Buyer FAQs

Frequently Asked Questions from Buyers of Distressed Properties

When can I buy again?

Click here to download a helpful PDF.

What is a distressed property?

A short sale, a bank owned home or foreclosure as well as HUD homes.

What can I expect when buying a HUD home?

A HUD home is purchased through an electronic bidding process rather than from a standard written contract. A Realtor must submit the bid on behalf of the buyer after the buyer has given the Realtor a signed and completed sales contract package, including the earnest money deposit good faith deposit check. A buyer who will live in the home gets priority over an investor buyer.

How do I find the best deals?

Bank owned homes typically represent the lowest priced homes. However, when bank owned homes are new listings in nice neighborhoods, there are often lots of competitors for the home. If a home is in need of repair or when it has been on the market for 60+ days, that is when you can usually get the best deal.

Many people think they can get a screaming deal on short sales. The banks on a short sale do not own the home and they want to recapture as much of their loss as possible. So, homes selling as a short sale are typically sold at or just slightly below market.

How long does a short sale take?

It depends on the number of loans, who the lenders are as well as the skill and experience of both the listing and selling agents. The more loans there are, the longer the process takes.

Inexperienced short sale listing agents often take longer because they don’t know what needs to be done to prepare a file that the bank will consider.

Inexperienced buyers agents take longer because they often don’t know how to manage the short sale process.

If you must be moved into your home in 60 days or less, a short sale is generally not a good option for you. You will need time to complete your escrow and the short sale approval process itself typically takes at least 45 days. That puts the typical timeline from the day you write the contract to the close of escrow around 75 days.

Aren’t pre-approved short sales faster?

They can be. However, often listing agents will say a home is pre-approved as a short sale because they had an offer from a buyer at a certain price which the lender(s) agreed to take and then the buyer who made the offer walked away from the transaction. The lender who agreed to that short sale typically did it based on a specific offer & buyer. Some lenders start the process all over again once there is a new buyer.

Once the home has gone through a lenders short sale approval process, it can take less time to get a new approval. However, when there is difference in terms from what the original buyer offered or if the valuation on the home is too old and a new valuation must be done, it can be almost like a new approval.

Some lenders, like former Wachovia loans and HAFA approved short sales are typically truly pre-approved.

Don’t most short sales fail?

The number of short sales being approved in 2011 is higher than in 2010. The banks expect to increase short sale approvals by 60 -70% in 2012 because the number of homeowners continues to increase while foreclosing on these homeowners remains a challenge for lenders in this political climate.

Additionally, it is far less expensive for a lender to accept a short sale than it is to sell the home after foreclosure. However, because both the homeowner and the home must qualify for a short sale, sometimes lenders find that foreclosure is their only option.

Is buying a short sale the same as buying a foreclosure?

No. A short sale is being sold by the homeowner. A foreclosure is being sold by a lender.

What can I expect when buying a foreclosure?

Foreclosure is a legal process, not a category type. There are 2 ways to buy a foreclosure.

The first way is to buy the home ìon the courthouse steps. You literally go to the courthouse on the day of the sale and bid on the home. The bank will have a starting bid and if you win the bid, you must have cashiers checks and you buy the home in As-Is condition and subject to any liens that are on the home. Sometimes the homeowner still lives in the home and you have to do an eviction. While you can get a screaming deal, when you buy foreclosures this way, there is obviously significant risk so you must do your homework prior to arriving at the courthouse steps.

If you buy a home that is on the multiple listing service (MLS), it means the home has been listed with a real estate agent. The home is likely to be vacant and the bank will typically deliver free and clear title to the home prior to close of escrow, which means the seller pays the liens. This obviously minimizes the risk that a buyer of this type of foreclosure takes. This type of foreclosure is called an REO or a bank owned home since it has been taken back by the bank through the process of foreclosure. Sometimes bank owned homes have been damaged by angry homeowners who lost their home to foreclosure.

When you buy a bank owned home that is listed in MLS, you will be required to sign the bank addendum. Each bank has their own and the terms spelled out in the bank addendum are in the banks favor and the terms are non-negotiable. If the buyer signs the addendum then the paperwork goes to the seller for final approval. NOTE: You are NOT in contract until the seller signs the contract. After the seller signs the contract, escrow is opened and your inspection period begins. Be aware that lenders are exempt from making certain disclosures. You can buy a bank owned home using financing as long as the home is financeable.

Do banks make repairs on the homes they are selling?

When a lender gets a home back through the process of foreclosure, they assign it to an agent who prepares it for sale. Part of the preparation is taking care of any repairs the lender chooses to make to the home. Once the home is on the market, it is being sold As-Is. If there is damage to the home, the lender has already taken that into account when pricing the home so the damage is not an automatic reason for you to ask for a price reduction.

There are 3 items the bank typically does prior to selling the home because they are required by the State of California. They are smoke detectors, proper water heater strapping and carbon monoxide detectors.

Can I offer less than the list price?

Yes. The price you offer should be based on the market value of the home.

What can I expect when buying a short sale?

In a short sale, the homeowner may be delinquent on making his loan payments BUT they are still the owner of the home. Negotiations are done with that homeowner and then it goes to their lender for a short sale approval. The price on a short sale is set by what the listing agent determines is the value of the home.

