Many of the homes for sale today – as many as half in some markets – fall under the category of “distressed properties.”

These are homes that have either gone through foreclosure or are being marketed as “short sales.” In a short sale, the homeowner can’t afford to maintain the mortgage, but the lender – rather than foreclosing – agrees to the sale of the property for less than the balance of the loan.

These types of sales have different dynamics than traditional sales – with more paperwork, often a longer transaction process and, in some cases, more frustration. For these reasons, many buyers shy away from foreclosures or short sales.

However, if you understand the potential pitfalls of purchasing a distressed property – and work with an agent who has a thorough knowledge of this market – you can get a great home at a great price.

This is an outstanding time to buy a home – distressed property or not. With historically low interest rates, and a glut of homes on the market in many areas, there are bargains to be found.

Is a distressed property for you? Here are pros and cons of buying one.

Advantages of Buying a Distressed Property

First, you’ll be dealing with a highly motivated seller – either a bank in the case of a foreclosure, or in a short sale, sellers who are in financial trouble and very interested in getting out of a mortgage they can no longer afford.

These types of sales take much of the emotion out of the process. You won’t be insulting anybody, for instance, if you make an offer that’s lower than the asking price. (That’s not to say that the low offer will necessarily be accepted, of course.)

Lenders are extremely interested in getting these homes sold and off the liability side of their balance sheets. Many foreclosed properties can be purchased for only a percentage of what they would have commanded five years ago. (This situation is beginning to change, though; bidding wars are breaking out on some foreclosed properties these days, especially those that are moderately priced. I know what’s going on in the Rochester area and will be able to help you arrive at a reasonable strategy for making an offer.)

If you’re looking at a short sale, you’re not likely to get quite as good a deal as on a foreclosure. But there are definite advantages to purchasing one of these homes. For one thing, since the homeowners want to get the home sold quickly, they are likely to keep it well-maintained and in good move-in condition.

Disadvantages of Purchasing a Distressed Property

If you’re looking for a “steal,” you’re probably not going to find it. The market is heating up, with more and more buyers jumping into the market. If you’re purchasing a home to live in, you’ll often be competing not only against buyers similar to yourself, but against investors. More competition inevitably leads to higher prices.

The transaction process for short sales or foreclosures often takes longer than for traditional transactions. It’s sometimes not clear which lending institution actually owns a mortgage loan, and it can take time to get it all sorted out – especially if there’s a second mortgage involved, which is often the case.

Some foreclosed properties are also in rough condition. Many have sat idle for a long time with minimal or no maintenance. The departing owners may have sold off fixtures, or damaged the property.

Interested in searching for foreclosures in your area? Access the Foreclosed Properties database here on remax.com.

Purchasing Tips

It’s critical to have the home professionally inspected before you make an offer or put down earnest money. The inspector will assess the structure’s soundness and may uncover problems that would be very costly to repair. Banks usually sell foreclosed homes as-is, meaning they won’t make any allowances for repair. And even in a short sale, they likely won’t make any such allowances, because they’re already losing money on the transaction.

You should have your financing in order before pursuing a foreclosure purchase. Pre-approved buyers have the best chance of getting the property in case of multiple offers. Also, banks generally aren’t interested in contingencies (for instance, needing to sell your current home before purchasing another).

You might also consider hiring an appraiser who’ll tell you what the house is worth. I can also perform a Comparative Market Analysis.

To guide you through the process – from obtaining a loan to identifying a home, to negotiating with the sellers (whether homeowners or banks), to closing – contact me at (585) 279-8250.

Mortgage and foreclosure terms defined.

Distressed Properties and FHA Loans

If you’re a first-time homebuyer, a federally insured FHA (Federal Housing Administration) loan might be a good option. The FHA has a program to help you repair a fixer-upper. You can get one loan that combines the mortgage with the repair costs. The amount of the loan is based on the projected value of the property once repairs are made.

FHA loans only require a 3.5 percent down payment – compared to 20 percent with conventional loans – and the down payment can come from an employer, family member or charitable organization. FHA loans also have lower closing costs than conventional mortgages.

Since the federal government insures these loans, you’ll get a competitive interest rate and lenders may be willing to give you terms that make it easier to qualify for a loan. If you have less-than-perfect credit, it’s easier to obtain an FHA loan than a conventional mortgage.

Find out more about FHA loans.

