From the “Ask the Broker” inbox comes an email from Darrell in Alberta, Canada:
I’m a Canadian looking to get into the Foreclosure market in your area. What’s the best way for me to approach this and where can I find the best information on the process and the pitfalls of these transactions?
Great question Darrell!
<< Fair warning – interminably long post ahead >>
I’m assuming here (and I really hate to assume anything) that the question is asking about homes that have already been foreclosed on — that being taken back by the lender and placed on the open market for sale. If you are wanting information on buying homes at foreclosure auctions, then that’s a post for another day. The quick fact is, the vast majority of homes at foreclosure auctions (more accurately in Arizona — a Trustee Sale) are not bought and they wind up reverting to the bank. Why? The bank wants too much at the auction. They’re attempting to recoup all their losses.
Here’s a couple of points regarding the Phoenix foreclosure market (as defined above) that you want to be aware of.
First, there are a lot of bank owned homes on the market. Keep in mind that “bank owned” = “Foreclosed” = “REO” (Real Estate Owned).
How many is a lot?
Hard to say. At this moment in time, there are 10,770 single-family home listings 9,509 in the immediate Phoenix metro area) and 1,106 condo/town homes in the MLS ((Multiple Listing Service — a database where the vast majority of homes for sale are entered)) flagged as “Lender Owned Property”. Likely there are some properties out there that are either: 1) not really lender owned but are flagged as such; or 2) are lender owned but not flagged as such. After all, the data in the MLS is only as good as what is entered.
Suffice it to say, there are many, many lender owned homes to chose from.
Second, be advised that many of these homes are not in good condition. It’s not unusual for foreclosed homes to be missing such functional items as cabinets, toilets, stoves and light fixtures. Sadly, when faced with foreclosure, many people take everything they can from the home in a last ditch effort to “get something” from their home purchase. I’ve seen foreclosures where the owners ripped out all the wiring. Others were trashed to the point where college frat house residents would be ashamed.
Contrary to somewhat popular belief, not all bank owned homes are trashed. There are many that are in pristine condition (and all points in between). You just have to either shop carefully, or be prepared with money, time and desire to address any deficiencies.
What is the best way to search for foreclosures in Phoenix?
Why right here! You can use our home search and select “Bank / lender owned” from the Foreclosures drop down. Or, if you prefer, just go straight to this page that is dedicated to searching for Phoenix foreclosed homes.
We don’t require any registration for any of our home search tools. If you want to save searches or get automatic updates of new listings via email, then we do require very minimal information. But you will never be hassled with follow up emails/calls. If you need anything, ever, just ask.
But wait! What about BUYING foreclosures?
The process of actually buying a foreclosed home is basically identical to buying any other home owned by an individual. The contracts are the same, the disclosures and time periods are all the same (though you’ll almost never get a sellers property disclosure statement from a lender owned home). Also be advised that some lenders will have additional addendums for the seller to sign.
That said, it is important to know that you should use a buyers agent that is familiar with the REO ((Real Estate Owned — the less nasty sounding term for foreclosed / bank owned homed)) paperwork and process. It can greatly help your chances of having your offer accepted if your agent knows how to handle REO paperwork. I’d tell you which Phoenix agent to choose, but you already know… 
.
The lender, who is in effect the seller, will want the same assurances as any other seller that you can secure financing. Like any other seller, they will want to know you’re serious and committed to purchasing the home you place an offer on.
For Canadian home buyers of US property, securing financing can be challenging. Thanks to the credit crunch, some lenders no longer service loans for foreign nationals. But some still do. They typically require 25 – 30% down. Other requirements vary from lender to lender. Given the recent volatility of the Canadian / US dollar exchange rate, it makes sense to at least investigate a foreign currency broker — they can save you a bundle.
The Phoenix Foreclosure Market
We’ve already discussed the bloated inventory of foreclosure homes on the market in Phoenix. So how does this impact the foreclosure market?
Bank owned homes in Phoenix tend to be aggressively priced. Lenders aren’t in the business of holding homes. They want them sold. (Which is why the tortuous process of short sales ((A short sale is when a home is sold on the open market for less than what is owed on it.)) is dumb-founding.) So don’t expect to get an offer that is pennies on the dollar accepted. In fact, it’s not uncommon for foreclosed homes to receive multiple offers at or even above list price.
Bank owned homes can often move very quickly. While it is disappointing to get over-bid on a home you really like, keep in mind the 10,000 plus foreclosures on the market and more coming on every day. The odds are overwhelming you can find another home to go after.
The Lowdown – Advantages and Disadvantages of Buying Foreclosures
To wrap this up (finally!) here are a couple of lists. . .
