Many buyers find themselves in the situation of looking at distress properties – short sales, foreclosures, and bank-owned properties. It may be because you specifically want to purchase this type of property, or that may be all that is available in your price range.

Some things you need to know as a prospective buyer if you get through the offer process and the short sale, foreclosure or REO is approved by the bank:

BUYING THE HOME AS IS:

Generally these are homes you must purchase “as is.” Be aware that you will be the one taking the responsibility for making repairs, not the lender. So find out what defects there are upfront by having a thorough inspection. In some case some repairs may be negotiated but don’t expect it. If the costs are high for these, factor this into your thinking about whether this is the right property for you or not.

Depending on the issues, you may want to have one or more tradespeople in to evaluate the defects (say plumbing and electrical) so you have an idea of how much the repairs might be. This additional information MAY be helpful if you are attempting to negotiate repairs (a good idea even in the case of a typical sale where you are dealing directly with the homeowner).

TERMITE ISSUES:

Here in California it is common for properties to have termite issues (this may not apply to those of you in other parts of the country).

In the typical sale the seller will complete a termite inspection and take care of infestation and termite damage as part of the negotiations (There are exceptions). A termite clearance MUST be provided before your lender will allow closing to occur. In the case of these distress sales you will often find that the seller, because of financial hardship, will not be responsible for termite repairs, but may pay to have the inspection done (they are pretty inexpensive). In the case of REOs, however, banks often will not do the inspection either. The Catch 22 is that your lender might require a termite inspection as well as a termite clearance.

If the bank is not willing to pay for this then you will need to do so. It is a good idea to have your own termite inspection if the seller will not so you are aware of any issues and can take care of them accordingly.

Be aware that with short sales and REOs, you may have to take care of the termite problems yourself in order to obtain the clearance and meet your lender’s requirements.

It is smart to work with an agent who has some experience with short sales and similar transactions so you get the guidance you need to make the right decisions.

You may be considering a foreclosure property as part of your home search. I have talked about buying foreclosures in the past, as well as short sales.

I have mentioned that with these types of properties you can expect that you will need to buy them "as is." Even though you will likely do an inspection, and there may be some obvious repair issues, the bank will not likely approve taking care of these problems. To some extent, this makes sense. If the seller is in a financial bind, they will not have the resources to take care of repair issues.

This can be a particular problem with foreclosures. Unfortunately, some sellers get themselves in financial difficulty where they cannot pay their mortgage and the bank forecloses. As one would expect there may be lots of anger and other strong feelings. For whatever reason, it is not uncommon to find that these homes are not in very nice shape, even if they are fairly new. Rugs may be extremely dirty or torn, walls may have holes in them and lots of marks, lighting fixtures may be missing along with light switches, and it is common that all the appliances will have been taken (stove, refrigerator, dishwasher, microwave, washer and dryer). It may be clear that someone deliberately trashed the house.

This is not to say that you should not buy it. The price the bank is willing to accept may be reasonable based on the market, but you will need to have a good idea of what all needs to be repaired, and what those costs will be including replacing fixtures and appliances, so you can make an informed decision as to the value of the home. I would strongly recommend an inspection in these cases, and perhaps having other professionals (electricians, plumbers) in to give you estimates of repair costs. This might even be smart before you submit an offer so you can factor that into your thinking.

Be aware, however, that the bank may not be willing to negotiate much, if at all, regarding the listing price they have chosen.