About HUD Homes

FHA-insured homes that go into foreclosure are acquired by the U.S. Department of Housing and Urban Development (HUD). HUD homes are offered for sale through Internet sites managed by management companies under contract to HUD.

Real estate agents who register with HUD can submit offers on behalf of their clients. HUD pays the agent’s commission.

HUD homes are sold as-is, without any warranty. HUD doesn’t make repairs nor pay to correct any problems. Again, that makes it critical to have homes inspected before making an offer.

In designated revitalization areas, law enforcement officers, K-12 teachers, firefighters and emergency medical technicians can purchase a home at 50 percent off the listing price. (They must commit to live in the property for three years.) Additionally, evacuees from hurricanes Katrina, Rita or Wilma can purchase a HUD home at a discount.

Find out more about HUD homes.

Find additional resources to help you avoid foreclosure.

Now is the best time to purchase a home. Interest rates are at a historic low, and housing prices in many markets have adjusted to levels that have not been seen in years.

But before you start your property search or drive around neighborhoods looking at every house with a “For Sale” sign in the yard, you’ll need some information. In particular, you’ll need to know how much house you can afford and get preapproved for a home mortgage.

Get Advice
Seek out a trusted real estate professional first. A Realtor who’s recommended by family, friends or business associates is your best bet. When asking for a recommendation, specify that you need an agent who understands your needs and circumstances and who will work within your budget.

Understand Your Income and Debt Ratios
Today it’s more vital than ever to consider your income and debt ratios. A good rule to follow for your monthly housing payment is principal, interest, taxes, and insurance (PITI), which should not exceed 28 percent of your total monthly gross income.

Share
By knowing your optimum monthly payment and how much of your savings you want to use for a down payment, a skilled real estate agent can determine approximately how much house you can buy. Be ready to supply some basic income and debt information to your agent and be honest with the payment you feel you can realistically afford. Just because you may eventually qualify for a higher monthly payment doesn’t mean you should put your family’s finances in jeopardy by stretching your budget.

Ask for a Lender Recommendation
Ask your real estate agent to recommend a mortgage professional who has given clients excellent service in the past. Find one who will work within your comfort level.

Be Prepared with Financial Information
When you sit down with the lender, have your two most recent bank statements, pay stubs for the most recent month, and your W-2 forms and tax returns for the last two years available. The lender will run a credit check and review your income and debt information and your credit scores with you.

Plan Ahead
If buying a house involves a higher payment than you’re currently making in rent or mortgage payments, take the difference between the current and proposed monthly payments and put it in a separate “house” account. At the end of several months, two things will have happened: First, you’ll have trained yourself to make the higher monthly payment and second, you’ll have grown the savings account for your home purchase.

Contact my office (585) 279-8250 or visit my website to find homes for sale in your desired neighborhoods.

If you have any questions regarding the short sale process call me today (585) 721-3010 or email me at thejeffscofieldteam@gmail.com

RISMedia, June 3, 2011—When it comes to private mortgage insurance (MI), there are several myths that exist that make buyers reluctant to consider a conventional loan with MI as an option when purchasing a home. One of the more common misconceptions is that cancelling MI is a difficult—not to mention time-consuming—process.

The irony is that the majority of buyers don’t harbor those same beliefs or reservations about an FHA insured loan when, in reality, FHA coverage may be less easily cancelled, or take longer to cancel, than MI.

HPA Makes Cancellation Clearer
When it went into effect as a new federal law, the Homeowners Protection Act (HPA) of 1998—which applies to both FHA and MI insured loans—required lenders and servicers to provide disclosures regarding MI for residential loans obtained on or after July 29, 1999. Prior to this, consumers were responsible for requesting MI cancellation if they met two factors: one, their loan balance was paid down to 80 percent of the property; and two, they had a good payment history.

While many lenders obliged consumer requests to drop MI coverage, consumers had sole responsibility for keeping track of their loan balance.

The HPA established three different times when a lender or servicer must notify consumers of their rights.

At loan closing, lenders must disclose:
• The right to request MI cancellation and the date on which the request can be made
• The requirement that MI be automatically terminated and the date on which this will occur
• Any exemptions to the right to cancellation or automatic termination
• A written initial amortization schedule for fixed-rate loans only

Each year, loan servicers must send borrowers a written statement that discloses:
• The right to cancel or terminate MI
• An address and telephone number to contact the loan servicer for determining when MI may be cancelled

When MI coverage is cancelled or terminated, lenders must send a notification to borrowers stating:
• MI has been terminated, and the borrower no longer has MI coverage
• No further MI premiums are due

Termination of Coverage
Under the terms of the HPA, mortgage lenders or servicers must automatically cancel borrower-paid MI coverage when the mortgage has amortized to 78 percent of the original property value, with all unearned premiums returned to the borrower within 45 days of the cancellation or termination date. This provision also requires that the borrower be current on mortgage payments required by the terms of the loan, and if the loan is delinquent on the date of automatic termination, a lender must terminate the coverage as soon as the loan becomes current.

