Cash is King: Buying a Foreclosure or Short Sale

Great deals on foreclosures and short sales are definitely out there, but you may run into financing roadblocks when it comes time to buy

By Kris Berg, FrontDoor.com | Published: 9/09/2009

The complicated appraisal process can make it difficult to buy a foreclosure.

The same banks who are "sellers" today are also the lenders for the purchases. Their rules have changed. The appraisal of the property, which used to be a single event, is often a process involving a second appraisal review, and appraisals missing on the low side are all-too commonplace.

Strict policies for income and assets documentation can mean additional conditions of loan approval cropping up well into the process, and these additional conditions can significantly delay or entirely stall the transaction. So now, it is not uncommon to see a cash offer trump a higher-priced offer with a loan involved, which leaves the average buyer at a disadvantage.

In the case of condominiums, the biggest issue we are seeing with financing is the owner-occupancy dilemma. Most lenders will require that a minimum 51 percent of a project's units to be owner-occupied as a condition of financing. With a less-than 20 percent down payment, this number can be much higher.

In the old days (a couple of years ago), this meant that a buyer needed only to watch out for projects with a bunch of renters on board. Today, a project built during the peak real estate market might not qualify because a majority of the units have been foreclosed on and are now vacant. In our downtown San Diego market, this is sadly not an uncommon situation, making many of the "deals" there available only to the cash buyers.

It's Not All Bad News

It's not all bad news, of course. After four or more years of declining home values in most areas of the country, prices are becoming very attractive in general, not just for distress sales. Further, not all distress sales will be off-limits to the traditional buyer needing to finance the purchase.

But, with attractive pricing comes competition. It helps to remember that a home purchase is a process, not an event, and that you won't necessarily win them all. Armed with information, reasonable expectations, and knowledgeable and experienced representation, however, you will dramatically increase your chances of getting that "deal." Worst case, you may have to settle for a really great home at a really fair price.

Kris Berg is Broker/Owner of San Diego Castles Realty in San Diego, Calif. Visit her Web site at www.SanDiegoCastles.com and read her blog at www.SanDiegoHomeBlog.com.

More on FrontDoor:

• Search Homes for Sale
• First-Time Homebuyer's Guide
• Foreclosure Buying Guide
• Experienced Buyer's Guide
• Home Finance Guide
• Tools and Calculators

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