FAQ: About foreclosure and short sale real estate for sale in Sullivan County NY

Information About Foreclosures and Short Sales in Sullivan County

A lot of real estate buyers in search of a super deal ask me about bank owned foreclosures, and their related sibling, short sales. Both can result in some very good deals, but they aren’t aren’t for everybody. Foreclosures, in particular, involve some very unique factors that make them appropriate only for a very small subset of buyers. I’ve put together the following overviews about buying foreclosure properties, and purchasing property involving a “short sale” to help potential buyers get a better understanding.

About Bank Owned Foreclosures

Lots of buyers ask about bank-owned foreclosures, the holy grail of  bargain hunters. Bank owned properties can be great deals, but they’re seldom the type of houses that second home buyers are looking for. Second home owners, or owners of houses that have great appeal to second home buyers, aren’t immune from falling into financial difficulty. But if they do, they’re more likely to be able to unload the house through a short sale rather than have it go all the way to foreclosure. The foreclosure process in New York is both lengthy and costly, so most foreclosed houses are ones that couldn’t be moved in a short sale.

For example, a lot of buyers ask me about lakefront foreclosures. Since the downturn in 2008, I’ve only seen two lakefront foreclosures on the market, and one was in such bad condition from water damage that it was close to a tear down. The more typical foreclosure is a Monticello or Liberty in-towner in fair to poor condition,

A downside of purchasing a bank-owned home is that the buyer has much less opportunity for inspections and due diligence. When a bank takes over a house in this climate, they typically have it winterized, draining the heating system and all the pipes. They may also shut off the electric service. So it’s not possible to test the water, or ensure that the plumbing and heating systems are operable. The house is sold “as is”. Some banks will permit a potential buyer to have the systems turned on and off — in a single day — at the buyer’s expense to do an inspection, but this is done before submitting an offer, as banks won’t include an inspection contingency in the purchase contract. Occasionally, a bank will turn systems on for inspections at their expense, but this is exception rather than the rule.

Bank owned properties are also less suitable for buyers who plan to get a mortgage, for two reasons. First, the bank will set a firm time limit to close, usually 30 days, sometimes 45, and that can be too short to get a firm mortgage commitment. Second, for a conventional loan, the lender wants the appraiser to verify that all systems in the house (heating and plumbing) are in good working order. If the systems are turned off, that can be impossible, although there are some convoluted workarounds to that glitch. Given these hurdles to getting a mortgage, a bank is much more likely to accept an all-cash offer, even at a lower price, than an offer involving financing.

If you’re an all cash buyer who is willing to do some (or often, a lot of) work and accept some risk, a bank owned foreclosure can be great. But if you’re planning to finance, and want a house in move-in condition that just may need some sprucing up, a foreclosure probably isn’t for you.

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About Short Sales

“Short sales” are sales where the current owner of a house owes more on the property than it can sell for, and they look to the lender to accept a payoff on the mortgage at closing of less than the amount owed. Many sellers mistakenly believe that simply because they owe more than they can sell for the house that they are eligible for a short sale markdown of the amount owed.

That’s simply not the case. A lot of prerequisites have to be met before a lender will even consider a short sale. Generally, the homeowner needs to be a certain number of months behind in their mortgage payments, and NFS (notice of foreclosure sale) lis pendens has been filed by the lender. (This is the first step in the foreclosure process, and is more a legal maneuver to protect the lender’s rights.)

The house should also have been exposed to market for a period of time (6 months seems to be the minimum), with periodic price reductions and no offers during that time sufficient to clear the mortgage. (A history of offers below the threshold to clear the mortgage, though, is good.)

The owner of the house should lack other resources sufficient to make up the pay off deficiency. Lenders are taking a much harder line with owners who have other resources and just don’t want to fulfill their pay off obligation. This is less important than the other two prerequisites, and varies widely among lenders. But the likelihood of approval of the short sale is greater if the seller doesn’t have other resources than if they’re sitting on a stash of cash and have a couple of other vacation homes or investment properties.

A seller that meets these general guidelines doesn’t necessarily guarantee a short sale approval. Lenders generally do not tell a seller what they are willing to accept as a deal price, although a few lenders will ‘pre-package’ a short sale with a floor price. So once the buyer and seller agree on a sales price and contracts are executed (subject to third party, or short sale, approval), a short sale package, including the purchase contract and a lot of other supporting documentation, is submitted by the seller to their lender.

Short sale approval by the lender can take quite a long time once the package is submitted. It can be difficult to predict the response time. I’ve seen short sale responses come through in as little as three or four weeks, and at the other end, I’ve seen it take four or six months. The response may be the bank accepting the deal as is, putting a counter offer on the table, or rejecting the deal outright.

The short sale process is fraught with landmines. So it’s imperative (which is a strong step above ‘important’ or ‘recommended’) that some of the professionals involved in the transaction have short sale experience — preferably at least one of the brokers and one of the attorneys.

There are some downsides to a short sale. The first is the often lengthy time time between finding the house and making the deal and actually closing on it, due to the added couple of months for the short sale approval. As a buyer, whether you actually get the house is largely out of your control, although working with a broker who understands the short sale process can give you a good feel for the odds. The second downside is that the buyer shells out quite a bit of money at the front end, for home inspections and attorney fees, well before the short sale approval. And lastly, it’s risky to lock your mortgage rate because you don’t really have an idea of when the sale might close.. The longest ‘rate lock’ a buyer can typically get is 60 days, which will likely expire before you can close on the house. So a buyer is more exposed on the mortgage rate side than in a traditional transaction.