Cancellation of Coverage
Also under the HPA, a homeowner has the right to request MI cancellation when the mortgage balance reaches 80 percent of the original property value. All payments must be current, meaning a homeowner must not be 30 days late on a mortgage payment within one year of their request, or 60 days late within two years.

However, a borrower can only initiate a cancellation request for FHA based on their prepayment of the loan, and even then, it can only be requested beginning five years after the loan origination date.

With MI, homeowners can request cancellation based on prepayment of the loan, as well as an appraisal. Despite falling property values, it’s possible for homeowners to gain enough equity in their home to request cancellation in less than five years based on a home appraisal.

Why This Matters to Agents
By understanding these rules and what they mean for homeowners, real estate agentscan educate their buyers to help them better evaluate allof their home financing options based on facts rather than myths.

This is even more important considering the FHA’s recent price increase, which has reduced buyers’ purchasing power and increased monthly mortgage payments.

Brien McMahon is chief franchise officer of Radian Guaranty Inc. More information may be found at www.radian.biz.

RISMedia welcomes your questions and comments. Send your e-mail to:realestatemagazinefeedback@rismedia.com.

Have you heard about RISMedia’s Real Estate Information Network® (RREIN)? RREIN is an elite network of leading real estate companies dedicated to providing consumers and their agents with leading real estate information, and committed to the belief that Information Share Equals Market Share. Having only launched this past June 2010, the RREIN network is already comprised of 40 leading brokerages, which make up 575 offices, 30,000 agents, 167,000 closings and represents over $41 billion in transactions. How can RREIN help your recruiting efforts and differentiate your company today? For more information, email rrein@rismedia.com.

Short Sale FAQs

1. The sale is subject to written approval by the mortgage servicer, as well as the seller and mortgage lender’s approval.

2. Approximately how “short” the sale will be based on the estimated total mortgage debt through the sale closing (include anticipated past due amounts), minus the estimated sale proceeds.

3. A short sale is a workout, and the seller owes the entire short amount.

4. They may be required to participate financially in exchange for an approval of the short sale.

5. They must demonstrate that a financial hardship exists.

6. They have the right to negotiate or decline participation if the servicer’s approval terms are not acceptable.

7. A person’s credit rating is a powerful measurement in today’s society, and a short sale is a better outcome than a foreclosure from a credit perspective.

-What can an agent do to increase the likelihood of a successful short sale after a purchase offer has been made?

1. The servicer must comply with various third-party requirements, so it’s important to follow the servicer’s instructions carefully for submitting documentation, and do so in a timely manner.

2. Follow up with the servicer often, but keep in mind they are dealing with unprecedented volumes of requests.

3. Keep a log of all activities related to submitting and finalizing the sale, including dates, results of communications, and names, titles and contact information for everyone you deal with.

4. Retain copies of all documents submitted and received.

5. Upon receiving the servicer’s written approval, review all terms and conditions promptly to ensure they were as negotiated and can be met. Some key terms to review are:

a) The authorized net proceeds figure, since the sale will likely be rejected if the servicer does not receive this amount.

b) If the seller is required to contribute cash at closing.

c) The specified settlement date.

d) If the seller is to net zero, since this means no funds can go to the seller.

e) If a promissory note is involved, to be sure it’s executed and delivered as needed and remains unaltered.

f) If the formal, written approval letter matches any pre-negotiated sale terms. If it does not, promptly outline to the servicer why the terms are not appropriate and provide supporting documentation.

6) Communicate the servicer’s approval terms to participants, but only share necessary information relative to the sale.

Are foreclosures getting makeovers? In today’s market they’re getting spruced up in hopes of catching more buyer interest.

The Chicago Tribune reported earlier this month that banks are investing thousands of dollars to clean up foreclosures. The goal, of course, is to attract a broader pool of buyers.

