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Interested in buying "distressed" real estate? Here's what you need to know

By   |  Posted in First-Time Homebuyers

Due to the housing bust and the overall economic downturn, a large portion of the available inventory in today's housing market is made up of distressed real estate--foreclosures, short sales and real estate owned (REO) properties.

For at least the next five years, or perhaps even longer, borrowers who can qualify for a home loan will encounter a lot of this "distressed" real estate out in the marketplace. While you can buy distressed real estate at below-market prices, it also brings a unique set of circumstances that you may not encounter in a more typical homebuying scenario.

The articles below are designed to educate you on what you need to know, what you need to look out for and what mistakes to avoid when purchasing foreclosure, short sale or REO properties. 

"Buying a foreclosure? It's more than just cheap real estate"

Foreclosure With many markets saturated with foreclosed properties, more prospective homebuyers are taking a closer look at these types of properties than ever before. Purchasing a foreclosure isn't just a simple matter of scoring a dirt-cheap bargain, however. What should you worry about--or not--when buying a foreclosed property?

Foreclosures being sold by banks have long been an attractive opportunity for real estate investors. But today, these homes are so plentiful in some markets that many consumers are purchasing them as primary residences.

The big attraction of purchasing a foreclosure is the expectation that it can be bought at bargain-basement prices. Whether that expectation holds true depends largely on local market conditions and what Keith Gumbinger, vice president of HSH.com, calls the "desperation factor" of the bank that needs to sell the property. 

"Here's how to buy & finance a short sale property"

Short Sale Short sales differ from most home purchases in almost every way. At every step, from shopping to negotiating to mortgage financing, short sale properties are just harder to deal with. Here's what you need to know.

A "short sale" indicates that the sales price of the property is less than the amount the former homeowner owed against it. With so many American homes underwater, it's a common sight in real estate listings these days. But a short sale does not mean a screaming deal for the homebuyer--at least, not necessarily. Just because the mortgage lender is probably taking a loss doesn't mean that the property is priced way below market value.

"People want to get houses for half price, and that's not going to happen," says Tina Uchytil, a Nevada-based REALTOR.

In general, short sales do offer some discount from the market value of the property--anywhere between 5 percent to just over 30 percent, according to RealtyTrac's first-quarter 2010 figures. If short sales didn't come with some discount, there would be no reason for buyers to deal with the myriad headaches that these transactions can present. Make no mistake, short sales come with headaches, so you need to know what to expect. 

"Buying an REO property: Know what to expect"

REO A Real Estate Owned property (REO) is a property that has reverted to the mortgage lender after an unsuccessful foreclosure auction. REOs are a large part of the housing market these days. In September 2010, distressed properties--many of them REOs--accounted for nearly 48 percent of home-purchase transactions, according to the Campbell Inside Mortgage Finance Survey.

Many banks have an entire department set up to sell REOs. Bank-owned properties can offer great deals for buyers, as they often sell for less than a typical resale home, but there are several things you need to know before investing in an REO property.

Even though REOs can be a bargain, that doesn't mean you should jump in with your eyes closed. "REO buyers need to do their homework so they understand the property, the market, the neighborhood, and the process," says Tom Kelly, a spokesperson for Chase Bank.

Here's what you need to know as a potential buyer of REO property in today's market.

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