Wednesday, October 20, 2010

Buying Distressed Property- A :How To" Primer

If there is an upside to the current housing mess, it has given some people the opportunity to buy foreclosed real estate at huge discounts. A recent report by Multiple List suggests that lots of people are looking to take taking advantage of this situation. As reported recently in the Baltimore Sun, thirty percent of all sales in Baltimore City were foreclosures.  While the Baltimore Region as a whole is much better off than say, Florida or Las Vegas, still about 18% of all regional sales are distressed property according to research firm CoreLogic.

With this in mind, the following is a “tour” for purchasers and investors wishing to navigate the distressed property market. First off, it is important to distinguish between the various types of distressed property:

Trustee Sale: When you see an advertisement in the legal or auction pages of the newspaper for a “Trustee Sale” it means a foreclosure auction. The Trustee representing the lender will auction off the property to the highest bidder. Trustee sales often occur on the steps of the courthouse. More often than not, the high bidder will be the lender who needs to gain control of the property for any one of a variety of reasons.  This is usually not a fruitful place to find distressed property because you normally can’t inspect the home and it’s difficult to ascertain true value.

REO or Foreclosed Property:  REO stands for “real estate owned” and it is the term that the lender applies to property it acquires through a Trustee Sale. It is also sometimes called Foreclosed Property or Bank Owned. Shortly after the lender gains control of the property they will inspect it, possibly make repairs and put the property back on the market with a Realtor. They will offer it at a price that they believe will generate interest quickly. The property will normally be available for inspection and the bank may or may not be willing to make repairs. The process of making an offer is different from buying a regular listing. If the prospective buyer is an investor the lender will probably not be willing to make any repairs or agree to a financing contingency. If the prospective buyer is intending to occupy the property the lender may be willing to consider contingencies. That should be clarified at the outset. The more expensive the property the more willing the lender might be to consider contingencies. Government agencies such as FHA, FannieMae and FreddieMac encourage home ownership and may be even more open to contingencies. Also the government agencies may have an exclusive period where only owner occupants can submit bids.

Short Sale: A short sale is when the mortgage lender agrees to accept a loan payoff less than the current mortgage balance. It occurs when the home is “under water” and the seller doesn’t have money to make up the shortfall at the closing table. Short Sales are becoming increasingly common as the housing downturn wears on. However, they are very complicated for both the buyer and the seller. The biggest obstacle is the length of time needed to close the sale…frequently 6 months or more. The other problem is the prospective buyer is totally in the dark while the lender evaluates the offer.  Lenders will usually not consider a short sale unless five criteria are satisfied:

1)       The owner is behind on their mortgage payments and the     likelihood of “catching up” is slight.
2)       The owner has suffered a hardship resulting in the delinquency…. unemployment, illness, etc.
3)      The owner has no other assets that can be applied to the delinquency or loan payoff
4)      The prospective buyer is financially qualified.
5)      The short sale is financially more attractive to the lender than a foreclosure.

These are often difficult criteria to satisfy and require a lot more documentation than a regular sale. Many short sales fail to materialize because of complications or the buyer looses interest. If you are considering entering into a short sale you need to understand that the “failure rate” is very high. Also, the Realtors handling the transaction need to be conversant with the short sale process. The seller needs to be "prequalified" based on the criteria listed above.

Of the three types of distressed property sales, REO properties are most like a regular sale and clearly represent the best opportunity for most buyers. Unlike a Trustee Sale, you will have an opportunity to inspect the property, assess its value and perhaps negotiate with the lender that owns it. A case may even be made that REO property represents a better value than Short Sale property because a positive outcome is more likely and the transaction is less complicated.

Buyers contemplating purchasing distressed property should only work with a Realtor who is knowledgeable regarding transactions of this type. Every Advance Realty office has agents who can be of assistance in providing suitable guidance.If you want a recommendation contact


  1. This is really interesting. My husband and I have been thinking about moving up into a better home and the idea of buying distressed property is of great interest. Our financial situation is good and my husband is handy. We may do this.

    Sarah Newcomb

  2. My buddy at work bought a forclosure and fixed it up and made a bundle. you have to have cash because you can not get fainacing.