During the lenders short sale approval process, the lender sometimes disagrees with the price set by the listing agent which can lead to a 2nd round of negotiations. Once an agreement has been reached, the lender issues a short sale approval letter. If there is more than one loan on the home, there must be an approval letter from each lender. Once all approval letters are obtained by the listing agent, escrow is opened. The short sale process typically takes much longer than a foreclosure.

The seller must complete all disclosures and the seller often is still living in the home during escrow. This means you can typically get better information about the home from a seller doing a short sale. Also, the home is often in better condition on a short sale because there is pride of ownership. Just because the homeowner had a hardship that has made it difficult for them to make the payments, they typically continue to take good care of the home. Afterall, they are counting on the buyer to buy the home and free them from the burden of the mortgage and they know that if they trash the home, you won’t buy it.

Does the seller make repairs on a short sale?

Not usually. The reason the seller is doing a short sale is that they have a financial hardship. Consequently, you are buying a short sale in As-Is condition.

There are 3 items the seller typically does because they are required by the State of California. They are smoke detectors, proper water heater strapping and carbon monoxide detectors.

I say typically because while these items must be done prior to the close of escrow, the seller is not required to pay for them. The buyer can pay for them if it is negotiated that way.

On a short sale, what if there are liens on the home?

That can be a problem. Again, because the seller is having financial difficulties, they may not have been paying some bills. The most common unpaid bills are property taxes, HOA dues and water bills. All 3 of these items, if unpaid, can lead to a lien being placed on the home. If there are liens on the home, you want to know about it and find out if an agreement can be met about their payment. If an agreement about their payment cannot be reached, you will be unable to buy this home with free and clear title so you might as well find out sooner rather than later.

What if the short sale I want is in foreclosure?

A skilled buyers agent will be able to tell you if the home you want to make an offer on is in foreclosure. Depending on how far into the foreclosure process the home is, a short sale may be difficult to get done, especially if there is more than 1 lender. This is why you need an agent experienced in short sales representing you as a buyer.

Another reason the real estate agent you choose is so critical is because lenders typically pursue foreclosure and consider short sales simultaneously. If your agent is unaware of the pending foreclosure, the home could be foreclosed on by the bank while you are in the short sale process. If that happens, your current contract is dead because the seller who signed it is no longer the owner of the home after foreclosure.

If you are buying a short sale as an investment property, special forms must be used to submit the offer.

What if the seller is in bankruptcy?

A bankruptcy will initially put a stay on everything, including the foreclosure process. The homeowner’s lender can no longer have any communication with the homeowner. Because a short sale requires communication with the lender, the short sale is halted in a bankruptcy. However, the trustee can have the home removed from the bankruptcy, in which case a sale could proceed. Seek legal advice is you are pursuing a home from a homeowner that is in bankruptcy.

Is it best to work with the listing agent or do I need my own agent as a buyer?

The listing agent has a fiduciary responsibility to the seller of the home. If that same agent also chooses to represent you, they have an agency relationship with you. The fiduciary relationship is a higher level of care than the agency relationship. Consequently, many buyers wanting the very highest level of care hire their own buyers agent.

Remember, the agent who lists the home for sale has a contract with the seller. You as the buyer should have your own contract with an agent to guarantee that you have the highest level of care.

Sometimes with a bank owned home, buyers believe their offer has a better chance of acceptance by working with the listing agent. The points referenced above still apply.

What do I look for in an agent?

The job of the agent is to help you find the home that best meets your needs, negotiate the best contract for you and take you all the way through escrow so that you become the owner of the home you want. Consequently, you want a great negotiator, someone detail oriented and who can explain things to you in a way that you can understand, someone with excellent follow through and who is experienced with both foreclosures and short sales. The absence of any of these skills could be the difference between buying the home you want and losing it. That’s a lot to risk so choose your agent (link to your contact page) wisely, especially when you are buying a distressed property.

How do I start my home search?

Over 90% of buyers in this market start their home search on the internet which is a great way to start. When you are actually ready to buy a home, you will want to go look at homes and you will need a real estate agent (link to contact page). Most buyers who actually buy look at 9-15 homes before they find the one they buy.

In this market, to submit an offer, you must have a pre-approval letter from a lender or current proof of funds if you are paying cash. If you don’t have either of these things, most real estate agents will not waste time by writing your offer because offers will not be considered without verification of funds. Consequently, in order to not waste your time, prior to touring homes, you must get pre-approved with a lender. It is typically best to work with a well known lender.

If you look at homes without a pre-approval letter or current proof of funds and you find the home you love, by the time you get the pre-approval letter, the home may already be gone. Every buyer wants a great home in a great neighborhood for a deal. To position yourself to get that, you need a pre-approval letter before you look at homes.

What type of loan is best?

That is what your lender will cover with you, based on your specific situation. There are hundreds of loan programs available so working with a trusted lender who understands your needs will position you to get the financing that is best for you. We can provide you with referrals of loan officers with a proven track record of getting homes closed and you need that in this market.

Please contact us or call 916-939-2040


Smith Real Estate Services, Inc.is a real estate brokerage company in California (DRE 01381095 and 00676207). We do our best to provide you with current and accurate information. However, we are not attorneys or accountants. Please consult with your attorney or CPA for further information and how this information may affect you personally. Visit our Resources for a list of professionals who specialize in helping distressed homeowners. This was written in October 2011.