Advantages of Buying Foreclosures:
- Aggressively priced.
- The owner (the bank) really wants them sold.
- Lots to chose from.
- Banks are relatively swift in making an offer decision — often as quickly as a few days (in stark contrast to the weeks on end a short sale decision can take).
- You will have an inspection period (typically 10 days) after contract acceptance to have the home inspected. Cancellation in this period is not difficult.
- The bank is not emotionally attached to the home. This can make negotiations swifter — though there is typically little if any room in price negotiations.
Disadvantages of Buying Foreclosures:
- Condition may be an issue.
- Typically sold “as is” — meaning the bank will not do any repairs (though sometimes they will).
- Buyer competition — may be in a multiple bid situation. ((Multiple Bid — where more than one potential buyer submits an offer on a home))
- Update: Financing Concerns. Sean Terry of the fabulous Deal Makers Blog made a great point in Comment #1 below about potential financing concerns regarding property in poor condition. Be sure to read it!
Hopefully this tome answers some of Darrell’s (and others) questions. I could ramble on forever about this and still miss something. Should anyone have any questions, drop a comment here or contact me!
As always, anyone reading who has anything to add is welcome and encouraged to do so!
The Phoenix Real Estate Guy was started by Jay Thompson, and I have a little blogging problem... he liked to say...
Thanks for the great article, a lot of power packed information. One of the major disadvantages about buying bank owned homes is if the property is in rough condition, it becomes extremely difficult for the buyer to obtain conventional financing unless they are using a specialty program like the 203 K. This means they have to purchase cash or use hard money and most hard money lenders I know here in Phoenix need to see some experience and cash. A buyer defiantly needs an experienced agent or broker that can guide them in the right direction. We are buying great deals at the courthouse steps or highly distressed bank owned, the deals are great, the best I have ever seen! Now the time to get in the game!
**Sean Terry´s last blog post..Fannie Mae 4 Property Rule…We Have a Solution!</abbr></abbr>
Sean –
Great point about financing "roughed up" homes and the Section 203(k) program. For those not familiar with the 203k, here is a good page from HUD on the 203(k) program.
Thanks!
You'll probably find a lot of Canadians searching down south in the coming year, our economy has been somewhat isolated from the economic downturn, and it's cold here. Phoenix sounds like paradise right now!
Gerard Hagan – Edmonton Home
Gerard – we get a lot of Canadian buyers here. Half our business in 2008 came from Canada! With the Loonie strong against the Dollar in late 2007 and earlier this year (basically at parity) it sparked a tremendous amount of interest.
While the exchange rate has softened, it's still not bad and as you mention, the Canadian economy is strong. (The weather is not-so-bad here either, especially the "winter"). There are a lot of great buying opportunities in Phoenix right now.
Great post Jay, I read the WHOLE thing! I would have to agree with you on all counts noting exceptions to every rule. Similar hair pulling experiences with the short sales on both the seller and the buyer sides. I recommend avoiding short sales if possible! REO properties that are not sold quickly are usually over priced or in an REO rich neighborhood of which we have many. Each bank is different in their perspective of value. Many banks are tied to rules and guidelines which make them rigid and not able to be as flexible as our market demands. In this scenario all one can do it wait for the scheduled reductions until price meets reality.
A note on the vandalism of the properties. It is true that many of the homeowners strip the homes but many of the vacant homes are being targeted and stripped by professionals (can you call a thief professional?). A clear sign of this is a missing air conditioning unit, missing pipes under the sink, at the hot water heater and in some cases, entire wiring ripped completely from structure. I all depends on how much time they have, copper is valuable these days! With the state of the economy and the increasing number of vacant REO or soon to be REO properties – vandalism is on the rise. I think it is important for a buyer ,who is purchasing an REO property, to take extensive pictures of the property at the time of contract writing. This will eliminate any question of condition should the property be damaged during the escrow period. The bank will have no other choice, restore or keep the property. Keep up the great work!
We'll buy them Gay! Just not in Maryvale
**Sean Terry´s last blog post..Fannie Mae 4 Property Rule…We Have a Solution!</abbr></abbr>
Great post. More than the average person will be able to handle, and a perfect case for using an agent that is experienced with foreclosures. A knowledgeable agent can walk investors through the red tape and find the best deals. The foreclosure market is fast moving, and you really have to be in it 100% of the time to stay up to date.
Jose Lopez
Sarasota Florida Foreclosures
Sarasota Florida Foreclosures
Thanks for the great information. Very informative.
