By Creighton A. Welch – Express-News
If you’re in the market for buying a house, buying a distressed property might be an avenue to look into.
But when buying a distressed home, make sure you know what’s involved, how the process works and the challenges you may face. Otherwise, you might become more distressed than the actual house.
“The perception of getting a great deal is definitely there, and in many cases you do get a great deal,” said Mike Ochoa, a real estate agent with Keller Williams Realty who focuses on short sales. “But you have to be patient. There are a lot of pitfalls that can be there.”
Distressed properties typically either are in foreclosure or are being offered through a short sale. In a short sale, the bank or mortgage lender will agree to discount the balance left on the loan, which helps the homeowner avoid foreclosure.
Often, buyers can find great deals on distressed properties, which is what makes them attractive.
Ricky and Sarah Alaniz recently purchased a foreclosed condo unit at the Camp Street Lofts.
Because it was foreclosed several years ago, the bank was ready to sell it at a discount, and “we were able to purchase it at it a good price,” Ricky Alaniz said.
He said it was cheaper by about $30 per square foot than a similar condo in the complex that was not in foreclosure, which ended up saving the couple about $30,000.
“It turned out to be a very positive experience,” he said. “It took a couple weeks longer, simply because there were some issues that were not resolved” ahead of time.
Ochoa says a short sale could take 90 days because of all the parties involved, and buying a foreclosure could take a similar amount of time.
Because a bank or lender often controls these properties, they act as another player in the process, which can add to the time it takes to buy a property.
Buying a distressed property “can sometimes be rather lengthy because there are multiple interests involved,” said Lisa Schmidt, a real estate agent with the Phyllis Browning Co. “Depending on the depths of the bank’s involvement, it tends to make the process a lot longer because you have more people who have to approve or check off on things.”
But banks with foreclosed property can sometimes represent the buyer.
“The bank that owns the property or is handling the property may be interested in providing the financing to the new buyer and so that can be a plus,” Schmidt said. “You’d want to compare what they’re offering with other lenders, but that can be a potential plus.”
The Alanizes financed their condo with the bank that had foreclosed on it. Still, working with a bank on a foreclosure made a difference compared with buying a conventional home.
“The difference in my perspective was mostly the financing end of it, where lenders were a bit more leery of financing an empty space,” Ricky Alaniz said.
Banks often will review their offers for foreclosed properties to make sure the offer covers all the debt owed against the property, because the mortgage might be just part of what’s owed. If there are condo or HOA fees, taxes or a home equity loan, that debt will be included in the purchase price a bank will accept.
Ochoa, who has been specializing in short sales since 1994, says buyers often can find better deals through short sales than through foreclosures.
When a lending institution takes the time to prepare a home for the market, whether that means paying any owed taxes or fees or repairing any damage, the bank may net as little as 40 percent of the original appraisal, he said.
“A bank foreclosure can cost the bank a lot of money,” he said. “On a short sale, we have a little bit more room. The lenders are going to tell us what kind of room we have to price it.”
When buying a distressed property, one risk is that the house is physically distressed as well. The Alanizes bought an empty shell because they wanted to design and build the interior themselves. But even with that shell, there still were plumbing issues that never had been taken care of and that delayed closing by several weeks.
“Maybe those owners weren’t able to keep up with the maintenance,” Schmidt said. “Certainly not all are in bad shape. Many are nice homes that were well taken care of.”
In some cases, prospective buyers might not have the opportunity to inspect the home before closing, Schmidt said.
“The banks are often in the mind-set of selling it in an as-is condition,” she said.
Another caution with buying a distressed property is that it could carry that price stigma throughout your ownership.
“I look at track records,” Ochoa said. “The majority of times, if you bought that foreclosure and you got that discount on it, you’re going to have to go around and sell for that discount.”