Financing Issues with Distressed Properties - by RE School Instructor Karen Laurence
Usually a foreclosed home is not in excellent condition. Most of them have been neglected by their owners for lack of funds to maintain as well as make the monthly payments. The Bank-owned properties are called REO’s(real estate owned) and are back on the market for sale as is. Some will not pass an appraisal for a loan and must make use of a rehabilitation loan (203 k)that can be obtained through FHA or a construction loan-both of which are expensive and time consuming. Distressed properties, which are short sales and foreclosures, made up 40% of the sales last month.* Many buyers are not prepared to wait 3-6 months or longer for bank approval to move forward on these homes. They are looking to buy a house and move into it within 3 months.
In addition to that, 35% of these sales are all cash because financing is not obtainable or they are investment homes which are also difficult to finance at this point in time. Most of the time the electricity and the water are turned off and lenders must have the heat and water on to approve the loan. And a Certificate of Occupancy. The interest rate on a FHA rehab loan is ¼ point higher and usually has one or two points in it.
Sometimes you can get that bargain home through an REO but you can also get a great home now with your local realtor because prices are still low.
*The New York Times, May 15, 2011, Maryann Haggerty