Buyer’s Perspective: Purchasing a Foreclosure
Purchasing a foreclosure may land you a great price, however, there are few things you need to know and understand with this type of transaction. Generally, there are more expenses on the buyer’s side that are customarily paid by the seller. You may be subject to pay:
- Survey of the property. This could run anywhere form $250-$600, depending on the size of the lot. Condominiums do not require surveys.
- City transfer stamps/city inspections. Many towns have transfer stamps that are either the responsibility of the seller or buyer. You may be responsible for this cost (can cost about $3 per $1000 of the sale price). Some towns require inspections before the property is transferred. You may be responsible for paying for the inspection and putting money in escrow in case any repairs are required. Visit the village website or speak to your Realtor regarding this.
- Well/septic test. For properties on well and septic, lenders require that the well and septic be in good working order and that the well water is safe to drink. You may be responsible for that test.
- Purchasing a property with an association? Section 9 of the Illinois Condominium Act states that the buyer may be responsible for up to 6 months unpaid assessments and legal fees prior to the bank taking ownership. You will want to make sure that your attorney fights for these fees to be paid by the bank. You may also want to put this in writing on the contact. However, the bank does not always agree to pay this and you may be responsible for all or a portion.
- De-winterization. Most foreclosure homes are winterized to ensure pipes do not crack or break in extreme temperatures. In some cases, you will pay a fee for the de-winterization of the property and then winterization again. This can cost around $300.
- If you do not close on your scheduled closing date, you may be subject to a $50 (more or less) per day fine. If the fault is not on your side, your attorney will need to write a letter asking the seller to waive the fee.
- Taxes are prorated at 100%. You will only be credited 100% of the most recent tax bill, not 105% or 110% as customary when purchasing a home.
- No bill of sale on personal property. This means that personal property such as appliances; curtain rods, etc. are not technically a part of the sale. More than likely they will not be removed before closing, but just understand that they are not part of the sale.
It is also important to understand the property is sold “as-is.” This means that the seller (bank) will not make any repairs to the property and does not make any warranties/guarantees on anything. The seller will also not allow the buyer to make any repairs prior to closing. The seller acquired this property through foreclosure and does not know what the previous owner did with the property. Keep in mind that the property may have sat vacant for some time.
It can take a few days to a couple of weeks for the bank to accept/reject/counter the offer. Please be patient. Once the offer is accepted, there will be a stack of papers, called addenda need to be signed. I recommend you read these very carefully and direct any questions to your attorney. Your attorney can suggest modifications during the attorney review period (after the contract has been signed by both parties); however, it is always best for you to understand what these mean before signing. As a licensed Realtor, I can only fill in factual data on these forms and cannot interpret or change these documents. If you do not have a real estate attorney, I can recommend the names and contact information of several.
Purchasing a Short Sale
You may come across a short sale property on your home search. The most important aspect to remember about short sales is that they do take time! You should not expect a 30-60 day close. Many times the property is occupied during the listing phase of the short sale process. The positive side of this is someone is paying utilities and maintaining the property. As opposed to a foreclosure, the property is not always sitting vacant for a long time.
Most buyers have a few questions about short-sales, such as:
- What exactly is a short sale?In a nut shell, a short sale happens when the owner of a property has suffered some sort of hardship (loss of job, divorce, medical bills). They can no longer pay their mortgage due to lack of income or overwhelming debt. The owner cannot sell the home at the current market value because the value of the property is lower than the mortgage balance. The owner asks their bank to accept a lower amount (the bank is then “short”). The owner lists the home with a Realtor and an offer is made by a buyer. When this happens, the seller’s Realtor or attorney will submit the contract to the bank, along with all of the seller’s financial statements. The bank sends for a BPO (Broker Price Opinion) where a third party agent determines the current value of the property. Based on this and the information from the seller, the bank will accept, reject or counter the offer.
- Do I qualify as a short sale buyer? That depends. What is your timeframe? A short sale can take anywhere from 3-9 months to close. If you are not in a hurry to move, this timeframe may work for you. If you have to move within 3 months because your lease is up, you have to enroll the kids in school, or you need to move out of your current accommodations soon for whatever reason, then a short sale is not a good choice for you. There will be extra expenses that the buyer will be subject to pay (see below). If you do not have the funds for these, a short sale is probably not right for you.
- How long does a short sale take? As stated above, the short sale could take anywhere from 3-9 months to close (the process from putting in the offer to close). This all depends on the bank, whether there are 1 or 2 (or more) liens on the property, how aggressive the Realtor or attorney are about negotiating the short sale and whether or not the seller has provided all of the necessary paperwork to the bank. The earliest you typically hear back from the bank is about 1.5 months. Remember, the bank can accept, counter or reject the offer. Think about how much you are willing to go up, so when the bank does counter, you know if you will accept their counter.
- Will I be responsible for any other fees? Similar to a foreclosure transaction, you will be responsible for paying for the survey on the property (condos do not require surveys) and possible other fees: city transfer stamps, well or septic tests. The taxes are prorated at 100% in a short sale transaction as well.
- Can I ask for closing costs in a short sale transaction? For a long time, banks did not agree to closing costs for the buyer. Now, we see more and more transactions come through with the bank paying for the buyer’s closing costs. However, you don't count on it.
- Should I complete my inspection and give my earnest money right away? Yes. Having the inspection now will give you an idea of the condition of the home and whether or not you want to continue with the sale. If you wait 3 months until the bank approves, and then decide you no longer want the property, you just wasted 3 months of your time (and the sellers). You have signed a legal contract, so earnest money consideration should be given now.
This information was not compiled to make you afraid of purchasing a foreclosure or short sale! Rather is it is offered so you can make an informed decision. Understanding the property is sold “as-is” and the extra costs involved will make all the difference when purchasing a foreclosure or short sale.