Buying Distressed Properties in Ohio
When you think of a distressed property sale, the first words that probably come to mind are bank-owned. But did you know that beyond bank-owned, these transactions come in many forms, including HUD and short sales. Conquering the world of buying and selling these properties requires you understand the difference. Here is a primer to put you on the path of successfully buying and selling distressed properties.
Let’s start with bank-owned, or REO (real estate owned) properties. Banks and corporations that hold liens on a property acquire ownership through the foreclosure process. When a homeowner fails to pay according to the terms of their mortgage, the property is eventually auctioned at sheriff sale. Once the sale is confirmed, the winning bidder becomes the legal property owner.
The process for buying bank-owned or REO properties is generally the same as traditional sales. In short, the process is as follows: you make an offer, the owner reviews and either accepts, rejects or makes a counteroffer. Most are even listed for sale in your local MLS and your Realtor can setup a search that presents only these opportunities.
While much is the same as mentioned, there are, however, important items to note:
- The owner has no emotional ties to the property, and the decision will be solely financial. They simply want the most money they can get from a qualified buyer.
- You must submit your pre-approval (or proof of funds if paying cash) at the time of offer. In many standard Realtor contracts, it is possible to write in a number of days to provide the pre-approval. You can still do so in an REO transaction, but your offer will likely be rejected without it.
- Unless it is an extraordinary situation, don’t expect to get the property far below their asking price. This is especially true in a strong real estate market like we are experiencing right now.
- Beyond the standard purchase agreement, the buyer will be required to execute owner-specific addenda that will supersede the standard Realtor contract. READ THIS CAREFULLY!
- Properties are sold AS-IS. This means you will NOT have the opportunity to negotiate repairs after your home inspection. And depending on the addenda you sign, you might not have a right to terminate based on what you find in the inspection. This is one of many reasons to pay close attention to what you sign.
- Dates are of utmost importance. While an owner occupant might be forgiving if you miss a deadline (for inspection, financing, etc.), a bank likely will not unless you can prove there were extenuating circumstances, but you are at their mercy.
Another type of distressed sale is HUD, which stands for Housing and Urban Development. HUD is a government agency that acquires ownership when an FHA borrower defaults on their loan. How one purchases a HUD property is a different process, however, to other sales. Here are some items of note:
- Properties and additional details can be viewed on http://www.hudhomestore.com.
- A real estate broker that is registered with HUD must place bids. Buyers cannot make unrepresented offers.
- There are periods for individuals, companies and non-profits to place bids. These are noted on the property listing on HUD Home Store. Typically, bids are open to owner-occupants and non-profit organizations first. This is referred to the Restricted period. If no acceptable bids are received during this time, bidding opens to investors and for-profit companies.
- If you are the winning bidder, you certify under the federal penalty of perjury that you will or will not occupy the property. If you will occupy the property, you must certify that you will do so for a minimum of 12 months.
- You must also certify you have not purchased a HUD-owned Property within the past 24 months as an owner occupant.
- There are two types of HUD listings: FHA insured and FHA uninsured. Properties classified as the latter cannot be purchased with a standard FHA loan. Instead, FHA buyers must utilize and FHA 203(k) loan. Read more about 203(k) loans here.
- Pay close attention to dates so that you do not forfeit your earnest deposit.
- Lastly, there will be addenda to the standard purchase contract that must be signed.
The next type of distressed sale is a short sale, which happens when a property owner owes more to lien holders than their home is worth. These scenarios became common when the real estate market collapsed as a result of international financial turmoil. The market peaked in 2008 and home prices rapidly declined for the next few years, leaving many homeowners in unfortunate situations.
Short sales are typically advertised in the MLS, but there are very important items to note. Here is a start:
- Short sales will require patience. Banks are in no hurry to take less than they are owed, and ultimately any contract will require the bank to sign- off on the sale.
- There is no guarantee you will get the home even after waiting, so don’t get emotionally attached.
- There are many reasons the bank might not sign off on the sale, and there is no requirement that they tell you the reason for their decision.
- Timing for inspections and all other contract timelines begin once you receive notification. This saves money in the case the sale never comes to fruition.