Buying distressed homes in Los Angeles
Los Angeles is home to plenty of distressed homes, opening a treasure trove of opportunities for savvy homebuyers and real estate investors.
Distressed properties can come in the form of:
- Short sales
- Real estate owned (REO) properties
In this post, we’ll differentiate the types of distressed properties and walk you through the basics of buying them.
What it is: It’s mortgaged property seized by a lender because of the owner’s failure to pay the principal and interest stipulated in the mortgage contract. After the property is seized, the owner is evicted and the property is listed for sale. It’s a sad story that happens all too often, but there is a way to turn around the gloomy ending.
You can buy property in foreclosure during pre-foreclosure or at a public auction.
The pre-foreclosure stage occurs when the lender files a notice that the owner has defaulted on mortgage payments. At this early stage, the owner can stave off foreclosure by paying what’s owed on the property. Or, the owner can begin entertaining buyers before the property goes into foreclosure.
Buying foreclosed property at an auction, on the other hand, will require you to haggle. Sometimes, you can work out a deal with the owner in default, but that’s not always the case. You should also remember that auctions can be canceled anytime, so it’s wise to contact the trustee/attorney to confirm details.
Together with your trusted Realtor, you should:
- Assess the foreclosed property you’re interested in. This may include having it appraised by a professional.
- Prepare the paperwork that paints a realistic picture of your current financial standing.
- Make a legitimate offer and submit it directly to the bank that owns the property.
Once you’ve submitted your offer, the lender reviews it. The bank (and other parties that may be involved) may accept, reject, or present a counteroffer.
For more information on buying foreclosed property, visit RealTrac.
What it is: A property goes on short sale if the lender and the owner both decide that it’s better to sell the property at a loss rather than have the homeowner default on his or her mortgage.
The short sale effectively halts the foreclosure process, and leaves the homeowner free to get rid of the property and not damage his or her credit record. In turn, the property will be sold for less than what remains of the current owner’s debt.
It takes a little coaxing for involved parties to take such a risk. Why? Because the process can take its toll on all.
The lender is not in the business of real estate and doesn’t want to be saddled with inventory. At the same time, the lender doesn’t want to lose money on the property. However, foreclosure costs a lot of money, too. Sometimes it is in the best interest of the lender to agree to a short sale.
To make up for the shortfall, the lender may ask the owner to pay back the difference between the short sale and the amount the house was originally mortgaged for.
In turn, the IRS considers this difference “forgiven debt,” or, in their estimate, taxable income that the owner has to pay for.
Couple this with the possibility that both lender and owner might not get any money out of the sale at all and the result is a short sale falling through.
To navigate a short sale, it’s best to:
- Hire a real estate professional who has successfully worked on short sales before. Your agent is your lottery ticket.
- Understand the circumstances you’re getting into. Short sales take a while to close and may require you to exert a little more effort.
- Practice due diligence. That means hiring a professional inspector, if needed, to identify the property’s underlying issues—everything from the trivial to the serious.
- Keep tabs on the status of the short sale. You don’t want to waste your time on a seller who is unwilling to provide all that’s required in order for the sale to push through.
If time is gold, you may need a king’s ransom if you’re intent on pursuing a short sale. Check out the guide by Bankrate.com for more information on short sales.
What it is: Once property has been repossessed as part of the foreclosure process, it becomes real estate owned or REO.
So, what separates REOs from houses undergoing foreclosure?
- REOs are not open for bidding in a foreclosure auction
- REOs are now lender-owned
- In most cases, REOs are free of tax liens and, if you happen to be the lucky buyer, the bank will even help you obtain a title insurance policy
- Bank-owned foreclosures may also be exempt from standard disclosure requirements
- Lenders don’t make any improvements in REOs; they are sold “as is.”
If you’re interested in buying REOs:
- Contact lending companies to find out if they currently have any REO properties. Better yet, contact a real estate professional as they are more reliable sources of REO properties.
- Prepare a cover letter to be presented along with your offer. State your commitment to buying the property as it is.
- Include an escape clause in your offer; handy if ever you want out of the deal upon the discovery of extensive property damage. Increase your chances of closing the deal by making an offer close to the asking price. But before doing this, consult a professional and have the property appraised. Who knows, the REO might be overpriced.
The process of buying an REO doesn’t take as long as short sales because you’re already dealing with the lender. To learn more, visit Realtor.com and About.com.
If you’re interested in purchasing distressed property, give us a call at 310-379-8800 and schedule a consultation.