Foreclosures, short sales, and other real estate deals

In today's real estate market there's a lot of talk of foreclosures and bank owned properties for sale. I know I've heard somewhere that, "Values are falling and there's great deals everywhere." That's somewhat true, but not entirely. Like any open market, the real estate market is constantly changing. As I've said in the past, property values are a floating number and what a property is worth today may not be the same value as tomorrow. Just like the car that you drive, groceries you buy, or goods at the farmer's market, prices are constantly changing.

Value can also be a function of motivation. A grocery store that has to sell food that is about to expire will typically set it out on the shelves at a discounted price. Similarly, the foreclosures (also known as REO or real estate owned) currently on the market are priced at levels that say, "buy me today at a discount". For example, I just came across some foreclosed condominiums in Sun Prairie that have been on the market since July of 2008. They are newer 3 bedroom condos and started out priced at $139,900. Some have sold in 2007 and 2008 for nearly $150,000. However as the economy started to decline in the fall of 2008, these condos also saw a decline in their asking price. Until the past few weeks they bottomed out at $104,900 and quickly received an offer at this price.

Wow, $104,900 seems like a pretty good deal, doesn't it. Well, maybe it is. Maybe it isn't. The person who bought their condo next door for $150,000 probably doesn't feel too good about this. But the buyer at $104,900 bought this property without much knowledge of conditions. When purchasing a foreclosure property from a bank, the seller (aka bank) will not give any representations to the condition of the property. They have never lived their and typically will always sell the property in the "as-is" condition. If you have an astute eye for estimating repairs then you might get a good deal. However, if you buy the property and then after closing discover major defects, then profits can quickly disappear.

The other thing you might see in a down real estate market is a short sale. Typically you'll see in the listing that, "property is subject to the lenders approval of a short sale". Quick question. If you lent someone $100,000 and they could not pay you back, would you take less than the amount they owed originally? Would you take $90,000 or $80,000? Or would you hold them to the entire $100,000 for the rest of their lives? In a short sale, this is what's going on. The amount a property is listed for sale is LESS than the amount that the seller owes the bank. In order for this transaction to occur, the bank has to agree to this loss, or "short" amount. As you can probably guess, banks (like other businesses) don't like to lose money and therefore short sales are not easy. If you need to move into a property quickly, a short sale might not be your best bet.

Although if you have to sell your house because you lost your job or had another hardship, it may be better to negotiate a short sale rather than have a foreclosure on your record. In today's tightening lending world, your credit score plays a much larger role than it did in previous years. If possible try to keep your score above 700 at all times and above 740 for the best interest rates. A low credit score may keep you from buying another home for a long time. If you are facing foreclosure contact an attorney or Realtor immediately to discuss some of your options.

Aside from short sales or foreclosures, there are some other good deals on the market. Some people have lived in their homes for a number of years and are not facing foreclosure but they are willing to sell at fair market value. Though this amount is probably less than they would have received a year or two ago, overall it doesn't matter. If you've lived in your home for 5 or more years, there's probably more than enough equity to be able to sell without fear of losing anything.

Whether looking at foreclosure, real estate owned (REO), short sales, or listed properties by a home seller, the biggest challenge in today's market is negotiations. It makes sense now, more than ever to have good information and a trusted adviser in your corner helping to negotiate for your best interests. The real estate market will rebound at some point along with the overall economy. In the meantime, now could be the best time ever to invest in real estate with low interest rates, reasonable prices, and a large selection.

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