A tanking housing market at the end of the 2000s left a lot of people without homes. With indications that the housing market has bottomed out, however, it could be a good time to get back into the real estate market. One way to get a good deal on a house is to purchase a distressed property. But before you go house hunting, take a crack at this quiz to test your distressed property knowledge.
Fact or Fiction: There is no difference between a short sale and a foreclosure.
Short sales and foreclosures are actually two different types of distressed properties. Foreclosures are homes that have been repossessed from their owners for failure to pay their mortgages. Short sales are deals that close before foreclosure, thanks to an agreement between buyer, seller and lender.
Fact or Fiction: A distressed property is a property whose owner has defaulted on their mortgage.
A distressed property is the real estate term for a home whose owner has fallen behind on their mortgage payments. Properties don't need to be foreclosed yet to be considered distressed.
Fact or Fiction: In 2011, a full third of homes on the market were distressed sales.
Despite positive economic indicators, and some experts claiming that the housing crisis might be over in early 2011, the volume of homes that were foreclosed on or soon-to-be foreclosed on hadn't decreased much. One out of every three homes on the market were distressed sales in the first quarter of 2011.
Fact or Fiction: Banks will usually try to get more for a distressed home than a regular home, so they can recoup their losses.
Since they are eager to get distressed homes off their balanced sheets, banks will actually list distressed homes for less than they normally would.
Fact or Fiction: Distressed homes are always sold "as-is," leaving all repairs to the new owner after the sale.
In most traditional sales, the seller takes responsibility for making repairs, or at least makes price concessions to account for the damages. But with distressed homes, the seller is in financial straits and can't afford to pay for those improvements. So distressed properties are sold as-is, leaving those improvements in the hands of the buyer.
Fact or Fiction: If a home you are interested in purchasing is too severely damaged, the lender might deny you a loan because the property is "deemed unlivable."
Lenders won't finance your purchase of a home that is so damaged that it's considered "unlivable." So, if your distressed home has extensive damage, you might have to find a way to finance the repairs before you can get a mortgage loan.
Fact or Fiction: There is no need to be pre-approved for a loan before negotiating a purchase of a distressed home, since the process takes so long.
Lenders only want to deal with serious buyers when it comes to distressed homes. That means they will only entertain offers from buyers who have preapproval for a loan, or buyers who can pay in cash. They don't want to spend too much time entertaining offers from buyers whose financing doesn't pan out.
Fact or Fiction: The National Association of Realtors began offering a certification for experts in short sales and distressed properties in 2009.
Because of the large amount of distressed homes on the market, the National Association of Realtors started a new program to certify its agents in listing distressed homes. It's a good idea to have an experienced agent, certified or not, on your side when looking into distressed homes
Fact or Fiction: It's a good idea to buy a foreclosed home in a neighborhood where most nearby homes have been foreclosed on. It will make the price even lower.
A neighborhood full of foreclosures is really a sign that the neighborhood might take a long time to bounce back. Buying a home in one of those neighborhoods might get you a very low price, but there's no telling when the values in the area will stop dropping.
Fact or Fiction: Banks selling distressed properties will not allow prospective buyers to have home inspections done.
Just like any other home, you should have an inspection done on a distressed home before buying. In fact, since those homes are usually damaged, it's even more important to get an inspection. If a bank refuses to allow an inspection, you should walk away from the deal.
Fact or Fiction: Foreclosed homes usually have damage, such as missing appliances and fixtures, or vandalism.
Foreclosures are emotional, so former homeowners might inflict damage out of anger. Thieves, vandals and squatters can also cause damage to foreclosed homes.
Fact or Fiction: Closing a deal for a distressed home is extremely time consuming. It can take up to 12 months from start to finish.
From filling out paperwork to waiting for bank approval, distressed home sales are a time consuming process. That's more true for foreclosures. Depending on applicable state laws, those transactions can take up to 12 months to be completed.
Fact or Fiction: Just like any other real estate sale, the seller usually takes responsibility for paying closing costs in a distressed sale.
Because of the money woes of the sellers in distressed sales, the buyer has to take responsibility for expenses like closing costs.
Fact or Fiction: Banks and lenders will typically not entertain any counteroffers from prospective buyers of distressed property.
Lenders will entertain counteroffers if your initial offer comes in too low. They will usually only listen to one or two offers before walking away, however.
Fact or Fiction: There is no difference between an REO and a foreclosed home.
An REO (real estate-owned) home is a listed home that has been foreclosed on. However, not all foreclosures are REOs. Some foreclosed homes sell at public auctions, instead.
Fact or Fiction: Because of the housing crisis, larger homes are in less demand, and can offer the best deals of any distressed properties.
Larger homes are less popular post-housing crisis since they tend to be more expensive. The increased supply of large homes on the market means they tend to be cheaper than they would have been before the crisis.
Fact or Fiction: Since banks are so desperate to unload distressed homes, buyers don't need to offer much of a down payment to purchase them.
Banks often receive cash offers from investors on distressed homes, so buyers need to show that they are serious. Offering a larger-than-normal down payment is one way to make an impression.
Fact or Fiction: Often, distressed homes' mortgages have been sold to third parties through securitization. That third party, usually an investment manager, will have to approve any short sale deal.
Distressed homes whose mortgages have gone through securitization can take even longer than other distressed homes to close. The investor has to approve any decisions the lender makes on whether or not to accept your offer.
Fact or Fiction: States do not have jurisdiction over foreclosure law, so you do not need to research state regulations if you are purchasing a distressed home.
Each state has its own version of foreclosure law. You should familiarize yourself with the laws in your state, since they could determine how long you have to wait before a foreclosure can be put up for sale.
Fact or Fiction: You shouldn't use a real estate agent if you are buying a distressed home.
An experienced agent can be a big help in navigating the unique complexities that will come up in the process of making an offer on a distressed property.
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