On the surface, bank owned properties seem like a great deal. Often, they do offer significant savings. Yet the purchase of a bank owned property, whether it is a short sale or a foreclosure, also comes with specific parameters and cautions for the buyer and the seller. Buyers must remember that a bank owned property purchase is vastly different from the routine property acquisition.

Bank Short Sales Statistics in Southeastern Virginia

Halfway through 2010, there are over 50 bank owned property listings in Williamsburg, James City County, Yorktown, Northern York County and sections of New Kent County and Charles City. In Hampton and Newport News Virginia, there are approximately 175 bank owned homes for sale. In the Northern Neck Counties on the Chesapeake Bay, there are 28 short sales and foreclosures for sale. These numbers indicate the recession is not over. Homebuyers can expect bank short sales and foreclosures to be listed for some time to come.

Short Sale Process

For property owners who are underwater, or owe more on the home then it is currently worth (and/or cannot afford their present mortgage due to reduction in income, unemployment, or change in life circumstances) a bank short sale may be a viable option.

Bank short sales are a tedious process. Those banks who accepted TARP money, such as Bank of America or Wells Fargo (the former Wachovia) are more inclined to short sale a property. These banks actually have the leverage to take the loss on the loan.

Some banks are not so amicable about a short sale. Instead these banks allow properties to go into foreclosure. Statistically, an average of 75% of short sales are withdrawn or often end in foreclosure. Banks can hold the inventory this way, and wait for property values to increase.

Buyers and sellers need to know that a short sale may take anywhere from four weeks to eight months or more to complete. If a buyer and seller are participating in a short sale, they must be patient.

Bank Short Sale Issues

There are some tricky issues with short sales of properties. To complete a short sale, a good attorney is necessary. The attorney will negotiate with the bank to obtain the best possible conditions for sale of the property. When there is a second mortgage on a property, there is little chance the company will receive any proceeds from the short sale. Since the second mortgage stands to loose the most from a short sale, the company may hold up the process.

Making a short sale on a property does not ensure the property owner will leave free and clear from financial responsibilities. Mortgage companies may still elect to hold the former homeowner responsible for financial losses even after a short sale is completed. A knowledgeable REALTOR will retain a qualified real estate attorney to ensure that the final contract includes verbiage requesting the remainder of debt owned by the first or second lien holder is forgiven. Inserting this clause may or may not work, but it should be written into the contract.

Foreclosures

The best way to find a foreclosed property (or a short sale) is to retain a qualified REALTOR in the desired area. This REALTOR will conduct a special search on the MLS for bank owned properties.

Foreclosed properties may be recently vacated, and some may have been left empty for a year or more. Some property owners elect to speak with their lender about their inability to maintain the loan, then voluntarily vacate the property instead of waiting for foreclosure. The homeowner will send the deed and keys to the lender and leave the premises. If a homeowner leaves in this manner, some banks may even forgive the unpaid balance.

Mortgage companies and banks like to privately “extend and pretend.” This means the lender acts as if the loan is performing so they don’t have to declare it as a non-performing loan. If the loan were classified as non-performing, the bank would have to pay more reserve money to ensure the investment. Bank owned properties stand vacant longer in this market for this precise reason

Once the lender takes possession of the property, it has the option to auction the foreclosure at the courthouse. Often these home auctions will only net 50% of the home’s value. If a lender cannot obtain enough money for the foreclosed property through public auction, it may hold it and leave it vacant or put it on the real estate market.

Condition of Bank Short Sales and Foreclosed Properties

Short sales and foreclosures are sold ‘as is,’ without negotiating repairs. The property can be inspected, but even if something is found wrong, the property owners are not required to do anything. The buyer, on the other hand, may need to meet certain conditions for the lender. Some may require moisture and termite inspections, or well and septic inspections, and theses costs are the buyer’s responsibility. Do they want to bear it? The seller will more than likely not want to pay for inspections or upgrades to present systems.

Some short sales and foreclosures are in pristine condition, whereas others are ‘buyer beware’ since they have repair issues. It just depends on the situation. An inspection is well worth the money, and certainly a good decision for a short sale or foreclosed property. Buyers and REALTORS should be on guard for extensive damage, wear and tear and possible structural problems. Avoid purchasing homes where large capital investments are needed to make the home livable: faulty sewers or wells, asbestos, bad roofs, lead or leaky waterlines and malfunctioning electrical are some of these. Even a small or negligible repair issue may grow greater the longer the house is uninhabited and the problem is ignored. Vacant homes are more likely to be filled with rodents and pests and even snakes and small animals. Look for signs of these when viewing the property.

Even if you are not the type of person who wants to take the risks of purchasing bank owned properties, do not let it defer you from purchasing a home altogether. All investments are a risk. It is often better to know what these risks are up front. If, after reviewing the conditions of buying bank owned properties, you decide it’s not for you, then consider purchasing a home through a traditional real estate transaction instead. There are still plenty of great bargains on home purchases.

About the Author:

Elaine VonCannon, is a REALTOR, Notary, Team Leader, Property Manager and an award winning agent in the RE/MAX Hall of FAME. Visit www.estatesinvirginia.com  or www.voncannonrealestate.com  for residential and commercial listings in Williamsburg, James, City County, New Kent County, Richmond and for more information.

=======

Elizabeth Kirwin, Publicist