Pot Of GOLD At The End Of Foreclosed Or Short Sale Property?

Most of the buyers I have been working with over the past 18 months start their conversation with me by saying they really would like to find a “good deal” or a really “great deal” by finding a bank foreclosed property or perhaps a “short sale” property that needs minor fix-up. I immediately know I am talking with someone who does not understand the current Denver area foreclosure and “short sale” market.

The thing they do not understand about the current Denver market is how loans have been put on the typical foreclosed and short sale property during the previous two or three years. Most homes owners placed maximum loan to value loans on their homes when they purchased them within the past few years. What this means is that they originated an 80% loan to value first mortgage and simultaneously placed a 10%, or 15% or in many cases a 20% second mortgage on the home. When the market softened they ended up owing more on their homes than the home was worth. Many home owners would need to come to the closing table with tens of thousands of dollars in order to sell their homes. Since they don’t have that money, they fall into a “short sale” or foreclosure.

Here is where it becomes interesting. What ends up happening is that the first mortgage lender can not recover all of the money owned to them. The second mortgage lender typically is looking at losing the entire amount owed to them in the loan they made. BUT, the second mortgage lender still must agree to release their lien against the property or the new buyer (perhaps you) can not close on the home.

What is happening in the Denver market today is that the second lender becomes extremely difficult to work with. They figure that they have nothing more to lose so they start pushing everyone involved to recover some of their money. This fight, mostly between the second and first mortgage lenders, can take months, or in some cases, longer than a year to finally resolve.

So, my buyers think that we can just find a real nice foreclosed or “short sale” property, make an offer and go to closing – like we did in the old days. It just does not happen that way any longer.

Today, the typical “short sale” or foreclosed home will be on the market long enough to have multiple offers written on the property. Most have four to eight contracts written. I have run into some that have over 20 pending contracts on them and the lenders still have not accepted a single offer. I recently read somewhere that the typical Denver “short sale” listings has an average of ten written offers on it before ONE of those buyers successfully goes under contract and to closing.

My word of caution for today’s “good deal” hunters is that the pot of gold you might be expecting when you purchase a foreclosed property or a “short sale” home may not be quite as easy to find as you think. Sauvé lenders know how to squeeze every last dollar out of their bad situation. After all, they are getting tons of experience with thousands of properties they have made bad loans to on how to force the negotiations in their favor. One way they do this is to just sit and wait for up to 25 offers to be written on the home. Then they start their negotiations from there to get the highest bidder even higher. (More about that tactic in a future blog)

If you have many months or even up to a year to buy a home than foreclosed and “short sale” properties may be just the thing for you to get involved with. There are “deals” out there. They are now becoming much more difficult to find.

Here is a tip for you if you want to consider this type of property purchase. Find as many homes as you can and submit a written offer on multiple properties. The Denver average is upwards of ten written offers to get one to go to closing.

So, Is There Really A Pot Of Gold At The End Of A Foreclosed Or “Short Sale” Purchase? I guess you will have to make that determination after your own unique experience. Be sure to let me know how many months it took you to close and how many contracts you had to present. I will be happy to report my viewers numbers.