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Buying a Northern Virginia or
Washington, D.C.
Foreclosure or Short Sale?
Search Local Foreclosures
Summary:
I have helped clients buy both foreclosures and short sales, but it wasn't as easy as they thought it was going to be. It’s commonly assumed (often based on media reports) that foreclosures and short sales are bargains and therefore an opportunity for easy money, and that banks will take any price you offer. This simply isn’t true.
Detail:
Foreclosure is a process which begins with a notice of non-payment and ends in an auction. It is a proceeding in which the mortgage holder seeks to regain the property because a borrower has defaulted on their mortgage loan payments. The process includes (1) a notice of non-payment, (2) a notice of default, (3) a notice of an auction date, and (4) the auction. The exact procedures are determined by state laws and may vary by jurisdiction. At the auction three things could happen, (1) no one buys it, (2) the property is purchased by the foreclosing party, or (3) the property is purchased by someone other than the foreclosing party. If the lender ends up with the property, it becomes known as bank-owned or real estate owned (REO). Since the lender is not in the business of owning real estate, they'll hire a real estate broker to sell the property through the local MLS on the regular real estate market. (Search Fannie Mae-owned foreclosures.)
Sometime during the process of foreclosure a “short sale” could occur. A short sale allows the owner of the property to sell for less than the amount owed to the lender. (Short sales have a much less negative impact on the buyer's credit rating than a foreclosure does.) The lender is contacted by the owner of the property to request that the lender take less than the mortgage amount. If the lender agrees to consider taking less than the balance that is owed, a “short sale” may occur. (A short sale may also occur for a property that is not in the foreclosure process.) Understand that "short" refers to the bank being "short" on the amount the homeowner owes the bank, not the amount of time it takes to complete the sale. The purchase of a short sales can take 3 months or more to complete -- much longer than the average 1 month it takes to close a regular sale.
Whether a foreclosure or short sale, the lender is always driven by its internal appraisals and number crunching as to when/whether a deal makes sense. The lender may decide that there's a better return on their investment to let a property go all the way to foreclosure rather than going through with a short sale. Don't forget the lender has to calculate in costs like staff to manage the short sale when determining what their best return is.
When considering a foreclosed, short sale, or REO property, go into it with open eyes. First, do your homework about the process. Learn about the process for the type of property in which you're interested and understand your rights and responsibilities. Second, do your homework about the value of the property. Work with your Realtor® to understand the true value of the home compared to the neighborhood market. If the property is in rough shape (and most are), also do your homework as to the amount of money and time will be necessary to make the home safe and liveable. Third, you must have patience, patience, and more patience. The bank will respond to you in their own time in their own way; you can't make them perform. Fourth, the bank is driven by the numbers, often in a formulaic way that may make no rational sense to you -- but there's nothing you can do about it. The bank wants what it wants. Fifth, don't kid yourself; the bank is not going to give away the property. Low-ball offers seldom work, at least not in the DC area.
These transactions -- especially short sales -- require extra time and patience on the part of all parties involved. Some quick points about short sales to keep in mind:
- It usually takes a minimum of 60-90 days before you get a response from the bank about your offer. Most lenders are severely understaffed to deal with the crush of foreclosures.
- There are few industry standards for how to deal with short sales. Every lender is different. Sometimes the lender's own internal policies can change on a daily basis.
- You may feel you're in a "black hole" when it comes to having no or little information on what's going on with your short sale purchase because the lender communicates only with the listing agent and then only on the lender's own timetable. Due to privacy issues, the lender will not speak to the buyer or buyer's agent.
- If there are two lenders involved (a first and second trust), both lenders must approve the short sale and must agree with one another what the second trust lender will accept from the first trust lender as final payment on their loan. If the two can't agree, there's no short sale.
- The lender will be offering the property in strictly "as is" condition, so strongly consider getting a home inspection before making an offer.
- There may be other special requirements the lender has to which the buyer must agree as part of the purchase.
In the Washington, D.C. area, the highest amount of foreclosures are outside the Beltway. The city of Washington actually has the least amount of foreclosures when compared to metro Maryland or Virginia. In northern Virginia, look at Prince William and Loudoun Counties if you want a foreclosure; areas inside the Beltway like Arlington and the city of Alexandria have a lot fewer foreclosures.
In summary, few if any foreclosures are the "deal of the century" many buyers believe them to be. They aren't the best option for every buyer given their timetable, prices, location, and condition. You need to consider hiring a Realtor® like me to help you understand the market and navigate the process. Let me know how I can help!
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