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How to Purchase Distressed Property

By looking at the average income of buyers versus the average cost of a house, this is the best time to purchase real estate since the Great Depression. Although Santa Barbara real estate has faired well during all the national problems, we have certainly not been immune to the major downturn that occurred from May 2007 to June 2009. As a result, there are many distressed properties available for buyers who have patience and are flexible on what they will ultimately purchase. Distressed properties are generally broken down into the following categories: Short Sales (Pre-Foreclosures), Foreclosure Auctions, REOs (Post-Foreclosures), Estate/Probate/Trustee Sales, and other miscellaneous Distressed Circumstances.


The California Foreclosure Process

In the California Foreclosure Process, if a lending institution wants to foreclosure on a property, they will issue the property owner a 90 day "Notice of Default". This tells the owner that he or she has 90 days to pay all the over-due mortgage payments, or the bank will put its lien up for sale at a Foreclosure Auction. If someone bids the lien up to its full value, the property will be transferred to that bidder, otherwise the bank will typically repossess the property at the end of the auction.


Short Sales (Pre-Foreclosures)

A "Short Sale" typically occurs during this 90 day Notice of Default period. Usually, the seller will put the property up for sale with a real estate agent. The agent prices the property at whatever arbitrary price he or she wants to put on it in an attempt to generate offers. Once the property has some offers on it, the offers are presented to the lender and the lender is asked to approve a Short Sale. A "Short Sale" means the seller is asking the lender to take a loss on the property rather than foreclosure on it. The lender will typically postpone the foreclosure process once offers are on the table. However, most banks have only a few staff member working on short sales, and they are typically inundated with Short Sale offers. This means that it usually takes 1 or 2 months for a bank to respond to even the simplest Short Sale request or inquiry, and to get a final decision from the lender typically takes 3 to 9 months. I’ve seen some buyers wait for over a year to get a final decision from the lender.

Please avoid Short Sales! Besides taking months or even a year or more of your time, the vast vast majority of Short Sale offers fail. Even if your offer appears to be accepted, the clear majority of the time it will still fail. Here are some of the reasons Short Sales often fail: the price is usually arbitrary and completely without the bank’s consent; the lender doesn’t want to take a loss on the property; the seller isn’t allowed to make any money on a Short Sale so they are typically just stringing things along to live in the property for free; the seller can change their mind about selling at any time (even though you think you have a binding contract with the seller, you effectively don’t); the bank can change its mind about selling at almost any time; and many buyers simply get frustrated after months and months of complications and move on to properties that are easier to purchase. If you value your time and sanity, please avoid Short Sales!


Foreclosure Auctions

Most foreclosure property ends up on the auction block. People sometimes ask me about Foreclosure Auctions. A common question might be like this "I just saw a foreclosed house online that's worth $1,000,000. It's going to be auctioned in two weeks for $90,000. What's the catch?". Well, there are several major catches: the $90,000 is just the open bid; the lender typically isn't going to allow it to be sold unless the final bid covers the lender’s full lien amount; the lender’s lien against the property is usually in excess of what the property is worth; and almost all auctions require all-cash bids with no financing allowed. Another possibility is that the $90,000 advertised is a junior lien (such as a second or third lien), and purchasing those liens is often a disastrous mistake. In any case, unless you have ample cash and 100% confidence in what you are doing, Foreclosure Auctions, like Short Sales should be avoided.

REOs (Post-Foreclosures)

REO stand for “Real Estate Owned”, and they are one of the best ways to get a bargain on real estate. Most attempted Short Sales fail, and that results in a Foreclosure Auction. Most Foreclosure Auctions also fail, and that results in the lender taking title to the property. Unlike Short Sales and Foreclosure Auctions, I highly recommend REOs. When an REO is put on the market, the lender already knows what they want for the property, the price is often below market value, you can use a loan to purchase the property, a written contract with the seller is actually binding, and the whole process for purchasing can often be completed within 30 to 45 days. This is the best time to purchase Santa Barbara real estate in many decades, and I highly recommend targeting REOs!


Estate, Probate, and Trustee Sales

Estate, Probate, and Trustee sales are other good properties to target. Although these are not always financially distressed, they tend to sell for below-market rates. Estate Sales typically occur when a person passes away. The descendants usually just want to get what they can for the property and have little or no emotional ties to the real estate. Probate Sales are sales ordered by the government, usually as a result of a lawsuit or someone passing away. The government just wants the property sold at a somewhat fair price. A Trustee Sale can occur for a number of reasons, but it usually means that a number of people will be sharing the proceeds. Again, this typically means that the sellers just want the property sold and have little or no emotional entanglement with the property. Estate, Probate, and Trustee Sales are all good sales to pursue. Ocean front homes and ocean view homes seldom get foreclosed on in Santa Barbara, so the best way to secure bargains on such properties is through Estate, Probate, and Trustee sales.


Other Distressed Circumstances

Although we sometimes wish that time could stand still, life keeps on moving along. Things happen in life that make people have to sell. People get sick, kids go to college, grandchildren are born in other towns, spouses pass away, divorces occur, private debts become unbearable, etc... In other words, things happen that force people to sell. As sad as some of these circumstances are, some buyer is going to get a good deal on the property and it had might as well be you.

Choosing the right real estate agent is an essential part of identifying these types of properties and getting the best deal possible. I know many sellers in the area, and I publish a monthly newsletter on distressed properties. My job is to find you a wonderful bargain, and I will work hard to make sure you get the property you want at the best price possible. It all starts by letting me know exactly what you are looking for.

Call or Email Me Today! 805-284-8422



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Right now is one of the best times to buy in decades. My services are free for you to use and I will keep you legally protected throughout the process. I use strong negotiation skills to get my buyers the best price possible. Many of the deals I put together are on properties that aren't even on the market. The sooner you contact me, the sooner we can make it happen!

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