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As one of my advertisers says - now is a great time to buy. It's a Buyer's Market as the saying goes - but you have to have your financial ducks in a row. This is not my strong point so I'm leaving the financial writing to others.

Follow this lead-in to Scott Johnson's article on Financially-distressed Properties - not the only option but it's One people with money are looking at - and investing in. Like I said before - it's sad to take advantage of someone else's distress, but you might also be getting them out from under more weight than they can carry. Make sure you don't take that burden on yourself! There are lots of options, so look at them all.

And read columnist Hans Bruhner's Ask the Loan Man (page 31). Hans is a perfect example of someone who will tell you IF you can fiance a home and HOW you can if the the answer is yes. Anyone in the business will tell you that you have to be smart, rational and conservative when dealing with as much money as it takes to purchase a home.

Don't let that bring you down - just let it motivate you to do it well. START with the money people before you ever get to a real estate agent. It's a lot easier to fall in love with a home than it is to finance it! Happy House Hunting!

The big realty-news story of the past six months or so has been the collapse of the "subprime mortgage" market. I believe the impact of this event has been greatly overemphasized in the press—apparently due to lack of more substantive realty news to report. One side effect of all this press is renewed interest by Investor/Buyers in acquiring what I term financially-distressed properties, or more specifically homes for which the Owner is struggling financially and needs to sell. Investor/Buyers assume such sales will be at a discount to the Seller and therefore represent a "market opportunity" for the Buyer. The purpose of the article is to discuss the various kinds of financially stressed properties and what services licensed realty agents can and cannot offer with respect to them.

There are typically three stages in the lifecycle of financially-distressed properties:

• pre-foreclosure, when the Owner still is in possession of the property, but is falling behind in mortgage payments to the Lender,
• foreclosure, when the Lender seeks possession of the property from the Owner, and
• post-foreclosure, after the Lender takes possession of the property and becomes the new Owner.

I'll discuss each of these stages separately.

Pre-Foreclosure

When Owners fall behind in mortgage payments, sometimes they will attempt to sell the property on the open market to get away from their debt and, hopefully, to recoup some of their existing equity in the property, if any.

If the Asking Price is below their current mortgage balance and the Owner has no equity remaining, that's known as a short sale. At the moment, about 100 of the nearly 3,000 homes listed for sale in Sonoma County are tagged by the Listing Agents as short sales. Alas, not all agents properly tag such listings in the MLS database, so undoubtedly there are more—perhaps 300-500, which accounts for less than 2% of the current inventory of homes for sale.

Despite the lack of tagging, short sales are not particularly difficult for experienced realty agents to discover. How such sales are conducted is essentially no different than normal realty transactions. Nonetheless, many agents shy away from representing Buyers for short-sale properties. Why? Because Lenders have to approve each sale individually and many times they will only approve the short sale if the agents involved agree to cut their commissions. Listing Agents who represent Owners for short-sale properties often have discounted their commission as a favor to the Owner to begin with. Since short sales typically are more work for the agents than regular sales, there's not much incentive to work harder for less money. Imagine if your employer cut your wages 25% and told you to work an extra half-day on weekends. How would you react?

If the Asking Price is above their current mortgage balance and the Owner has at least some equity remaining, the sale looks, smells, and tastes like a regular sale. In general there is no way to distinguish them from non-short sales in the MLS database. After all, there is no advantage to Sellers in declaring to the world their sale is distressed. Doing so would only encourage low-ball offers, thus further reducing their remaining equity.

Foreclosure

Once Owners receive a formal Notice of Default from their Lenders (and thus enter the "true foreclosure" stage), State regulations prevent nearly all realty agents from representing most Buyers in the purchase of such properties. There are third parties that will sell Buyers information about properties in foreclosure so they can seek to purchase them on your own—directly from the Owners, from the Lenders, or even at the Courthouse steps. Since agents generally cannot represent Buyers in foreclosure transactions, few of them appear in the MLS database and few agents subscribe to these foreclosure services.

