All media reports point to this being a perfect time to purchase a home. An obvious reason is the number of homes in foreclosure, and the number of families pursuing short sales due to financial trouble. But is it really a great time to buy a home? And if so, how can one best take advantage of this market?
My husband and I purchased our first home in our late 20’s. I’d learned quite a bit about real estate from my grandmother who owned numerous properties in her day. In fact, she was a real estate investor before the concept was even popular. Although my husband and I have not chosen to become full-time investors, we have owned and sold many properties over the years. Consequently, we’ve learned a considerable amount from these experiences.
Is This Really a Good Time to Buy a Home?
No matter what the market dictates, only you can determine whether this is a good time to buy a home or not. Don’t be enticed by the affordability of homes. If your personal circumstances are adequate to buy a home, then this is a good time. But, if your finances are tight and/or your job stability is a little shaky, it may behoove you to wait despite this being a true buyer’s market.
How Much Home Can You Afford?
Many will look at a home in foreclosure or short sale and think of it as an opportunity to buy a home that they normally could not afford. For big risk takers, this might work. Nonetheless, the wisest and safest way to buy a foreclosure or short sale is to be more conservative.
Say the bank gives you approval to buy a $250,000 home. You begin your home search and you run across a home valued at $375,000. But because it is a short sale, the seller is only asking $250,000 for the home. You think you can probably get it somewhere near the top of your budget so you go for it. There are however some snags in this plan. What many novice home buyers don’t consider are other expenses associated with the home. Although you are getting the home far below market value, the cost to maintain the home remains closer to it’s true value of $375,000 than your purchase price of $250,000. Some of these expenses might include taxes (although this can be appealed, the taxes will probably be calculated based upon the homes true value), homeowner or condo association fees (if applicable), landscaping (at that price point your neighbors may expect you to have your lawn professionally done) and any repairs or upgrades needed. Additionally, if a home is in foreclosure or short sale, you can probably expect that maintenance has been lacking on the home. Therefore you will need to have a little money in reserve for emergency situations.
The best scenario is to purchase a home that might be valued somewhere between $250,000-$300,000. In a foreclosure or short sale you can probably get that type of home for an average of $175,000-$225,000 (not exact, just a range). This leaves you with a lot more wiggle room, and you are still getting a much nicer home in a better neighborhood than you may have expected.
Dealing With Short Sales
A short sale is very different from that of a foreclosure. The main difference is that in a short sale the seller is still the owner of the home. A seller will typically opt for a short sale to actually avoid a foreclosure (that is the bank repossessing or taking back the home). In this case, the seller will market the home for a quick sale (that is usually well below market value), and then ask the bank to accept the proceeds from the sale as complete resolution of their debt.
For example, if the seller owes $162,000 on the home, and they sell the home for $110,000, they will ask the bank to accept the $110,000 as a settlement on their loan. Why would the bank agree to this? With so large of a number of foreclosures, and with foreclosures costing the bank considerable legal fees, a bank may agree if they believe they have no hopes of collecting the debt in it’s entirety.
Consequently, a short sale can only go to closing if, and only if, the bank approves of the transaction. Because the decision is typically made by a bank review board, their approval or acceptance of a deal can take as long as 2-6 months. So if going for a short sale, you must first be prepared to be patient. If you need to get into a home right away, a short sale is not for you.
Although buying homes through a short sale can be a great deal, it can also be a great risk if you don’t protect yourself. Therefore, it is wise to have your own representation to protect your interest (i.e. a Buyer’s Agent or Real Estate Attorney).
Dealing With Foreclosures
In a short sale, because you are dealing directly with the seller and not the bank, protective clauses can be incorporated in your purchase agreement. One such clause makes the purchase contingent upon an acceptable home inspection. With a foreclosure, you are dealing directly with the bank. Consequently, they want a simple agreement. Simply put, you buy the home “as is”. Again, be sure to have legal representation for yourself. Foreclosures can be quite tricky, and you want to make sure that you have clear title for the home (that is no liens against the property). Let’s face it, if the home has gone into foreclosure, there is a strong chance that back taxes, water bills, etc. might be past due.
For many, this is one of the most opportune times to buy a home. Nonetheless, before launching an all out house hunt, do your homework and take care of business first. Begin with determining how much home you can afford, then pursue mortgage pre-approval. With a foreclosure or short sale, it is important to show that you will be able to secure financing to purchase the home.