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Roy's Cell: 928-300-0690
Foreclosures & SHORT-SALES -
big Opportunities and some pitfalls
ROY GRIMM, PhD
Currently, foreclosures amount to about 26% (down from 33%) of the sales of single family homes – short-sales another 12% (up from 10%). They include some of the best bargains we’ve ever seen in the Sedona real estate market. Plus, they’ve put a damper on prices for the entire market by providing extremely stiff competition for the buyer’s dollars. So far this year, however, both inventory and sales of foreclosed homes is down signifcantly, so their impact has lessened a bit. In fact, there are so few of them these days that all of the REO transactions I’ve been involved with lately have attracted multiple offers – as many as 10 the first day on the market – and I’ve seen the final purchase price come in at tens of thousands of dollars over list price.
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That said, the whole distressed property market still represents some terrific opportunities for buyers.
The downside for buyers is that there are some major drawbacks in the pitfalls, especially for Short-sales. More on that in a bit.
Because they’ve become such an important part of the Sedona real estate market, this page is focused on giving you the information you need on Foreclosures and Short-sales in general. And, ready, up-to-the minute notification when they come on the market. For Foreclosures (aka, REO’s) you need to be prepared to move fast. Also count on lots of competition for them. Multiple offer situations are very common for REO’s.
If you are a serious buyer, we will be happy to enroll you in an automated system that will send you listing data on Foreclosures when they hit the Sedona Multiple Listing Service. Then you can come back to me for my personal insights on ones that intrigue you. Simply email me and request that service. We’ll set it up for you quickly.
FORECLOSURES:
Also known as REO’s (Real Estate Owned – by the bank).
When a lending institution forecloses on a property – that is takes ownership of it back from the borrower – it will first send it to a trustee sale/public auction. Surprisingly, only a small percentage of those properties are actually sold at auction – particularly in Northern Arizona. That’s because the banks tend to establish the minimum auction price at the loan amount. Not too many buyers at that level because usually the home is worth less than the loan amount.
Once it clears auction, the property will come back to the MLS as a more-or-less normal listing. Certainly more normal than a short-sale. With luck it will be listed by an ethical Sedona Realtor rather than the sometimes-less-professional out-of-town agent. There are some horror stories about the latter.
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The difference between an REO and a conventional sale is that, in addition to the standard statewide real estate contract, the lending institution will send along an addendum to the sales contract. I’ve seen them range from 5 to 18 pages long. The addenda tend to take away rights that the buyer would have according to the standard contract. For starters, the buyer will need to sign an “As Is” adddendum. When the home inspection reports various parts of the house in need of repair, the bank insists that it will not make any. Actually, they occasionally do some repairs – especially things like termite remediation. But, generally, the buyers options are to either take responsibility for the repairs or just cancel the contract.
The bank also often reserves the right to cancel the contract any any point before Close of Escrow and take another offer.
As nasty as those particulars are, REO’s can be absolute steals and therefore worth the risks and hassles. The most dramatic example closed in August 2009. In March, just before it went into foreclosure. the house was listed for $1.4 million (down from $1,650,000 earlier). It showed up on the market in July and our clients eventually paid $512,500 for it. Granted, that’s far more of a drop than is typical, but it does demonstrate the the possibilities.
By the way, expect to have competition. With so many buyers on the look-out for REO’s, they tend to attract multiple offers and go quickly. This phenomenon often drives the eventual selling price up well above the original list price. Even then they are usually well below market price.
Click here to search Sedona AZ Real Estate Foreclosures
SHORT-SALES
A short-sale is a pre-foreclosure situation in which the lender agrees to accept a price/loan pay-off that is below the current loan amount – essentially to keep it from going to foreclosure.
We always need to verify that the lender has indeed authorized it before making an offer. Many properties are listed as short sales before the sellers have jumped through all the hoops and restrictions, only to find that they don’t qualify.
It’s possible for a buyer to snag a very good deal via a short-sale, but I have to warn you that the whole process tends to be exceedingly slow and frustrating without much assurance that you’ll actually end up with the property. Past estimates have been that 95% of short-sales never go through – although that seems to be changing lately. The banks are starting to ease up a bit to avoid foreclosure in some cases. The lender or servicing company will accept an offer on a property and then sit and wait to see if any better ones are coming in before giving its final approval. The time-lag for that is a few weeks to several months or more. Until that happens there’s no contract. In many cases the lender will simply reject the offer. Absurdly enough, if the buyer wishes to up the offer, the new offer goes back to the bottom of the pile and the waiting game begins again. The national average for the initial bank response is three months.
Up to a few years ago nobody had ever heard of them in reference to real estate (they have no resemblance to stock short-sales). Now they’re getting more common. Not many at the high end of the market, but once in a while we see one pop up.
Basically the seller is upside down with his loan. That is, the loan amount exceeds the market value of the property. But, he still owns and often still lives in the house because the bank hasn’t foreclosed, yet.
Like REO’s, the other consideration is that the property is always sold, “AS IS” so you’re not going to get anything in the way of seller concessions or repairs. .
Some people focus on finding them exclusively, along with foreclosures, because a buyer can wind up with an excellent deal. But, that can be a mistake because many of them come with major issues – made worse by neglect. Plus, the whole process of dealing with a lender’s over-burdened bureaucracy (sometimes out-sourced overseas) that often doesn’t seem to care whether or not the transaction ever happens is frequently, as I mentioned, very frustrating for everyone involved.
Or, the seller can inadvertently blow up the whole transaction by declaring bankruptcy at some during the process. In that case, the contract is canceled and the property put in the hands of the courts. All sorts of pitfalls abound, so they’re not for the faint of heart or anyone without infinite patience.
Click here to search Sedona AZ Real Estate Foreclosures
THE REST
Beyond that, we’ve been able to get a fair number of contracts at short-sale level prices on properties where the seller is up against the wall or just highly motivated to sell. In general, the whole market, including many of the primo properties, is selling at huge discounts compared with two or three years ago. So just zeroing in on short-sales doesn’t make much sense.
There are relatively few of either short-sales or foreclosures in the Sedona area compared with Phoenix or even the rest of the Verde Valley. We’ve had far fewer investors who’ve gotten in way over their heads as in other parts of the country. At last count about 8% (down from 12%)of the home listings in the MLS were either short-sales or foreclosures.
Having said all of that, we do keep an eye out for them and have successful experience in working with both short-sales and foreclosures in which our clients have done quite well.
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