A Web search of the term "foreclosures" will produce the names of dozens of foreclosure-tracking services. RealtyTrac.com appears to be the largest Web-based service. To the best of my knowledge, none of these services are free, although some offer very limited free trial memberships—after obtaining enough contact information to hound you for life if you don't pony up. In fact, you typically cannot find out what these services even charge until after you've given them your contact information. Would you patronize a merchant who won't quote you sales prices until after making a photocopy of your driver's license?

The foreclosure marketplace is riff with savvy investors and even a few shady dealers. And since realty agents effectively are barred from participation, you'll be completely on your own—strongly not recommended for novice investors!

Post-Foreclosure

Once Lenders take possession (thru Court-ordered foreclosure, from the prior Owner thru "deed in lieu" of foreclosure, or by other means), they become bank-owned properties, or realestate owned (aka, REOs). Some banks sell their REOs directly to the public— presumably to cut their losses further by avoiding realty commissions. You must check with every bank individually to determine their REO inventory. But don't expect it to be easy!

Nonetheless, many—if not most— banks also list for sale their REOs using local realty agents. A few Listing Agents specialize in REOs, but there's no advantage to you in contacting these agents directly. After all, they really work for the banks—not for you. Any agent can represent Buyers in REO purchases that are publicly listed and I have done so on several occasions in the past few years. Unlike short sales, agents usually are paid a full commission on REO sales. They're still more work than regular sales, however, consequently some agents shy away from them.

Conventional wisdom says banks will negotiate to get rid of their REOs. However, it's been my experience that banks are particularly difficult Sellers, so don't expect to negotiate much. It's basically a take-it-or-leave-it affair, at— or very near—their Asking Price. Since most banks operate at least state-wide, they don't want to be bothered learning and following the local realty customs. For example in Sonoma County, Buyers typically select the escrow/title company. For REOs, expect the Seller to make this selection, probably with an affiliate company who doesn't have an office in Sonoma County. Worse yet, Southern California-based banks will insist on following the escrow/title practices of the Southland, which are quite different and more costly than those of Northern California. Don't expect the bank to pay the additional cost.

At the moment, fewer than 20 of the nearly 3,000 homes listed for sale in Sonoma County are tagged by the Listing Agents as REOs. But as with short sales, most Listing Agents don't like to highlight that their listings are REOs, so it's impossible to put together a comprehensive list. Of the approximately 160 homes current listed for sale in the Russian River area, I'll speculate that no more than 10 are REOs. The foreclosure-tracking services will be happy to sell you information about REOs, but knowledgeable realty agents can find these properties for free for you—at least in their areas of primary practice.

Final Words

Regardless of the stage of financial distress, Buyers need to arrange their own financing--usually prior to making an offer. Conventional wisdom says Bank-Sellers will help with the financing to rid themselves of inventory. This has not been my experience. In fact, when your Lender discovers you're buying a financially-distressed property, expect them to scrutinize the transaction extremely carefully. They may even require a second appraisal, for which you must pay. In general, any offer you make on a financial-distressed property must be accompanied by a preapproval letter from your new Lender. This asserts the Buyer is qualified to make the purchase; it does not guarantee your Lender will approve of the property itself—that's a separate determination your Lender makes during the due-diligence period after your offer has been accepted.

So yes, there are some bargains to be found among financially-distressed properties in the current market. Just don't expect to make an easy profit. You (and your agent) will have to work hard to find and acquire these bargains.

One last point to keep in mind: financially-distressed properties often also are physically-distressed. In other words, they're seldom the prime properties in their neighborhoods. In the Russian River area, this translates into fixers, homes in flood zones, homes on steep grades, homes on substandard lots, homes of below-average size, homes with outstanding permit violations, etc. Once you purchase financially-distressed properties, obviously they'll no longer be financially-distressed. But they still could be less desirable and potentially harder to resell than other nearby properties. This often translates into selling at a discount—especially in the current Buyer's Market. So it's probably best to plan to fix-and-hold (as opposed to fix-and-flip) financially-distressed properties in the current market.

Copyright © 2007, Mark Scott Johnson of Russian River Realty Co., Guerneville.

Affordable Homes Part 4 »