Many investor Buyers are often looking for great deals on foreclosures, court-ordered sales, estate sales, and listings with high days on the market. Below are my important considerations that Buyers need to know before focusing on these specific categories:
(1). Foreclosures occur primarily when a property owner defaults on a mortgage payment or other related bills tied to the property. When a bank takes over a foreclosure, it is often a lengthy process whereby the property owner at any time prior to a sale could come up with the money, pay out the outstanding debts, and retain control of the property. Because banks do not want to waste considerable time, cost, effort, and risk with managing foreclosures for an extended period of time, they tend to under-price foreclosures to help generate a quick sale:
DRAWBACK: While in theory under-pricing may be somewhat enticing for Buyers, the problem with this approach is that it is geared towards the whole market, not geared towards any specific Buyer. In a regular or hot market it is common for bank foreclosures to generate multiple offers (i.e. create a bidding war) and be sold thousands or tens of thousands of dollars above list price at an amount higher than it may have sold at with a regular market list price and fewer offers.
DRAWBACK: In multiple offers often the successful bid is unconditional which means no extra Buyer protection for financing or inspection as there would likely be without multiple offers. If a Buyer cannot get the money upon closing or if there is something found to be wrong with the home after the turnover (e.g. electrically, mechanically, structurally, etc.) the Buyer has 100% full responsibility so Buyers are advised to avoid unconditional offers unless they are highly experienced and have consulted with their REALTOR® and lawyer regarding the risks.
DRAWBACK: Many banks insist that a foreclosure property be sold ‘as-is, where-is’ relating to the condition, appliances, and every other aspect of the property (including the chance that the property may change (i.e. worsen) between the time of viewing and the turnover date). Often Real Property Reports and Compliance are not provided thereby pushing additional risk onto Buyers relating to lack of building permits, encroachments, and encumbrances. Foreclosures can be severely damaged if the previous homeowner ripped out fixtures or caused vandalism (e.g. dumping cement down the sewer, as an example) so it is important to carefully view and inspect all parts of a foreclosure before offering.
DRAWBACK: Depending on the bank, often foreclosures can take a few days or several days to receive an offer response and this provides more time for other Buyers to jump in to the multiple offers thereby further decreasing the chances of success for each individual Buyer. Also, by waiting for a prolonged period for an offer response, the Buyers have their deposit held up and may be more apt to miss out on another opportunity while they wait for the foreclosure result.
DRAWBACK: With foreclosures, often it is a case where someone lost their home who could not afford to pay their bills and they may attempt to seek revenge on the new homeowner who takes on the property from the bank. Therefore personal security is a risk and foreclosure Buyers must be careful and should notify the police (and their lawyer) immediately if any such problems occur.
DRAWBACK: Even if a Buyer is successful, often there may be a Seller condition inserted in the contract whereby the bank may retain the right to opt out of the contract by a specified date if the original homeowner comes up with the money at the last minute to pay out the debt and retain the property. Therefore even if you are the successful bidder out of many offers (after all of your time, effort, expense, and patience) you may still lose out on the property so the odds of being successful on a foreclosure sale are often much lower than most Buyers would expect.
(2). Court-ordered sales include foreclosures, but also include other types of sales such as expropriation for properties used for an illegal purpose; divorce settlements; payment of debts owed; etc. Similar to foreclosures, often the courts under-price the properties, hold out for offers, and the drawbacks are usually quite similar to those described above for foreclosures.
DRAWBACK: The Court can continue to collect offers until such time as they are ready to remove their condition (i.e. being pending to numerous buyers at once) without concern as to how much time, effort, and expense is incurred by each of the pending Buyers before selecting the highest offer once all Buyers have removed their conditions.
DRAWBACK: In rare cases for commercial property foreclosures it is possible for a Buyer to incur thousands of dollars expense with inspection, appraisal, environmental phase I and II only to discover that the Court sold to another unconditional offer or the foreclosed owner suddenly came good on their debt.
DRAWBACK: Courts have an obligation to the foreclosed owner to sell at market value (not below). Without the prospect of getting a good deal (i.e. under market value) in exchange for the huge Buyer risks incurred, it is a wonder why Buyers would treat a court-ordered sale any more favorably than a good deal where the same Buyer risks do not exist?
(3). Estate sales is another category of investment opportunity, and in most cases occur when someone has passed away and family or acquaintances take over the estate. If there are multiple beneficiaries, often the estate executor will decide to sell a property in order to divvy up the benefits to each of the beneficiaries. Most estate sales have usually one primary goal: to sell for as high an amount as possible, even if it takes several months for the property to sell because the primary goal of an estate sale is to generate money for the beneficiaries. Some Buyers are worried if the previous owner passed away in the home and if that happens to be a concern for you (note this is not a concern for all Buyers), you should ask your REALTOR® in advance and do not write an offer on an estate sale until you receive a satisfactory answer one way or another to your question. Do not assume without asking questions because anything is possible when buying an estate sale.
(4). Another category is days on the market – many Buyers ask ‘how many days has it been on the market’, however days on the market are in many cases deceiving particularly in slower markets since a property can be listed and re-listed several times with various price reductions before selling. Hence the real question Buyers should ask their REALTOR® is ‘how many days has it been on the market at the current list price’? Just because a property has been on the market since last June does not guarantee extra ‘seller motivation’ or ‘willingness to consider lower offers’ particularly if the list price was dropped an additional $50,000 yesterday. However, if the property has been on the market since last June at the current list price there is a possible chance of increased Seller motivation to consider lower offers. Also, if a property has been on the market for six months at varying prices it does not mean there is something wrong with a property other than the price since it is not uncommon for well-upgraded homes to sit months on the market if they are priced $30,000 or more too high. Ask your REALTOR® about the property history and dates of price drops (as well as any information on previous offers, previous pending offers that fell apart, details of any previous home inspections, etc.), as that will give you more useful information than simply knowing the total days on the market.
(5). Buyers also like to know ‘why is the Seller selling’; ‘How motivated is the Seller to receive offers’, etc. While these questions can be posed by your REALTOR® to the Seller in the chance that the Sellers may be willing to disclose, note that normally nothing is disclosed on these topics as most Sellers wish to keep this information confidential from Buyers. If a REALTOR® represents both the Seller and the Buyer as clients (i.e. in the cases of transaction brokerage) unless specifically instructed it is not disclosed to Buyers if known: (a). The lowest price the Seller is prepared to accept; (b). The reasons that the Seller is selling; and (c). Terms and conditions of competing offers. Similarly, the same REALTORS® will not disclose to Sellers if the reasons that the Buyer is buying is known or if how high the Buyer is willing to pay is known, and this is done in efforts to be fair and equitable to all parties and to act in an impartial, even-handed manner.
In summary, shrewd investors and family-home Buyers alike are advised to exercise caution and not get too specifically focused on foreclosures, court-ordered sales, estate sales, and properties that have been on the market a long time since there are drawbacks and the best buy for your money could be a foreclosure or it could instead be a nice family home – therefore 'limiting only to foreclosures' could mean missing out on great deals that are 'non-foreclosures'.
[Article written and ©2009, ©2020 by Kelly Grant, M.Eng., ABR, NCSO, P.Eng. - REALTOR® at MaxWell POLARIS in Edmonton, AB]
Disclaimer: for those readers not currently represented by another licensed REALTOR®, to obtain more information on this topic and / or if you will be selling or buying in the Greater Edmonton Area, call Kelly at 780-414-6100 (pager); text Kelly at 780-717-9290; or send Kelly an email to SOLD@KellyGrant.ca to schedule a confidential appointment.
