Top 3 REO-Forclosure Purchasing Pitfalls (Simi Valley Real Estate)

I am going to focus several blog posts on REO purchases. The Simi Valley Real Estate market is experiencing more than half of it’s sales with distressed homes; a good portion of these being REO or otherwise known as foreclosures.

1. Getting caught up in the hype. There are two kinds of hype to watch out for. There is hype that is generated by Real Estate Agents who’s commission is driving their eagerness to close a sale.  There are under 600 real estate agents in Simi Valley and approximated 100 home sales per month,  many people are not making a living.  If you take in account that many of our sales involve agents from out of the area, there are Simi Valley Real Estate Agents desperate for a sale.  Desperate is not what you want to take to the negotiation table.

I take a pretty bearish position when commenting on the current market which is not popular with those who think we should will the market back with positive spin. The facts are that the economy is in trouble, the mortgage industry is on the ropes and these things take time to work themselves out. The positive truth of this is that careful, diligent people can make smart buys in troubled times like these.

The second kind of hype is eBay hysteria. I joined eBay in 1998, have sold and bought on eBay over the years. My most successful auctions as a seller occurred when the bidders got caught up in hysteria with a “win at all costs attitude”. Relax, take a step back and be prepared to walk away, there will be another better house down the road at a better price.

2. Working with an inexperienced Agent. Loans are very difficult, business relationships mean everything now when there are multiple offers, buyers more than ever need an agent that knows what to do when everything starts falling a apart and even better knowing when to go ask for help when an escrow looks like it is dead. Understanding how loans work, where the money is coming from, the differences between FHA, FHA 203k, VA, Conventional, Warehouse lines, direct lenders, mortgage brokers, etc.; this is not all common place knowledge. Knowing if loan conditions are common conditions or uncommon conditions. Sensing if a desperate loan broker is trying to force something. Knowing to bounce every loan off two or three other lending professionals to make sure the loan can go through. An agent who puts all their eggs in one basket when it comes to lending today is foolish.  Experience cannot be underestimated.

Experience can kill your transaction as well.  All the servicers and asset managers on these REO-foreclosure sales require offers to be emailed as one file.  Older experienced agents in my field are very reluctant to embrace new technology and lag in this area.  If your offer is faxed and broken up into several difference files, your experienced agent has just made the listing agent’s job harder and the asset manager’s job harder, so finding that balance between experience and a modern practitioner will be hard to find.  One hint….if their email ends in “aol.com”  they probably have no idea how to use PDF files.

3. Understanding property conditions. How that will affect the loan and more importantly how that will affect you the buyer after you have moved in and the excitement of the hunt is over? What I am seeing now with the inventory on the market has been very interesting.  Several trends have appeared.

Foreclosed homes are in typically poor condition.  The prior owners could not afford to make payments and if they were short on money, then regular maintenance and upkeep was often neglected.  The prior owner(s) knowing they would lose the home, had no incentive to care for the home.  Most REO-foreclosures are loaded with deferred maintenance issues and many times unknown issues, as the prior owners do not leave a list of items or conditions when they leave.  In some cases the prior owners are angry when they leave and they take appliances, light fixtures, carpeting, Toilets, sinks…I even saw one home where the air conditioning and heating system was removed.

During the hype of the up market, buyers overlooked serious defects on homes and serious deferred maintenance on homes because of the low inventory and the fear of being priced out of the market.  I am seeing serious un-repaired issues left over from the 1994 Northridge earthquake on many of these homes.  In the last couple of months I have been in a dozen homes with cracked foundations, chimneys that were broken off at the roof and repaired.  Un-repaired cracks in the walls.  Homes with soils issues.  The house in these last pictures has a few problems that were visible to start.  The first picture shows the back yard and how the pool parallels a down sloping hill.  A repaired crack in the bottom of the pool runs the length of the pool parallel to the hill.  The deck is sinking and pulling away from the pool on the same side as the hill.

Further investigation inside the home shows that the kitchen, which is next to the down slope of the same hill is sinking.  The picture of the kitchen has a yellow line drawn on it with and when I was in the home, if you stood back, the sinking ceiling and un-level floor line on that side of the house were evident.  I have a level program for my iPhone and confirmed my suspicions.  These are the kinds of things picked up from my construction experience and close work with home inspections, foundation engineers and structural engineers.  While I am not qualified to make findings and suggested corrections on these kinds of issues I helped my buyer decide to either move forward with the purchase and hire the right people to advise on repairs or just walk away an look for another home.

A few years ago when homes were selling as fast a McDonald’s dollar Sundaes in a heat wave, many agents were able to get by selling homes as almost every escrow closed because lending was easy and deferred maintenance issues did not cause concern with many buyers.  Today this is very different; an agent needs experience in many areas and needs to be a constant practitioner honing his/her skills.  Please ask yourself who is in your corner.