Prequalifying: are short sales or foreclosures a bargain?

October 05th, 2010

In some markets across the country, 30 percent or more of the homes on the market are bank controlled, meaning the home is either owned by a bank due to foreclosure or the seller is requesting the bank approve a “short-sale” transaction. Many homebuyers are under the impression these homes can be a bargain compared to a more traditional sale. Is this true? Are bank-controlled sales more of a bargain for you than a traditional sale where homeowners are making the decision?

The pluses

The primary advantage for you in a bank-controlled home sale is the lack of seller emotion in the transaction. Just as your prequalification calculator provides you with a sales price and loan amount just using math and without considering other variables; so too do most banks use just math in determining the sales price of one of their properties. How much the bank is willing to lose is based on their estimate of the value in the marketplace. Because of this objectivity on the bank’s part, you may be able to purchase a foreclosure or short-sale property at a price below what a family who has lived in a home for twenty years may be willing to take.

Another plus is that when the appraisal comes in, if it is below the price agreed upon between you and the bank, in most situations, the bank will agree to the lower value on the appraisal and adjust the sales price accordingly. This is less common with short-sales but it can occur.

The minuses

There are several drawbacks in dealing with a bank officer located far away on the purchase of your new home as opposed to negotiating with a seller who lives in the home or nearby. The primary negative is the time it can take to get a response from the bank approving the offer or countering with another price. If the seller is trying to get the bank to approve a short sale and there are two loans on the property the process of negotiating the short-sale between the two lenders, the seller and the buyer can take months

If the bank is already losing money on the transaction there is little room to negotiate the inclusion of your closing costs or for work to be completed on the property if it is in disrepair. Since the decision for the bank is only dollars and cents the incentive to accommodate a buyer willing the purchase the property is often less than with a traditional seller. Using the closing costs calculator for such a property you will want to calculate using figures with you paying all your own closing costs to be prepared.

One more potential minus to purchasing a bank controlled property is the “per diem” factor many banks are now placing in accepted offers. A per diem is a rate per day that you will agree to pay if you close after the agreed upon closing date, whether the closing is late due to the bank or the bank’s service providers not performing or not. Depending on the time frame this can lead to extra costs at closing for you and erode any bargain you may have felt you were getting in purchasing the property.

A bargain?

Whether you are able to find a bargain in this current market, and the time frame in which you will learn if you have an offer or not, depends on numerous factors such as the asking (or list) price, the condition of the property and how many buyers in your local market are chasing bargains. Be aware that many homeowners are discovering that working through a bank-controlled real estate transaction is no bargain at all, despite getting a lower price for a home than they might have with a traditional sale, because the process can take much longer to complete.

If you are going to be writing offers make sure you use free on-line mortgage calculators to ensure you are financially prepared to purchase a home. Be prepared as well for bank-owned properties to require pre-approval by a lender chosen by the bank; often times this can be avoided if with your offer you present a strong pre-approval letter from a mortgage professional of your choosing.

Posted By :
Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years' experience in the mortgage industry.

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