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NewVintageHome  Where life begins...
These days, the most frequent question I get asked is:  
What do you think about buying foreclosed homes?  (Or, something very
similar.) As simple as this question may sound to answer, there are
surrounding circumstances one should consider.

1)        Is this a good time for –you- to be buying?  This answer is relatively
easy to ferret out. If the person / couple is qualified to borrow, then it’s
probably a good time to buy!  (See below regarding waiting for prices to
drop.)

2)        Are you looking to live in the home for more than a few years?  This
answer will help me understand whether you are looking for an
investment property, (to rent out), or a primary residence. Statistically and
historically speaking, you should plan on making a sizeable profit over the
next few years. The general pull back in prices has pretty much assured
us of this, (in Santa Clara County). Capital gains taxes should be
considered.

3)        Are you also asking about homes in, (or near), default, but have not
been ‘repossessed’? They are called ‘short sales’. Basically, this is
when the mortgage lender has looked at the homeowner’s financial
situation and is in agreement the homeowner will no longer be able to
make their monthly mortgage payments. The lender agrees to (possibly)
take less proceeds from the home’s sale than it will take to pay off the
outstanding loan/s against it.   

Whether you are considering buying a bank owned home (often referred
to as an REO, Real Estate Owned property), or a ‘short sale’ property not
yet in the bank’s hands, you and your Realtor, or real estate agent, could
be in for some tight negotiations. Some of the items ‘on the table’ will be
price, close of escrow date, closing costs, whether or not you (as the
buyer) must pre-qualify with the current lender, the agent’s commission,
and even whether or not you will actually be the fortunate new homeowner.

You must watch out for the last of these negotiation items!  Lenders
customarily use their own Purchase Agreements. This means your agent
may be seeing this particular contract for the first time. Be sure –you-
know what’s in it. One of the gating items could turn out to be the lender
has the option of backing out prior to close of escrow because of a better
offer.  

With the above in mind:

4)        Do you have time and patience to work through what could be a
longer than usual negotiation process?  Each lender has their own
timetable. Unfortunately, your agent is not in a position to make any
substantial modifications to it.  If the seller’s agent is experienced in
foreclosures and/or ‘short sales’ and has already received and
authorized price and terms from the lender, the process could easily be
less than 30 days. Otherwise, you may be looking at 60+ days from start
to close.

5)        Something significant to consider:  Let’s say there are two homes
on the same block with closely comparable ‘trimmings’, (number of
rooms, size of lot, upgrades, landscaping, upkeep, etc.).  Both homes
were purchased 3 years ago for $650,000.  Homeowner (A) put $100,000.
down and has been making principle and interest payments for the past
3 years. Homeowner (B) got 100% financing with an interest only loan.     

Now both of these homeowners have to sell, (for any number of reasons).
Due to the downturn in the market, the going price in the neighborhood for
the ‘exact’ home is $610,000. If Homeowner (A) owes about $545,000.
and Homeowner (B) owes $650,000. which home is most likely to be the
better buy?  

The answer:  It might surprise you to discover the answer is not as
obvious as it may seem on the surface!  It will depend on the willingness
of each party to take a loss. Homeowner (A)’s invested equity is at risk.
Homeowner (B)’s lenders’ funds are at risk.  (This also sheds some light
on why these types of loans are no longer available!)

In this case the answer will lie with the owners:  Will homeowner (A) be
willing and able to give up some of their hard earned equity?  Will
homeowner (B)’s lender be willing to give up the bank’s invested
money?  

Here’s where negotiation skills come into play!

As for the question is it a good time to buy? (Whether it is a foreclosed
property, a ‘short sale’ or just someone trying to sell their home.)  The
answer is absolutely! Why:

•        Interest rates are still holding at historically low rates. (Albeit,
qualifying is more stringent.)  
•        There are many, many homes available priced way below (even
today’s low) market value.
•        The reasons we have been in this market trough are being
mitigated. (You’re welcome to have me explain this…)
•        The homes bought in the last 2 of the past 5 years that have
contributed to the lower market rates were bought at higher prices than
the ones in the first 3 years.  This may sound confusing.  

Think of it this way: Person (1) bought a home for $500,000 mid-2004.  
Person (2) bought a duplicate of it down the street for $550,000 in late
2006. If you are waiting for home prices to come down because there are
still 1 ½ to 2 years worth of Adjustable Rate Mortgage loans you’re waiting
for to collapse, and force those homeowners into selling, remember the
‘late comers’ owe more than the ones who bought first.

It is possible your waiting will be to your advantage, (rates –might- get
better, your dream house –might- come on the market later…). It is just
as possible you are passing on the current opportunities, and possibly
better rates and your dream home is waiting right now!  No one knows.
The best we can do is apply the best logic we can to formulate ideas for
ourselves.

I recommend to people standing on the sidelines, either buyers or
sellers, make their calls to their lenders, mortgage brokers, Realtors,
accountant, etc., and get information on what options are currently
available.  Find out if the timing is right for YOU.  

If you have comments on this, or any other real estate / mortgage
related topic, you are welcome to:  Contact Kathryn

      
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