Buying a Foreclosures, Short Sales and Zillow Pre-Foreclosures
I’m about to explain the part of real estate that attracts buyers like a Home Shopping Sale Rack. The impression buyers have of Foreclosures & Short Sales is that they can grab something super cheap and make lots of money.
Foreclosures and Short Sales get the reputation of “Discount Purchases.” But we’ve all seen too many home flipping shows to know that’s not always the case.
Here’s what you need to know as a buyer.
Buying a Foreclosure
Foreclosure is a legal process that begins when a homeowner is unable to make their mortgage payments. The lender can then step in and take the property. The lender usually either sells the property to a third party, or sells it themselves on the open market.
From a buyer’s perspective, you will see homes listed as bank-owned or REO property. This signifies it is a Foreclosure.
What that Means to a Buyer:
Let’s just say that Foreclosures are usually the Ugly Step Sister on the block. There’s certainly some surprises when touring these homes.
Mold? Maybe. Holes in walls? Could be. Rodents? Sure!
Just make sure you don’t look cute when you take a look a look at these homes because you truly don’t know what you’re walking into.
That’s because foreclosed homes can sit vacant for months, maybe years before they get put on the market. They are often pretty rough around the edges and sold As-Is.
As for timing, don’t be afraid of the sales process. Buying a foreclosed home takes about the same amount of time as a regular property. You can own the property within 30-45 days.
Buying a Short Sale
Okay, most people get foreclosures, but short sales are WAY different.
The seller is the homeowner, not a third party or the bank. So, a short sale is essentially when the seller asks the lenders if they can sell the house for less than the amount owed on the mortgage. And the lenders have to say yes.
This creates a lot of paperwork & a lot of beaurocracy. Buckle in, this usually is a long process. Just to be safe, mentally prepare for 6 months. It could be more or less. But that’s where you head should be.
You will sometimes see short sales listed for WAY BELOW market value. Like, a $500,000 house listed for $299,000. But settle down everyone, there is no way the house is going to be sold that low.
That pricing is a strategy by the listing agent to get as many eyes on the home as possible. Hopefully they will get enough people to notice the property and they’ll get some offers quickly. Because once they have an offer, they can present it to the bank and the short sale process can begin on that end.
The lender will (eventually) come back with the number they would accept, and it’s going to be MUCH closer to market value. So now, whether these original buyers want the house for that price or not, at least the sellers know what the lender will accept. Short sales are much smoother once the seller has this nod of direction from their lender.
And What about Zillow Pre-Foreclosures?
I almost was going to skip writing this section (you’ll see why if you keep reading) but I get asked about these properties ALL THE TIME so I figured it was important enough to get some things straight about Zillow.
First of all, you HAVE TO start thinking of Zillow as Craigslist in terms of accuracy. There is absolutely no monitoring of this site and it is not held to any standard of reliability. It is NOT the MLS (multiple listing service).
So when Zillow has homes listed as pre-foreclosure, what does that mean?
Buying a Pre-Foreclosure
A pre-foreclosure is when a homeowner is in default on their mortgage, but the home has not been foreclosed yet. So essentially, the property is not technically for sale.
Zillow makes it seem as though these are “secret” deals in your neighborhood that you are missing out on by looking through the regular MLS. The reality is these homeowners typically get caught up, get their home out of default, and go on living their lifes.
The part I HATE about this is that these people are our neighbors and friends in a blimp of financial strain, and Zillow is highlighting their addresses as deals to be made. I cringe when clients ask me to call these people seeing if they want to sell — knowing that the likely scenario is the home will never exchange hands. It used to be more of a hunt for investors to find these pre-foreclosure properties, but now that they’re on a super common site like Zillow, the average home buyer doesn’t quite separate the process from the general MLS. It’s NOT just a “reach out and see” type of process, as with other homes actively being sold on the market. You have to do your research, and most of all: proceed with care.
What that Means to a Buyer:
To keep it frank: for the average buyer this is typically a dead end.