How Long Does it Take to Close on a Foreclosed Home? (And What Do You Need to Look Out For?)
The other day I wrote a post on how long it takes to close on a short sale, and the 
answer is that it depends, but it could take a long time. With the April deadline for the home buyer’s tax credit approaching fast, home buyers are wondering if they will have the same issues when they buy a foreclosed home. The tax credit has two components, first, the contract has to be written and accepted by the end of April, and second, the home has to close by the end of June. So the big question is, if you buy a home now, that is make an offer and get the property under contract, will you have enough time to get the financing wrapped up and the loan closed by the end of June. The answer here is yes, in most cases there will be plenty of time to close, even if you wait until the end of April before getting your contract together. But there are special issues you need to be aware of when dealing with foreclosed homes, and if you are better prepared, the process will go smoother and with less stress.
A foreclosure is a bank owned property. This means the bank (it could be the loan servicer, or it could be the end lender, like Fannie Mae, Freddie Mac or HUD) have already gone through the foreclosure process and the home is now a liability they need to get rid of. From the bank’s standpoint, the difference between a short sale and a foreclosure is motivation. A short sale is a potential problem. It may be in the banks best interest (it usually is) to negotiate and take a smaller loss with a short sale than to wait, and take a bigger loss. But the banks aren’t set up for these transactions, and a potential loss isn’t near as motivating as a big loss that is already on their books. By the time a foreclosed property hits the market, the bank already knows how much the property has cost them, they know what condition it is in and an idea of the range in market value. By the time the foreclosure is listed for sale, it is an old problem where the bank has already sunk money into it, and someone at the bank is assigned to sell the property. At this point they are ready and able to make a deal. So with a motivated buyer and a motivated seller, the home should be able to close quickly, right? Not necessarily. There are a number of land mines common with the sale of foreclosed homes which take extra time and may delay the closing.
Things to watch out for when buying foreclosed bank owned properties:
Condition of the property – This is the big one. Foreclosed properties are sold “as is”. This means the bank is selling the home in its current condition and they will not make any repairs to the property. This is usually the biggest problem with foreclosures, but also a big reason that they are priced so low. This means that you need to do a thorough home inspection so that you know everything that is wrong with the home, and an idea of how much it will cost to fix it. But this brings up another problem. If repairs are needed, most loan programs (both conventional and FHA) will require that the repairs are done and the home be in good shape before you can close. The problems with foreclosed properties can range from minor to the need for a full rehab. But even if the work is minimal, don’t expect the bank to do the work, they won’t.
So if any repairs are required, it is up to you to get them done. There are two options for this:
1. Do it yourself – If the repairs are minor, many home buyers are doing the work themselves, before the close and before they own the home. If you ask any good real estate attorney what they think about this, they’ll tell you it’s crazy and you are taking a big risk. And they’re right. But this is done all the time, and when the repairs are relatively minor the risk might be worth the reward since spending a little now could save a lot later.
2. FHA 203k Rehab Loan – This option is best for any situation where there are more extensive repairs. With the FHA 203k loan you can buy with a low 3.5% down payment, just like with any other FHA financing, but you can include the cost of the repairs (or remodeling) into the loan amount. There is more work involved with these loans. In addition to approving you and the property, we also have to approve the work you plan on doing. We need to get a detailed contractor’s estimate, and the appraisal shows the value of the home as it is now, and what it will be once all the work is completed. Because there is more involved, it takes a little longer to close with an FHA 203k, expect 60 days, but it can be sooner. With these loans, the repairs are done after the closing.
Lack of responsiveness – One of the biggest frustrations when working with a foreclosed property is the lack of responsiveness from the bank. This is the classic hurry up and wait attitude. When the bank accepts the offer they will usually want to set a quick closing date. This makes sense, the quicker they can get the bad loan off the books the better. But often as part of the loan approval process, or whenever you need the bank’s sign off or approval, the clock starts to drag. It isn’t surprising that banks move slowly. Decisions are often made by committee or passed up the chain of command. Also, the REO staff at the bank is likely to be overwhelmed. They might have hundreds of properties they are responsible for, and only so much time in the day to deal with everything. So you could be waiting a while for them to respond. This might not make a difference if you aren’t on a deadline, but if you are planning on getting the home buyer’s tax credit, make sure you build in extra time, and don’t count on their meeting the closing date on the contract.
Lack of responsiveness often describes the listing agent in a foreclosure, too. The listing agent is the Realtor who is marketing the home for the bank. In a normal transaction, the listing agent acts as a liaison between the buyer and the seller. The problem (not in all cases) is that it is common for one agent to be responsible for up to 30 listings. This means they are spread so thin that they often don’t even return phone calls let alone help in moving the transaction toward the close.
Title issues – Another common problem with foreclosures is title issues. The title is the chain of ownership and guarantee that you own the property and no one else can claim the home after you close on it. In order to close, the new mortgage lender needs to prove that you have a clean title so they feel safe lending the money for the mortgage to purchase it. Each step of a foreclosure adds extra legal documents which need to show on the title. The bank handling the foreclosure is probably the servicer, not the actual owner of the property, and it is common to have the property transferred from one entity to another. All this extra paperwork means that it may take more time to sort everything out, especially if you are trying to get documents from the bank (see above).
Utilities – In order to close (unless you are buying with an FHA 203k loan where this is part of the repair estimate) the water, gas and electrical service all have to be turned on. Even something as simple as this can take extra time. If the utilities weren’t on when the home was appraised, we will need to do an inspection before closing verifying that they are on and everything is working properly. The bank holding the property won’t turn on the utilities until after you have full loan approval. Then it goes through the chain of command, while everyone else waits for something to happen.
Extra fees – Check the contract, but banks are now asking for the buyer to pay extra fees or to pay charges which are normally paid by the seller. I have seen cases where the buyer had to pay the state and county transfer taxes, even though these are traditionally considered seller paid items. These char5ges can add up to thousands of extra dollars for the buyer. But remember, everything is negotiable. If the deal is good enough it may be worth paying some of the seller’s costs or extra fees, but the bottom line is that the seller wants, and needs, to get rid of the home.
Penalties for not closing on time – The contract will also most likely have a clause requiring the buyer to pay a fee for everyday beyond the contract closing date. This is pretty logical. The buyer should have an incentive to make sure they aren’t dragging their feet and are working to get the home closed on time. But what happens when the delay is their fault?
The key to getting through the extra obstacles of a foreclosure, and getting it all done in time, is to work with experts who know the process and can help you steer clear. This means a good loan officer, a good Realtor, and a good attorney. You can find bargains with foreclosed homes, but be prepared to deal with some frustration and expect some bumps along the way. But the payoff can be worth the extra hassle.
Thinking of buying but not sure where to start?
First Time Home Buyer Webinar this is a recording of a webinar I did recently which goes over the entire home buying and mortgage process in just under an hour.
Free Home Buyers Guide – From A to Z, everything you need to know about buying a home and getting approved for a loan.
Peter Thompson 630-479-6424
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