I will be in touch
Darrell
I agree with Jose, buyers considering foreclosures need an experienced agent on their side. We're currently working with two different investors who purchased homes from banks pre-foreclosure with the intention of flipping for a profit. They though that because the homes were about to go into foreclosure and that they were buying directly from he bank, it had to be a great deal. They have now dropped the listing prices below what they paid. It's turned into an expensive lesson.
Very well said, that really gives buyers a clear idea of what to expect when home hunting.
**Matthew Coates´s last blog post..Listing of the Week</abbr></abbr>
I think the post is succinct, not long! Very useful.
There are a ton of great opportunities in bank-owned properties. For many years to come, people will be talking about the bargains that were purchased during this time.
Nevertheless, buyers may be limiting themselves when they focus exclusively on bank-owned homes. If the home is a bargain, does it matter if it is being sold by a bank or by Joe Homeowner? A bargain's a bargain.
**John Wake´s last blog post..What the financial crisis means – for Borrowers with Less-Than-Perfect Credit</abbr></abbr>
Very true John….
A good many of the homes sales in Bend Oregon are bank foreclosures and short sales. It looks like a good time to buy in your area.
Jay. I follow your blog to keep up on the Arizona market. Keep up the good work!
I don't foresee the housing market getting any better in the near future. However if you have the money it is an amazing time to buy.
I am looking to buy a home in the near future and will be looking for a foreclosure or short sale. I am leaning towards the short sale as it seems to me that you can avoid most of the disadvantages mentioned.
John – I didn't mean to imply that a short sale eliminated the disadvantages of buying a foreclosure.
Short sales can be filled with issues. Primarily the fact that it can take weeks, MANY weeks, to get a response from the lender.
Many short sales are listed at prices the bank will never accept. So you can make a full list price offer, and sit around for 6, 8, 12 weeks or more only to hear "No" from the bank.
One would think banks would respond to short sale offers like they do bank owned homes. But they don't.
Every foreclosure disadvantage listed above also holds true for short sales — with one exception. While occasionally a lender will offer to make a repair, a short seller will virtually never do so.
I'll work on another post about advantages / disadvantages of buying short sales.
Shortsales drive me a little insane. Too many banks seem really unwilling to negotiate on short sales (although they are a little more reasonable once it goes into foreclosure)
With the market down the one thing I tell buyers interested in foreclosures is to not discount non foreclosures. There are a lot of agressively priced properties by distressed sellers. In some cases for a neighborhood homes by desperate sellers are cheaper and better maintained than foreclosures
These no intention to buy any home or something. Just saving my money for upcoming bad days. I am completely in recession depression.
Foreclosure seems to be a magical word for many would be home buyers. I just has a buyer close on one last week in fact. Real estate in general can be a great investment foreclosure or not.
**James Boyer´s last blog post..Summit NJ home sales December 08</abbr></abbr>
"Time is of the Essence" is never more important than when wanting to get into the Foreclosure or HUD home game. Being able to act fast, and be decisive is critical. Granted, the banks do not share that philosophy, since sometimes it can take 4-6 weeks to even get an acknowledgment of the offer.
**Jay Myers´s last blog post..Another reason SOME real estate agents suck</abbr></abbr>
Wow!!! Alot of excellent information. Here's a thought. Just invest with an established company who already has all the infrastructure in place to rehabilitate damaged foreclosures and receive your investment return. No sweat, and you don't have to get your hands dirty. That's what I am doing.
Hi Jay,
I know this reply is not too timely, but wanted to contribute a bit of personal experience on this topic.
To all fellow Canucks, this is doable, and highly worth doing, IMHO. Bank financing is available – I found four lenders willing to fund the purchase, and one of them was AMAZING. As such, I am confident my purchase will provide me returns for years to come. And it's a beautiful house.
I believe it is an incredible time, with an incredible opportunity for anyone, Canucks or not.
Jerry
Investing in the foreclosure market can be a means to gaining wealth, but it takes real effort to cash in. As such, it should be approached as any significant investment, requiring focus, diligence and careful research into local property, economic and demographic trends. It also requires the formation of a strategy for acquiring properties and for eventually selling them. You need to do a significant amount of research on the local markets that are targeted for acquisition.
Regards, Shane, Guy into real estate in panama
Thats great info. What I hate is how when Buying Foreclosures you go to membership sites that say they have the best listings but then try and charge you to sign up. Do you know any good free sites?
Heyy guys very true…but check out this link it will really help you out…***************************Jack Brosnanforeclosure auctions
With the state of the economy and the increasing number of vacant REO or soon to be REO properties – vandalism is on the rise. I think it is important for a buyer ,who is purchasing an REO property, to take extensive pictures of the property at the time of contract writing.