like playing blind man’s Bluff. You have no idea how high the other offers are and what the terms are.
Sometimes, a buyer will offer $1000 over any other bona fide offer that can be shown in writing. But even that can present a problem. What if two buyers write the same kind of offer? And does the bidding continue to escalate ad infinitum? Fortunately, that’s a question I haven’t had to face yet. But it could happen.
Another issue with foreclosures is the condition of the property. It’s amazing to see what people will take when they’re leaving a foreclosed property. It’s not uncommon to have all of the light fixtures stripped along with curtains carpet cabinets counter tops and even bath fixtures. A foreclosure buyer has to be prepared to make more repairs and cosmetic improvements in the average home buyer.
Also, inspecting a foreclosed property can become an issue. Often, the bank will not authorize the utilities to be turned on for inspection. So if they are turned on they must be turned on at the buyers expense and then turned back off again. So, the buyer ends up with a sizable investment in the property before they even know if the inspection will be satisfactory.
All of this is not to say that good deals can’t be had. They can! It’s just that patience and strategy is important. If you consider buying a short sale or foreclosure, I would strongly suggest getting experienced, competent expert advice. The results can be rewarding but the risks are substantial.