Buying a Foreclosure Could Cost You Thousands More

The home down the street you've always loved is on the latest "Foreclosure List".  You think to yourself 'hey, if I wait until it goes back to the bank, I'll get it for a WAY better price', right?  WRONG.  Many people believe that the best deals in real estate today are bank-owned properties, also called foreclosures.  It is true that foreclosures are often attractive to prospective buyers because they are commonly priced below market when compared to similar, non-distressed homes.  True, there are some great deals to be had in the foreclosure market, however, banks have recently realized that they take a greater loss by going through the foreclosure process, and naturally, they build those losses back into the list price when the property goes back on the market - passing the costs along to the consumer.  They've recognized the time-value of money and have become much more likely to discount a property up front (short sale) to preserve assets that would go toward the rehabilitation of the property once they take ownership.  By waiting for that perfect property to come back on the market after the bank takes possession also opens up the possibility for greater competition.  The more interest in a property, the more offers, the higher the sale price.


A short sale is a property offered for sale at a price that is below the debt currently owed on the mortgage.  All short sales are subject to third party (bank or investor) approval.  'But aren't short sales difficult to complete?' Well, this was the case years ago when banks weren't prepared for the tidal wave of defaults that ensued, but they've now realized that it costs them far more to foreclose than to take the loss up-front and accept a short sale - even if it's thousands, or hundreds of thousands - of dollars less than the current debt.

'But doesn't this usually take months to complete?'  Maybe.  It depends on the type of loan, and there are two possibilities:  delegated and non-delegated.  With delegated loans, the investor (private individual, foreign entity, mutual fund, etc.) has authorized the loan servicer to negotiate on their behalf.  Many banks sell loans as packages to outside investors but continue to "service" the loan, accepting the payments from the original borrower for a fee.  Short sales related to delegated loans convey relatively quickly, sometimes as fast as 30 days.

Investors in non-delegated loans have not authorized the debt servicer to negotiate on their behalf, so each interested party must be consulted prior to the sale's approval.  These are the short sales you hear the horror stories about that can take months to complete.  Even so, if a buyer's able to acquire a property at a 30%-40% discount, many are deciding it's worth the time.  The only problem is that it's impossible to know what type of loan is attached to the property without presenting a written offer.  If you receive a response in one or two weeks, it's probably a delegated type.  If you present an offer and don't hear anything for a month or longer, it's safe to assume it's a non-delegated loan.

Most investors today, like the banks, have realized that they minimize loss by proceeding with a short sale and have begun authorizing the banks to conduct those negotiations, making it easier for all interested parties to proceed with a relatively prompt sale.

When you think about it, if you're truly interested in getting a 'screaming deal' wouldn't it be worth waiting 6, 7, or even 9 months if it meant you could buy a $400K home for $280K?  I think most buyers would say YES!