Foreclosures 101 (Part 2): Loan Options and Submitting Offers

We left off on Forclosures 101 (Part 1) with you getting a lender pre-approval. In Part 1, you also learned that the majority of foreclosure properties have deferred maintenance and will require repairs. Given that, your loan options are not as wide open as with a regular property purchase.

Loan Options

• Conventional – One of the best choices for a foreclosure purchase. It requires a larger down payment, but is probably the easiest of the loans one can get. A solid down payment and good credit will take you far!
• USDA – This loan requires no down payment, but you will have to ante up closing costs. While you will make an earnest money deposit with your offer, that will customarily be credited back to your closing costs at the close of escrow. Note: The funds for these loans are released incrementally throughout the year, so USDA loans are not always available. Unfortunately, USDA almost always takes at least 60 days to close, so not all REO sellers look at these favorably. Sellers want to divest themselves of their properties quickly and get them off the books. Still a good choice for the buyer with not much deposit money.
• Fannie Mae HomePath – Strongly recommended for purchasing Fannie Mae properties. In some cases, only requires as little as 3% down. The percentage rate may be a point or two higher, but this loan requires no appraisal or mortgage insurance, so the monthly payments are competitive to a lower rate loan.
• Fannie Mae HomePath Renovation – Fannie Mae properties only, for the home that you really love that has good “bones,” but little else (needs a lot of repair) another solid loan.
• FHA – (not FHA 203K see below) Unless you are looking at foreclosure properties that are in genuinely good condition, you are unlikely to find a property that will pass the stringent requirements that FHA guidelines provide for. If you are focusing on a foreclosure, it’s recommended to go with one of the other loans available.
• VA – Ditto FHA
• FHA 203K – Like the HomePath Renovation loan, this is also a decent alternative for foreclosure properties that are in need of substantial repair.

So, you have that pre-approval in your hot little hands and now it’s time to start looking!

Property Hunting

Spacious REO home in Lanai City (MLS# 351721)

Do yourself a BIG favor: choose a Realtor who has experience in REO/Foreclosure purchases—you really do need an expert to navigate this purchase for you. A Realtor with plenty of proven REO experience under their belt will make this process go smoother.

That Realtor is more likely to have answers for most of the tricky issues that could potentially come up and has probably encountered before. Better to be prepared for what may happen than to be blindsided with a problem another agent may not be aware of, or be less equipped to maneuver through.

Now that you are looking, if you are a first time home buyer, universal good advice? Lower your expectations.

What! Lower my expectations? Yes. Please! The reality is that you won’t find a MTV Crib your first time at bat. You may not fall in love with your first house right away, but once the repairs are complete, your pictures are hanging on the wall, and your furniture is all in place, you will love it and it will be home. Look at the bigger picture.

So, you have found the house you want, next step? Let’s make an OFFER!

Offers

This is not a normal purchase…there are different rules. Starting with: offers should always be emailed in PDF format. Please don’t FAX or send JPG’s. You will only succeed in annoying the listing agent if you do. Not a good way to start a possible 2 month or longer relationship.

1. If the property you are offering on is a brand new listing, be prepared to move very quickly. The best well priced listings are usually under contract within just 3 days of the listing going active.
2. There is no sugar coating this, as tempting as it may be, low ball offers are a no-no on new foreclosure listings. If there are other offers on the table, you can bet at least one of them is over listing price. Once the property has been on the market for some time (2 weeks or more) then you can make a lower offer, but on newly released listings that are seeing a lot of activity? The seller will not take you seriously. If making an offer over list price makes you nervous and you are worried about the difference in your loan payment, just call your loan officer. Oftentimes, the difference in the loan payment in a slightly higher offer can be negligible, indeed little difference, mere dollars per month over the lifetime of the loan. How badly do you want the property?
3. Don’t ask for pie in the sky in concessions. These properties are strictly “AS IS”. Sellers of REO properties generally will not grant termite inspections, survey, cleaning, or permit packages. Thinking of asking for cosmetic repairs? Don’t. In fact, for the most part, the only repairs that will even be considered are “lender required repairs”. If you load up your offer with lots of concessions, you may well fast track your offer to the bottom of the seller’s pile. What you can ask for (and most savvy buyers often do) is up to 3% back in Seller paid Buyer closing costs. Unless noted in a bonus incentive program, the seller will rarely credit more than 3% in closing costs. The cleaner your offer the more likely it is to be the one the seller likes the best. Offer smart and purchase smart!
4. Put as much down as possible. This is where USDA loan pre-approvals can be a disadvantage. Sellers look for the most money down and the fastest close.
5. REO inspection times allowable are usually 10 days. This time period can be limiting, especially for mainland buyers who wish to fly in for the inspection period. Unfortunately, sellers cannot and will not accommodate travel plans to prolong the inspection period.
6. The property is priced with condition already taken into consideration. Don’t send in comps to justify your offer price. The comps won’t be submitted. The seller is well aware of the market value of their property and has appraisals and BPO’s in place to support their asking price. Also, the traditional warm fuzzy letters about how long you have been looking and how little you have to spend hold zero weight with the seller. The truth is that your story has nothing to do with the seller’s goal. If your offer does not meet their bottom line your offer wont be accepted.
7. Typically, once you submit your offer, negotiations are done verbally by email. Generally, there is no need to submit a formal counter form. In fact, most of the REO sellers will only use their own forms and have little use for the Hawaii state purchase contract. This will vary from seller to seller.
8. If the property you are offering on is a brand new listing and there is a great deal of activity (showings), odds are that there will be multiple offers. Occasionally, between the time you receive the verbal acceptance and the signed “Real Estate Purchase Addendum”, the seller may have received another offer. In many cases, the seller will then send to all buyers a “highest and best” request. You are now competing against other buyers for the property. Be sure to understand that you do not have an accepted offer until the seller signs the document and sends it back to you.
9. And, of course, nothing beats CASH. A lower cash offer with a fast close will trump a lender qualified higher price, longer escrow offer almost every time.

Acceptance

1. Once you have submitted your purchase contract (PC), if the seller agrees with the price and generally on the terms of the PC, you should receive a verbal acceptance.
2. Don’t get too excited.
3. You will then receive a document called the “Real Estate Purchase Addendum”. This will take precedence over many of contingencies, terms and time frames you put in your original PC.
4. Review all of the terms and conditions in the Real Estate Purchase Addendum and insure that you are willing to proceed based on those terms.
5. Please do not make any changes on the Seller Purchase Addendum itself. If you want to make changes to the terms then you will need to itemize those changes on an addendum and send them to the seller’s agent to submit to the seller. Any changes you make to the seller’s contract (without authorization) will null and void the contract.
6. Please allow up to 4 days to receive the contract back from the seller. In the meantime, instruct your lender to proceed with the loan process and not to wait.
7. The seller will not negotiate terms after your offer has been accepted, so negotiate all terms before your offer is accepted.

Congratulations! Your offer has been accepted. You still have a long road ahead of you. We will take a trip down that road in a week or two with Foreclosures 101, Part 3. See you there.

I’ll have the top down, you are almost at your destination!