Ways to Really Make Distressed Sales Profitable!

Wendy Weir
Published on October 23, 2017

Ways to Really Make Distressed Sales Profitable!

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If you are in the market to buy a home, don’t overlook the “distressed sales” that come from foreclosures, short sales or Real Estate Owned sales (REOs). Many buyers associate distressed sales with “deals” and see a money savings in their future. More risk-averse buyers hear “distressed” and steer clear.

While all distressed sales aren’t created equal, each type should be approached differently. Before you set out in search of your next home, educate yourself on distressed sales terminology.

Short Sales

Short sales are home listings where the current market value of the home is lower than what the homeowner owes to the bank. Most of the time, the seller’s short sale position is of no fault of their own. A job transfer, divorce, or growing family could mean a move is necessary. Unfortunately their home’s value took a hit since they purchased the property. Distressed sales in this are have fallen off dramatically since the market crash in 2007.

The Risk

  • Short sales are complicated because although a seller has control over the sale, they need the bank’s permission to take less than what is owed.
  • Even if a buyer may makes an offer that the seller accepts, it could take months for the bank to respond (even if there is a signed contract.) The bank can add conditions such as asking a buyer to bring money to the table, or countering on price.
  • This added delay scares some buyers off because they want to be in their new home by a certain time. Because of this, don’t get emotionally attached to a short sale home. Agreements can fall apart if the bank rejects an offer, or the seller and bank can’t come to terms.

 

The Upside

  • If you are not in any rush to get into a new home, you could get a good deal, sometimes up to 10 – 15 percent below market value. The longer the process goes on, the better the price. In some cases, the market is improving as the bank works through its processes.
  • Short sale sellers tend to price their listings below market value because they know that many buyers won’t want to wait around or deal with the uncertainty of the bank’s decision. So, the price suffers, and the patient buyer wins.

Foreclosure sales

Buying a home through a foreclosure sale should be reserved for only the savviest of real estate investors. A foreclosure is when a homeowner doesn’t make their mortgage payments over time. The bank begins the foreclosure process and sells the home to the highest bidder on the courthouse steps, auction style. If the loan amount is much lower than the market value of the home, you can expect to see bidders there. If the mortgage amount is more than the market value and nobody purchases the home, the bank is forced to take the home back and become the new owner. As mentioned, these distressed sales are very tricky – and should not be attempted by anyone other than a very experienced investor. A great article on this is ‘How to avoid the sting of Foreclosure

The Risk

  • Bidders must show up with a cashier’s check in hand because foreclosure sales are cash-only sales. There is no asking the bank for credit or a refund if there are problems.
  • Foreclosures are sold absolutely “as is.” These homes are not listed for sale on the open market so bidders don’t get the opportunity to step inside to inspect the property.
  • Additional liens on the title, tenants in place, or any number of red flags, all make the purchase riskier because they become the problem of the new owner.

 

The Upside

  • On average, foreclosure sales are priced at least 25 percent below the market. Typical foreclosure buyers will take on the risk and do what is necessary to make the home marketable for sale or rent.

 

Real estate owned (REO) sales

If nobody purchases a home at a foreclosure sale, the bank takes it back and it becomes “Real Estate Owned” or REO. Banks don’t want to own real estate so the property will get listed and sold as quickly as possible. You can find bank-owned homes for sale through online listings and your agent.

 

The Risk

  • Like foreclosure sales, there are few to no disclosures and the home is sold ‘as is’.
  • With an REO, you can actually go inside the home, look around and have the property inspected. They may even have open houses. But there is still a bit of a risk without a homeowner to answer questions.

 

The Upside

  • REOs are generally listed at 15 to 20 percent below market value because they need improvements, both cosmetic and structural.

 

Does a Distressed Sale Home Still Sound Appealing?

Now that you know the different degrees of distressed sales, if you decide you are interested in one of these types of properties, keep your lender in the loop. When you’re writing a purchase agreement (contract), it’s easy to forget about your lender in the excitement. Your lender must be involved because a purchase contract can impact the lending process. Here are 10 FHA Guidelines every home buyer should know. Quite honestly, many FHA loans won’t approve a ‘Distressed Sales property’. But the information here is very valuable if you can go this route!

 

The purchase offer must match loan documents

Names in the “buyer” section of your offer must match the names on the loan application exactly. This small but critical detail can delay or kill a deal. If you use an entity like a trust or a business as the buyer, ( an LLC or limited liability corporation) you’ll be forced to change the contract to human buyers that match the loan application. Mortgage loans must be made to humans, and later, usually the same day, or at the closing table, you can transfer to the LLC post-close, if that’s your goal.

