It was the best of times, it was the worst of times. Across the United States many of the homes for sale today – as many as half in some markets – fall under the category of “distressed properties.” This, in my humble opinion presents a once-in-a-generation opportunity for aspiring Canadian real estate investors with a long term plan, the commitment and fairly humble financial resources to get involved.
So, what are distressed properties exactly Stevie? Distressed properties are homes (including condos) that have either gone through foreclosure or are being marketed as “short sales.” In a short sale, the homeowner can’t afford to maintain the mortgage, but the lender – rather than foreclosing – agrees to the sale of the property for less than the balance of the loan.
These types of sales have different dynamics than traditional sales – with more paperwork, often a longer transaction process and, in some cases, more frustration. For these reasons, many buyers shy away from foreclosures or short sales.
First, you’ll be dealing with a highly motivated seller – either a bank in the case of a foreclosure, or in a short sale, sellers who are in financial trouble and very interested in getting out of a mortgage they can no longer afford.
These types of sales take much of the emotion out of the process. You won’t be insulting anybody, for instance, if you make an offer that’s lower than the asking price. (That’s not to say that the low offer will necessarily be accepted, of course.)
Lenders are extremely interested in getting these homes sold and off the liability side of their balance sheets. Many foreclosed properties can be purchased for only a percentage of what they would have commanded five years ago. (This situation is beginning to change, though; bidding wars are breaking out on some foreclosed properties these days, especially those that are moderately priced. Your Real Estate Broker ought to know what’s going on in this area and should be able to help you arrive at a reasonable strategy for making an offer.)
If you’re looking at a short sale, you’re not likely to get quite as good a deal as on a foreclosure. But there are definite advantages to purchasing one of these homes. For one thing, since the homeowners want to get the home sold quickly, they are likely to keep it well-maintained and in good move-in condition.
If you’re looking for a “steal,” you’re probably not going to find it. The market is heating up, with more and more buyers jumping into the market. If for example, you’re purchasing a home in which to reside, you’ll often be competing not only against buyers similar to yourself, but against investors. More competition inevitably leads to higher prices.
The transaction process for short sales or foreclosures often takes longer than for traditional transactions. It’s sometimes not clear which lending institution actually owns a mortgage loan, and it can take time to get it all sorted out – especially if there’s a second mortgage involved, which is often the case. Some foreclosed properties are also in rough condition. Many have sat idle for a long time with minimal or no maintenance. The departing owners may have sold off fixtures, or damaged the property.
It’s critical to have the home professionally inspected before you make an offer or put a down-payment. The inspector will assess the structure’s soundness and may uncover problems that would be very costly to repair. Banks usually sell foreclosed homes as-is, meaning they won’t make any allowances for repair. And even in a short sale, they likely won’t make any such allowances, because they’re already losing money on the transaction.
You should have your financing in order before pursuing a foreclosure purchase. Pre-approved buyers have the best chance of getting the property in case of multiple offers. Also, banks generally aren’t interested in contingencies (for instance, needing to sell your current home before purchasing another). You might also consider hiring an appraiser who’ll tell you what the house is worth.
Finally, what are the two golden rules all Canadian investors should keep in mind?
1. Always seek advice from Canadian legal, tax and mortgage professionals before making your foray down south. This small investment of time will highlight the traps and rewards of cross border investing; potentially saving you thousands!
2. Seek advice from local professionals operating in the U.S. market that you’re considering. The rules of engagement are very different from how the game is played in Canada. Advice is plentiful and the investment you make is a small price to pay to educate you on the big picture.
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