In highly competitive real estate markets, like California, buyers often seek out distressed properties. While this can be an attractive and lucrative option, buyer beware. Every day, you can read new blog posts, network television channels, and news stories about the success and glory of purchasing a property in distress and restoring it to the buyer’s delight. Distressed property purchases entail additional work and attention to be successful. Arm yourself with information and expert guidance.

TERMINOLOGY

What makes a property “distressed?”

A distressed property is any property that is under foreclosure due to ownership default. In these cases, the property is either being sold by the lender or the bank. Most often, the distressed property is a result of a homeowner who was unable to keep up with the mortgage payments or the tax assessments.

In some cases, a property may have been transferred and the recipient is unable to pay the adjusted tax assessments. Prop 19 passed on November 3, 2020. It was a hard won battle and passed by a very slim majority. The amendment made two changes to California property taxes. It allowed homeowners over 55, severely disabled, OR victims of natural disasters to purchase a new home anywhere in California and retain their prior home’s tax assessment one time during their lifetime, and it limited prior parent-child and grandparent-grandchild exclusions to properties that will be used as the recipient’s primary residence and to family farm transfers. https://bridges8.com/proposition-19-and-your-family-in-2022

Historically, the number of distressed homes available in a market varies by the conditions of the market. Florida and California have tracked the highest number of distressed sales in the United States since the late 2000s.

What is a Foreclosure?

A foreclosure is a home that has been repossessed by the lender for lack of payment. Foreclosed properties are either sold at auction or as real estate owned (REO) listings. Lenders often sell the property “as-is” to the highest bidder, and it is common for a distressed property to sell below market value.

What is a Short Sale?

Short Sales are a bit complicated. In this case, you will negotiate with both the homeowner AND the lender. Essentially, the homeowner owes more that the home’s appraised value. The lender wants to reap some of their loss, and the owner may wish to avoid having foreclosure on their credit history. In a short sale, the sale must close before the foreclosure deadline.

What is real estate-owned property, AKA bank-owned?

An REO scenario occurs when the lender is unable to sell the foreclosed home at auction. Consequently, the bank will seize control and sell the property through a real estate agent or an online listing. HUD has an online search for REOs here: https://www.hudhomestore.gov/Listing/PropertySearchResult.aspx?sState=CA&sLanguage=ENGLISH

Is it easier to buy from a lender or bank than an owner since emotion is removed from the negotiation?

It certainly would seem to be the case. Certainly, lenders and banks want to get these properties off their books fast. So, the property pricing tends to be lower. However, lenders typically sell the properties “as-is,” and they often need expensive and extensive repair. And the competition can be fierce with bidding wars. 

Also, there IS often emotion involved on the part of the displaced homeowner. There are cases in which the owners and/or occupants intentionally destroy property before giving up their access. While there are some ways to recoup costs in these cases – see below on California foreclosure laws – it can take a lot of time.

DOS AND DON’TS TO BEAR IN MIND

Work with an Experienced Agent (Select a Real Estate Agent)

Partnering with a well-trained Real Estate Agent can help make the home buying process smoother, easier, and can help you find the home of your dreams. A knowledgeable Real Estate Agent can help guide you through each step of the buying process, offering sound advice along the way. Working with a professional Agent who knows the ins and outs of the real estate industry and the market/s of interest will help you minimize mistakes. Working with an agent that has experience with distressed property sales is a MUST.

Make sure you are Pre-Approved for Financing and have Cash for Repairs

As we shared in our “First Time Buyer” article, one of the most important reasons to team up with a mortgage professional before beginning the process of shopping for a home is to obtain a Pre-Approval. A Pre-Approval is part of the official loan process where a lender provides you with a letter confirming the specific loan amount for which you can expect to be approved.

Individual buyers simply can’t compete with large commercial property flippers who show up with cash offers.

As for repair needs, as we referenced above you may have significant repairs to make to the property in order for it to be inhabitable. And you may not always be privy to what those needs are before your purchase closes.  

Know the Micro Market in Distressed Neighborhoods

Once you’ve found the home of your dreams, your Agent will research recent comparable sales – known as “Comps” – of similar homes in the area to help determine a fair selling price. Based on those comparable sales, as well as other factors like inspections and repairs, an Agent will then help you structure an offer and negotiate to get the very best deal possible.

California is a Seller’s Market. As a result, buyers will more than likely encounter bidding wars for the same property. The competition can be fierce, even for distressed properties in foreclosure. Just because a property is in distress doesn’t mean it is a good investment for you. 

Invest in a Home Inspection if Circumstances Allow

In a traditional property sale, your lender will require a thorough home inspection to avoid surprises down the road that will negatively impact the estimated value of the property against your loan. The inspection process can be much trickier in cases where the home is still in foreclosure and/or has homeowners or renters occupying the property.

Distressed homes ALWAYS need repairs. If you’re buying from a lender or bank, you won’t get seller disclosures and must purchase the property “as is.” If you buy the home in a foreclosure sale, the homeowners may continue to live on the property until the “redemption period” expires.

While you can be compensated by homeowners, what you collect must go toward the redemption amount. You can make repairs and improvements to the property while the owners are in residence, but it is certainly not ideal. 


Educate Yourself on California Foreclosure Laws

We encourage you to consult a legal expert as you pursue properties in foreclosure. A few final things to bear in mind.

1. If the foreclosure is “judicial”, the homeowners may redeem the property with certain qualifications and time limitations
2. If the foreclosure is “nonjudicial,” foreclosed homeowners have no rights to redeem their property after foreclosure
3. The IRS can redeem the property in some cases

You can read more about California foreclosure laws here: https://www.courts.ca.gov/1048.htm?rdeLocaleAttr=en