How To Navigate the Purchase of a Distressed Property

In March I wrote about and concluded that while we should have concerns about the potential increase in foreclosures this has to balanced with consideration of what is happening in or local market. That piece generated a lot of interest so I thought I would follow up with a review and tips (courtesy of Trulia) on how to manage the purchase of a distressed property.

 According to Jeffrey Otteau of the Otteau Valuation Group in April New Jersey recorded the 12th lowest rate of foreclosure filings. In April, 0.04 percent of all NJ homeowner households filed for foreclosure compared with 0.18 percent nationally. But the lower level of filings is due to the freeze on foreclosures due to concerns about improper documentation. If the freeze is lifted we could see many more foreclosure filings especially in rural area like Sussex and Warren Counties and in inner cities.

As a buyer, how do you navigate the process of buying a distressed property?

1. Expect delays. Banks do not have the same sense of urgency as the “ regular” seller. A “normal” transaction might take 45- 60 days from signature to closing; short sales can take much longer. Take this into account when negotiating your mortgage and locking in the interest rate. You might set aside an allowance in case you have to extend your low interest rate.
2. Make a Smart Offer. Don’t assume that the bank will accept any offer which might be a fraction of the market value. Banks have a duty to their shareholders and investors to get the best price they can. Work with your agent; look at comparable sales and make an offer which makes sense for you and is not way out of the ball park in terms of fair market value.
3. Postponements and Cancellations Happen. Understand that if you are in contract on a short sale you do not have a deal until the bank approves a transaction – even if the sellers have agreed to the sale. Last minute delays happen.
4. Communication Issues. In a “normal” deal the listing and buyers agent are in constant communication – you can expect to know what is going on. If you make an offer on a bank owned property or short sale you might go for weeks without knowing what is going on. Continue house hunting and get your agent to call the REO listing agent or the short sale listing agent regularly.
5. Respond in a Timely Manner. Make sure that you respond in a timely manner to the bank’s requests and your obligations even if the bank does not. Working with the banks terms is unavoidable when you buy a distressed property
6. Work with an Experienced Agent. Choose an agent and an attorney experienced in the purchase of distressed properties.

Distressed properties can offer great value; make sure that you understand the process, manage your expectations and get yourself an agent and an attorney experienced in managing the process. And do not expect there to be too many right now in Chatham!