Approach distressed properties with caution
Originally appeared in Bay Area News Group publications on September 2, 2011
I admit it – in over 30 years as a real estate broker, I have never represented either a buyer or seller in a transaction involving a “distressed property,” i.e., an REO (real estate owned by banks) or a short sale.
The reason is simple: dealing with banks under these circumstances can be worse than water-boarding torture. Some sellers may have no choice other than to succumb to this process; buyers in the Oakland/Berkeley market almost always have, in my opinion, better options.
The folks who usually benefit most from foreclosures are the small cadre of professional investors who seem to live on the courthouse steps. They pay all cash, get a seriously discounted price, and have the greatest margin for error.
Non-professional buyers, who venture into short sales and/or REOs, however, tend to be unaware of how big a risk they are taking. Instead of getting a bargain, you might end up with more grief than you ever imagined.
Lenders cause stress
A recent survey by the California Association of Realtors (C.A.R.), revealed that more than 75 percent found working with big banks, especially on short sales, “difficult” or “extremely difficult,” describing the short sale process as “broken.” This is despite repeated promises from the largest lenders to improve efficiency and effectiveness.
Survey results described short sale procedures of lenders and servicers as “onerous.” Don Faught, C.A.R. Treasurer, summarized statewide Realtor feedback: “Lenders are out of touch with the realities of the market…”
Communication problems topped the list of complaints. Two-thirds of Realtors surveyed said “it took more than 60 days for lenders or servicers to return a written response on the approval or disapproval of the short sale agreement submitted.” Almost half the Realtors indicated that “it took the lender more than five days to return any form of communication.”
Over half the respondents complained about having to resubmit paperwork. In a “this can’t be happening” scenario, lenders frequently lose documents, insisting they never received them. C.A.R., in letters sent to the large lenders, requested:”Do not ‘restart’ files from square one if something is missing. Allow the correction and continue, without bumping it to the back of the line.”
Giving away your protections
The standard contract used by most licensees to protect buyers and sellers in real estate transactions is the C.A.R. purchase agreement. This document, however, is not accepted by lenders in distressed property sales. Instead, buyers and sellers are forced to agree to legal language, usually prepared by out-of-area attorneys who are not familiar with our market or laws, crafted to favor only the bank.
In most cases, the C.A.R. contract is “countered” by a long addendum that eviscerates clauses created to prevent buyers and sellers from being abused. As an example, a big bank counters that “Buyer has not relied upon any representation by seller or (bank’s name).”
This verbiage is outrageous. In regular property sales, buyers have a right to totally rely on seller representations. That is the whole point of state disclosure laws.
Other wording used by this same lender states that after the date for the buyer to remove his inspection contingency, if he has not told the lender in writing that he wishes to cancel the contract because of inspection findings, “buyer is obligated to complete the purchase or forfeit his earnest money deposit.”
These are just a few examples of how buyers, if they decide to purchase a distressed property, are put in a position of giving away protections commonly provided in standard contracts. I ask my clients, “Why would you want to do that?”
Multiple offers
Distressed properties frequently generate multiple offers because the asking price appears to be a bargain, thereby pushing the price higher. That, in and of itself, decreases the desirability of these houses.
Wait, be rushed
Especially when there are a number of offers, lenders are notoriously lax in responding to bids. Remember that, as above, it is more the rule than the exception that the buyer will not get a written response within 60 days. A common complaint of agents who work with buyers on these homes is that they never even received a response.
After what is usually a protracted waiting period, the “lucky” buyer is then unreasonably rushed to move the escrow along and close.
Condition, inspections
As I have counseled many times over the years, condition of the property is very important and is often given short shrift by both buyers and their agents. This requires even more focus with distressed properties because the owner’s financial situation may have precluded him from keeping the home in top condition. Couple this with the fact that the lender says he knows nothing and will take no responsibility for problems, and it is apparent that an unknowledgeable buyer can fall deep into a money pit that is discovered only after close of escrow.
Final Thoughts
Fortunately, and in contrast to other locations such as Eastern Contra Costa County, only a small percentage of the area and price range I cover involves distressed homes. I understand and respect the fact that many licensees have no other choice but to work these properties. I opt not to because I believe the risks to my buyers far outweigh the benefits.
I would not be surprised to hear from some agents or buyers who say got a “steal,” which they contend only could have happened in a short sale or REO. Congratulations to the small percentage that beat the odds. Many others have nothing but tales of woe and wasted time, effort and money. Decide what is best for you.