OK, so let’s say you are a first-time home buyer and home prices have finally reached a place where you can afford to buy. You’ve got some money for a down payment, and you’ve been pre-qualified for a home loan. Maybe you’ve even made offers on short sales that seem to go nowhere, and you’re getting frustrated waiting for something to happen. You’ve found a foreclosure that you like. Sure it needs a little work, but it’s in your price range and you’re not afraid of a little sweat equity. After all you’re pretty handy with a hammer and a paint brush.
Here’s the challenge: bank owned properties typically need repair, but the seller (bank) wants an a-is offer and will neither make the repairs or pay for them. Meanwhile, your lender (also a bank, maybe also the seller) will likely require repairs before they will make the loan. Seems kind of self-defeating, and it is by conventional methods.
You can’t afford the repairs because you’re using all your savings for the down payment. So what do you do?
Build the repairs into your offer. Ask your lender or Realtor for a list of typical items that the lender will require, then go and perform a thorough visual inspection of the property. Estimate the amount you’ll need and add it into your offer price, then ask the seller to credit you for repairs. You have to keep it reasonable, though, say within 3-5% of the offered price. Most bank sellers will entertain this kind of offer, and it can even work for FHA and VA loans.
The point is to ask for these concessions up front. Once you have presented your offer, it will be nearly impossible to ask for additional concessions. The easier you make it for the seller, the more likely they are to agree.
VA loans are just as likely to succeed with REO as any other conventional loan, they just take a bit more work and preparation. They can also be competitive, but the competition is fierce for well-priced homes. That may change some over the next few months, since we expect the available inventory to increase. Since February the national foreclosure moratorium clogged things up, but that’s started to loosen. So, patience and persistence will pay off. Hang in there.
With a VA loan, try to get a termite report in advance. The idea is to structure your offer to allow some buyer money to pay for repairs. If you know what the cost will be, you can ask the seller for a specific credit for VA required repairs in your offer, say in lieu of a credit for closing costs, then add the amount to your offer price. Most REO sellers will consider this an attractive offset. If you include the report and the Section I estimate, it would be a compelling offer. Sometimes the listing agent will have a report already, if not call in some favors and get your own. Of course this could get spendy if you have to do it over and again. Keep an extra watch for listings that are seasoned for 60 days or more because there will be less competition, but your VA offer should stand well among multiple offers. Seller will almost always ask multiples for a ‘final highest and best’ counter offer, so you might get a second shot at the price.
There’s a lot of buzz about loan modification, a process where borrower and lender renegotiate the terms of a home loan so that the monthly payments are lowered. Either the interest rate is reduced, or the repayment term is lengthened, or both.
The federal government, that is, both the administration and Congress, seem to think loan modifications are key to correcting the home loan mess. We disagree.
In fact, our opinion is that in general, loan modification only adds to the problem. We read recently where something like 3 out of 4 modified loans re-default within 6 months. 6 months! What are the numbers after 12 months? Basically, loan modifications are just extending bad debt further. This is exaggerating the problem, not solving it. Still, individual borrowers may get some short-term relief from a loan mod.
But be careful! We’ve heard some horrible stories about people who still lost their home to foreclosure after paying lots of front money to “professionals” who offered to negotiate a loan mod. They take your money, do nothing, and then they stop answering the phone.
Always interview more than one lender, ask a lot of questions, and don’t pay anything up front.
If you owe more than your house is worth and are having trouble keeping up with your payments, this is our first recommendation.
Very simply put, a Deed In Lieu of Foreclosure gives the property back to your lender, who forgives the debt, and you walk away mostly intact. You suffer far less damage to your credit and the lender suffers fewer losses than with either a short sale or a foreclosure.
If the circumstances allow it, this is door #1. Ask your lender about it, they should be very helpful in determining if this will work for you. After all, they’re plenty motivated to cut their losses, which are already substantial.
It’s almost certain in Silicon Valley.
Because of the overwhelming number of short sale offers, it can take months before the bank can review yours. If there is a second lender, it could be another few months before you get a response.
Meanwhile, if the seller misses enough loan payments, the foreclosure process starts almost automatically, with a definite time-line. It’s common that foreclosure will happen before the bank can respond to a short sale offer.
We’ve noticed that home values in some local areas have slipped lower than they were in 1997. Chances are good that if you bought a home in the last 10 years, you owe more than your home is worth.
Before you try a short sale, ask your lender if they will consider a Deed In Lieu Of Foreclosure. Just call customer service. This is one of the least understood, yet best alternatives to foreclosure, and well worth the time to check it out. You might not qualify, but if you do, it may save you from foreclosure.
Why are they so difficult? Why do they take so long?
We get asked a lot of questions about short sales. Short sales are usually challenging and frustrating for everybody, and have little chance of success. Popular opinion is that banks seem to favor foreclosure instead of short sale. It sure seems that way.
But that’s not it. Foreclosure is far more costly to the lender than a short sale. Banks want to approve short sales, but have been overwhelmed with offers, and simply don’t have enough qualified staff to process them. It might be 90 days or more before an offer actually gets reviewed. If there is a second loan or lien, then it’s practically impossible to get a short sale approved.
Banks aren’t being stubborn, or even stupid, as we’ve heard suggested. They just can’t handle the volume. This is the consistent feedback we get from within the default servicing industry.
If you are a buyer, ask your agent if the listing you’re interested in is a short sale. You’re going to have more success and a lot less stress trying to buy something else, like a foreclosure. Chances are that if you wait long enough, that short sale listing will become a foreclosure anyway, and it’ll probably be a bit cheaper. We’ll blog about that later.
If you are a homeowner considering a short sale, a great alternative is a Deed In Lieu Of Foreclosure. We’ll blog about that later, too. In the meantime, you might want to google that term and ask your lender if they’ll consider it. The circumstances have to be right, but it might save you both a lot of grief.
