Fact or Fiction: Distressed Properties

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.

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.

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.

Since they are eager to get distressed homes off their balanced sheets, banks will actually list distressed homes for less than they normally would.

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.

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.

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.

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

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.

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.

Foreclosures are emotional, so former homeowners might inflict damage out of anger. Thieves, vandals and squatters can also cause damage to foreclosed homes.

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.

Because of the money woes of the sellers in distressed sales, the buyer has to take responsibility for expenses like closing costs.

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.

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.

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.

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.

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.

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.

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.