Bargain hunting for Chicago real estate is a popular pursuit for home buyers these days, and one favorite place to shop is among those properties whose current owners are facing the prospect of foreclosure.
These properties, often described with the term “pre-foreclosure,” typically have two characteristics in common, according to Jim Merrion, regional director of RE/MAX Northern Illinois, the Chicago real estate leaders:
- The market value of the home is less than the outstanding mortgage principle amount;
- The current owners typically are a month or two behind on their mortgage payments, but the mortgage lender has not officially initiated foreclosure proceedings.
There also are instances where homes on which mortgage payments are still current can fall into this category, notes Merrion. That happens when, due to health problems or loss of a job, it becomes clear that the current owner won’t be able to keep the mortgage payments current in the months ahead.
When properties in these circumstances are sold, the resulting transaction is called a “short sale” because the sales price of the property falls short of paying off the mortgage, and the homeowner lacks the financial resources to make up the difference. While the mortgage lender doesn’t legally own the property, it effectively becomes the seller and must approve the price and terms.
“I’m definitely seeing more buyers, including groups of investors, looking at properties that have already been foreclosed or those that might be subject to a short sale,” said Cindy Banks of RE/MAX Cornerstone in West Chicago, Ill. “Most investors hope to buy a distressed property like that at anywhere from 10 to 20 percent below the market price for a comparable property where the owner hasn’t run into financial difficulties. Trying to buy these properties at an even bigger discount isn’t realistic though some buyers would like to think it is.”
What happens in a short sale, explains Nancy Freeman of RE/MAX Realty of Joliet, is that the lender will agree to sell the house for less than the amount owed under the existing mortgage. Freeman has considerable expertise on the subject and teaches a continuing education course for real estate agents on how to handle these transactions.
“A short sale is usually a better deal for everyone – the buyer, the homeowner and the lender – than would be the result of continuing through the foreclosure process with the property,” said Freeman. “The seller needs to get the lender to agree in principle to the idea of a short sale, and reaching that initial agreement is typically a key responsibility of the seller’s real estate agent. The agent wants to determine upfront what the lender will require from both the seller and the eventual buyer in order to formally authorize the sale and close the transaction.”
However, in addition to an agent with experience in handling short sales, the seller also needs an attorney with comparable expertise, according to Freeman.
The attorney’s job is to negotiate with the lender (or lenders if there is a second mortgage), and work out the final terms. Freeman urged homeowners who may be headed toward foreclosure to explore the option of a short sale before it is too late.
“Don’t put your head in the sand and ignore the problem,” Freeman advised. “Start the process as soon as it is clear that you are going to miss two or three mortgage payment. Otherwise, it may be too late.”
Indeed, many homeowners who are facing financial difficulties don’t understand the short sale option that is available to them, according to Laura Heinberg of RE/MAX Connections II in Marengo, IL.
She tells of one couple who fell behind on mortgage payments and owed $280,000 in principle and late fees on a home that was worth about $260,000. They tried to sell the home for $330,000 because that would cover all their costs and yield a small profit. However, no one would buy at that price, and the lender finally foreclosed. A new buyer then purchased the home from the lender for $220,000.
“The couple probably could have kept their loss down to less than $50,000 if they had talked to their lender and done a short sale,” said Heinberg. “Instead, they lost their entire investment.”
For buyers, the secrets of successfully purchasing a property via a short sale are threefold.
“You need to keep your contract clean, by which I mean without a lot of contingencies, and your financing must be in place and you need to be patient,” Heinberg said.
As foreclosure problems have increased nationally for lenders, those seeking to purchase pre-foreclosure properties have found patience to be a cardinal virtue, reports Craig Stein of RE/MAX Showcase in Gurnee, Illinois.
“Four years ago, a wait of 10 days for lender approval of a short sale was a long time, now a lender may take a month or more to approve,” said Stein, noting that lenders aren’t delaying because they want to but because the evaluation process can be complicated.
Stein recalls a situation last year, where he represented a seller in a short sale situation for a property that attracted offers from five buyers.
“But by the time the lender responded, three of the buyers had withdrawn their offers. I tell my buyers who submit an offer on a home in a short-sale situation that they should keep looking at other properties until the lender approves the contract,” he said.
According to Jim Merrion, regional director of RE/MAX Northern Illinois, buyers currently are advised to give a lender a month or more to respond to an offer.
Buyers who want to consider pre-foreclosure properties should also keep a few other considerations in mind, according to Stein.
- The home will be sold “as is,” and the lender probably won’t agree to make any repairs.
- Because the current owner is having financial problems, there can be issues with getting clear title to the property.
- The closing will be scheduled at the lender’s convenience, not the buyer’s.
Though buying a home through a short sale can be more challenging than other types of residential transactions, they appear to be growing in number.
“I recently saw one respected industry source quoted to the effect that 20 percent of completed home sales nationwide are now short sales,” said Merrion. “We aren’t seeing that high a percentage of short sales in our area now, and I don’t think we ever will. Still, short sales are more common right now than at any time in recent decades, which is why so many of our agents have been getting additional training in how to handle these transactions.”
