I have been selling foreclosed properties for about two years and this year we have transacted about 50 properties. In transacting that many properties, I’ve seen strategies that work and others that don’t. Many young and low income families who can now afford these properties often lose to investors with cash. So is there a strategy that can improve their chances? I think so…
Knowing that cash is king, the best strategy is to buy with cash and finance after closing. Some buyers may be able to borrow from family members to fund the purchase . However, the buyer must keep the right for appraisal and renegotiation or cancellation without penalties if the property does not appraise to the selling price. The buyer can get financing later and return the cash they borrowed from the family. There are some additional closing cost with this strategy, but the savings on the property may overcome the additional expenses.
Barring any family loans, if a buyer must obtain financing, the most important factor is to work with a reputable and reliable lender –someone who is going to tell you the truth upfront. The worst situations I have seen involves loan officers who promise the world, then do not deliver at closing. Most banks selling REO require pre-approval by a favorite lender, but allow buyers to finance with the lender of their choice.
With foreclosures (or REO as they are known) properties in high demand, time is of an essence. Buyers who are working with one real estate agent are going to have an advantage over buyers who try to find properties alone or buyers who do not commit to working with one agent.
In buying foreclosures, timing is critical and if a real estate agent does not feel that you are being loyal to him or her, they are not going to put you at the top of their list. You must have an agent who works full time, focused on finding properties that meet your criteria and budget. That agent in turn, must know and work with listing agents who handle foreclosures. It takes 2-6 weeks to bring a foreclosed property to market. Listing agents know which properties are in the pipeline and they can let you or your agent know and possibly let you see the property before it hits the market.
The moment a property that meets your criteria hits the market, you need to be ready to see the property (if you have not done so already) and present an offer. Some banks do not accept offers the first 5 working days. Since foreclosure are now priced very aggressively, the best strategy for presenting an offer is to offer asking price or even a little above. Your objective is to be the first full price offer and to get the Asset Manager to make a decision before other offers come in.
If you offer below asking price, the Asset Manager is bound to counter offer – by the time you accept or counter his/her counter offer there will be 5-10 more offers and now you have entered a bidding environment that usually results in offers above asking price. At that point the property will go to the highest cash offer, because financed purchases do not close above appraised value, but cash offers do.
So to summarize:
- Your best chance to get a great deal on a foreclosure is to buy with cash. Try to borrow from family members to fund the transaction and re-finance after you close.
- If you need financing, work with a reputable and reliable lending officer who represents a major lender. Get pre-approved for a loan before you start looking.
- Work with ONE agent and let him/her know that you are only working with him/her. Request that he/she set up an auto-search using your criteria.
- Find out if the agent you are working with has foreclosure listings of his/her own or if their company has other agents with foreclosure listings. They may be able to find out about properties before they are listed.
- When you find out about a listing that meets your criteria, see it the same day it is listed.
- Your goal is to submit the first full price offer. Some banks require that a property be in the market for at least 5 working days before accepting an offer. Find out from the listing agent if that is situation with the property you want and have your offer ready.
- DO NOT OFFER BELOW ASKING PRICE — if you do you will likely lose the property. Of course have your agent prepare a Comparative Market Analysis to verify that the property appraises. If you submit a cash offer, make sure that your agent adds a clause to the contract reserving your right to an appraisal and to renegotiate or withdraw offer without penalties.
The Seller’s goal is to sell the property at the highest price and close as quickly as possible. To that end banks have their preferences from the offers received:
- Cash offer with no conditions or inspections accepting property as is with all faults. They may favor less money for the assurance of closing.
- Cash offer AS-IS with right to inspect. This is almost as good as the above.
- Financed offer AS-IS with right to inspect with conventional financing. Offers with 20% down or more will be favored above those with lower down payments or FHA financing.
- FHA financing is acceptable but the most desirable in this market.
- Least favored are FHA 203K, because they take very long to close and often fall appart before they close.
You should expect from the bank clear title and all fines resolved to the date of closing. However, many banks will not resolve code violations unless they are considered title defect that will not let the property be insured for title. If you have any question or need assistance you can contact me at 305 510-0647 or my associate Alex Salazar at 305 807-0931.