 

The lender must approve home inspections you request

Your offer contract will ask you to select which home inspections you want. Appraisal inspections are required by lenders. Optional inspections include contractor, structural, engineering and pest. Some lenders look for red flags that may cause them to request a certain inspection report.

 

The lender must be able to perform on your closing timeline

In low-inventory markets where sellers have the upper hand, buyers who can close fast get the most attention. Your lender will tell you how long it will take to appraise the property, review title history and finish approving you. All you have to do is tell your real estate agent to get the timing from your lender.

 

The lender must be able to perform on your due diligence timeline

Contract timing needs to include how many days are necessary for each stage of due diligence like completing your appraisal, securing your financing, approving seller disclosures, and completing inspections. Just like with the closing timeline, sellers respond well to speed.

 

The lender must approve credits you ask for

Often real estate agents will advise buyers to seek a credit from the seller at closing in lieu of reducing a purchase price. A seller credit enables buyers to negotiate better terms for themselves while also conserving cash because the credit will be used to offset closing costs.

Credits are often they’re requested after an inspection reveals a minor property issue such as scuffed walls or damaged window screens.

 

Congratulations, You Just Purchased a Home from a Distressed Sale!

Now that you have the distressed property, your expenses and renovations can be rolled into the 203K Rehab loan. Here are 26 mini make over tips to save a lot of money fixing up your home.

 

  1. Kitchens and bathrooms are the workhorses of the house. But with the average cost of a bathroom/kitchen remodel at $9,275, consider a DIY makeover instead. A quick, DIY cabinet project can change the whole look of a kitchen. Remove the doors on upper kitchen cabinets and paint the back interior wall an eye-catching color. This creates an open and playful display space that also provides ultra-functional kitchen storage.When remodeling is beyond your budget, the simplest approach is to just clean it up.

 

  1. The bathroom can be low cost or higher budget depending on the price range of the home you’ll be buying.

 

  • What you do to the walls can be a game changer. Painting will instantly transform the space in a variety of ways. Color, works wonders. Have fun and play with this!

 

  • Update the lighting. If the home has dated electric, you will most likely need to invest in wiring first. Once that is taken care of, attach lighting sconces at eye-level on each side of a bathroom mirror for a cleaner, more modern look.

 

  • Depending on your budget, new accessories can include items as small (but with a big impact) as new throw rugs to a new mirror and faucets. Consider at least buying a new shower curtain and coordinating towels and rugs.

 

  • Ditch the plastic switch covers for some of the new ones that come in a wide range of finishes, such as aged bronze and brushed nickel. With a bit larger budget, you can quickly add new life to the bathroom by replacing the drawer pulls and cabinet door knobs to match the finish of the switch plates.

 

  • Finally, don’t forget those walls you worked so hard on, consider staging them with artwork, (under glass frames, due to the moisture in the bathroom).

 

Bigger renovations

Let’s say you found some distressed sales properties in very nice neighborhoods. They of course cost a bit more, but the can still be bank owned, trust owned or in bankruptcy. How do you choose which one to buy? Generally speaking, ranches offer the most flexibility to really make a good profit. Reason being, they lend themselves to the widest range of upgrades and remodeling at a lower cost. For example, you can take an existing ranch and simply begin opening your floor plan. You need to find the right ranch that will allow you to either open walls or possibly remove them.

 

Choosing your realtor

Hopefully, you have found a realtor you trust and enjoy working with. There is however, a very important aspect you need to be aware of when purchasing a distresses sales property. A very small percentage of realtors are actually aware of all the requirements, with the banks, trusts … You not only need the advice of an expert in this field. you must require your agent is not both the listing and selling agent on the property.

So many people feel they will save a ton of money going directly to the listing agent. This is a very bad decision. First and foremost, the listing agent has a ‘Fiduciary Responsibility” to the seller. So if you decide to go to the listing agent on the property, you will be creating a ‘Dual Agency’ contract, which a smart seller will not even consider looking at.

Why? Because the listing agent now actually does not represent either one of you! They cannot advise you on price, or terms (because they know what the seller wants). Then, when you come to the inspection, he/she is again ‘unable and legally bound’, so therefore, unable to assist you to in negotiating the areas you found were problems in your inspection report. You now are responsible to find out where to get bids, where to get the different permits, for; plumbing, heating, electrical and mechanical… You have literally tied your own hands and cut your feet off too. This is my favorite article on Dual Agency, read it very carefully before going down this route!

 

Related Articles;

3 Basic Ways to Make Money from Investing in Real Estate via Maria Mastrolonardo

15 Questions You Must Ask When Buying a Home via Deb Rhodes

How To Spot Past Issues In A Home via Anita Clark

 

Wendy Weir Relocation – Real Estate Agent, Relocation Specialist, Birmingham, MI

 

 

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