When banks take over foreclosed homes, they’re often in bad condition and depending on how long they stay vacant, they could get even worse. Foreclosed homes are frequently vandalized. These homes can have broken windows, water damage, missing fixtures, plumbing pipes, door handles, and more. Some homes are even uninhabitable, making it nearly impossible for a buyer to secure a mortgage.

Real estate agents are reporting that they’re making suggestions to the banks and the banks are doing more than just listening; they’re taking action. The agents are identifying the target buyer for a foreclosed property. Then they address the necessary repairs which often include fixes such as paint, some remodeling, refinishing damaged floors, repairing leaky roofs, and replacing old and broken windows.

Banks are hoping that the repairs will make the properties more appealing to regular buyers instead of just investors and professional rehabbers.

As banks invest a little more “makeover” money into the foreclosed properties, there may be an overall boost in the real estate market due to greater demand and increased sales prices of these homes.

The foreclosure market is also gaining more attention from financial giant, Bank of America. Its decided to no longer offer reverse mortgages. The Wall Street Journal reported that Bank of America ranked No. 2 in reverse mortgages for 2010.

These types of mortgages were only available to seniors (62 and older). The mortgage works in reverse. It’s based on the buyer’s equity in the home. The buyer gets monthly payments from the lender instead of the reverse. So instead of having money tied up in the home in equity, the money is paid to the senior (borrower). The bank takes possession of the property when the buyer dies or moves out (often into a nursing home or with other family members). However, by eliminating reverse mortgages, the bank will focus on more traditional mortgages aimed at assisting distressed borrowers who need loan modifications in order to prevent foreclosures. The bank will create a unit to deal specifically with troubled mortgages which are facing possible foreclosure.

Reverse mortgages have come under fire frequently due to their potentially risky nature. Regulatory agencies are scrutinizing these types of loans to ensure that those taking these types of loans aren’t being forced to purchase additional products in order to receive the reverse mortgage. The Federal Housing Administration wants to make sure that borrowers completely understand the reverse mortgage and their role especially when it comes to home insurance and property taxes.

Bank of America’s focus on what it calls its “core mortgage operations” may benefit troubled homeowners. And according to a report in The Wall Street Journal, this move to end reverse mortgages may reduce the banks presence “in areas where there could be liability and exposure.”

The Liberty Consulting Group of Quentin, Pa., will conduct a management audit of Iberdrola S.A. and its New York affiliates, including Rochester Gas and Electric and New York State Electric & Gas Corporation.

The state Public Service Commission, which made the announcement Thursday (March 17), said public service law provides for examinations of the management and operations of major electric and gas utilities.

This audit will focus on the Iberdrola companies’ construction program planning and operational efficiency, the PSC said.

On Dec. 16, the PSC authorized the issuance of a request for proposals from independent third-party consultants.

Seven management consulting firms submitted proposals for consideration. Liberty, which will report directly to commission staff, was selected as the most qualified based on expertise and experience, demonstrated understanding of the commission’s objectives and cost.

The total potential cost of the audit could be up to about $1.54 million, the PSC said.

Although Liberty’s focus will be on the construction program planning and operational efficiency of the New York operating utilities, “issues related to corporate governance, distant ownership and affiliate transactions add more complexity than is typically seen in management audits in New York,” the PSC said.

Additional emphasis also will be put on developing cost-benefit analyses to better ensure accountability on both the part of Liberty and the utility implementing the recommendations.

The audit is expected to take several months to complete, PSC spokesman James Denn said.

Liberty provides consulting services to utility managers, executives and regulators, according to its website.

A Rochester company that offers training for environmental workers and a national labor firm are joining forces to recruit workers at a job fair this week for more than 100 positions in the environmental and general construction fields.

The fair is scheduled for Wednesday and Thursday, 9 a.m. to 5 p.m., and may continue for part of Friday at the Staybridge Suites Hotel, 1000 Genesee Street. The fair is aimed at locating workers for contracts in the Rochester, Syracuse, Buffalo and Corning areas. M&V Labor Resources has arranged the contracts and Cornerstore Training Institute provides training for the specialized positions, offering a discount to workers recruited through the job fair. The work of removing asbestos and lead, for instance, requires special certifications.

“Although the unemployment rate is high in Rochester, it’s hard to find good qualified workers due to their lack of training,” said Jesus Mendez, president of M&V Labor Resources. Based in Orlando, the company also has an office on Humbolt Street in Rochester and has worked on a number of projects at Eastman Kodak and Syracuse University.

For more information about the job fair, visit www.mvlabor.com or call (407) 217-5989.