Foreclosures, REOs and Short Sales -- What buyers need to know
What are Short Sales, Real estate Owned (REO) and Foreclosures and should buyers consider them in their search?
If you categorically remove short sales and REO properties from your home search, you might miss a great property you’d otherwise have loved, but these properties require a bit more care in the process of purchasing them. First, what are the differences between them?
When the proceeds of a Real Estate Sale fall short of the balance owed on a property. The normal procedure is for the existing lender to agree to accept less than what is actually owed in order to allow the property to be sold and avoid foreclosure. Lenders require sellers to show proof of hardship for a short payoff sale.
EXAMPLE: Joe Smith bought his home in 2007 and got a loan of $500,000 from Wells Fargo. The market dropped significantly and the home is only worth $450,000. Including the $25,000 in closing costs, he would only receive $425,000 at closing if he would sell.
But since he has a job transfer that requires him to move to Texas, he needs to sell. Since Wells Fargo is going to forgive $75,000 on the sale, they make the decisions on which offer to accept, NOT the seller.
HOW IT IMPACTS YOU: If you are interested in a short sale, there are times when they represent a good deal, but banks don’t like to leave a lot of money on the table, so it is not often that you can get a REALLY good deal, but sometimes they do occur.
If you are going to buy a short sale, remember that patience is a virtue and a requirement. It can often take weeks or even months to get a response from your offer.
During the height of the real estate decline a few years ago, we had one situation where it took over a year to close a short sale from the time we submitted an offer. The process to buy a short sale is very similar to a standard purchase; it can just take a bit longer.
REO (Real Estate Owned)
Property owned by the lender, typically a bank, after an unsuccessful sale at a foreclosure auction.
Example: When a homeowner/borrower isn’t paying their mortgage payment, the bank can initiate the foreclosure process. The process ends with an auction of the home on the courthouse steps.
If the opening bid on the auction is above what the home is worth, no one will bid on the home and then the deed for the home is given to the bank, who now owns it. Now, the bank will hire a realtor and start the process of selling it to recoup as much as it can.
HOW IT IMPACTS YOU: Banks are getting MUCH better with their timeliness on REO sales and while it can take longer than a standard sale because a department within the bank has to review and approve all offers, it has gotten much better in the last year. The process to buy REOs is very similar to a standard purchase; it can just take a bit longer.
Legal proceeding in which a bank or the lien holder (usually lender) obtain a court order allowing them to sell the property. This is very expensive for a lender - months of unpaid mortgage, fees, unpaid property taxes, HOA dues and penalties, insurance, repair & cost of sale. Lenders usually prefer short sales as a way to recoup monies from a loan gone bad.
HOW IT IMPACTS YOU: We get asked about buying foreclosures all the time. The truth is that while there are many instances of buyers getting great deals, there is so much risk and the costs to participate are limiting for most buyers.
First, there is no inspection of the property, you buy sight unseen and with NO warranties at all. It is NOT uncommon for buyers of foreclosures to buy a property and then find all of the cabinets and fixtures gone. We had one foreclosure buyer to show up to the property he bought at a foreclosure auction only to find that the aluminum siding had all been removed and recycled.
The second factor limiting normal buyers from buying foreclosures is that there is no financing available. All cash and you need to bring a cashier’s check to the auction. True foreclosures are best left to the professional all cash buyer who has done complete rehabs in the past.
Minimize Risk and Look for Hidden Value
So, now that you understand the different categories of distressed homes for sale, what are the increased risks and how can you mitigate them?
First, it is important to work with a Realtor® that really understands the market and how to successfully complete a purchase of these types of homes. Some agents are accredited.
Second, these homes usually involve working with a bank employee who knows has never lived there (probably never even been there in person) and will almost always require the buyer to buy “As Is” and will require the buyers to sign many documents relieving the bank of any liability.
So, if you buy it and discover that the previous owner had not permitted the addition or that he had done all of the electrical work by himself in an inadvisable manner, you are left to clean up after the mess. In order to protect yourself, you need to employ strategies to minimize your risk.
- Search public records to make sure additions or modifications were done properly.
- Meet the neighbors and ask them if there is anything unusual about the property that you should know.
- The MOST IMPORTANT – have the home inspected top to bottom by a reputable and detailed home inspector. If you are buying as-is, then you need to know exactly what you are buying.
- Consider an agent that is a Short Sale and Foreclosure Resource®
Banks aren’t in the business of owning homes. They want these properties off their hands as soon as possible.
Banks will take seriously any buyer who’s well-qualified and ready to close a deal, and this could represent opportunity to you.If you have good representation and do your homework, buying a short sale or REO could be a great way to get a great home!
Christine DiCarlo, Broker of Reméo Realty is an accredited Short Sale and Foreclosure Resource.
Whether you are a seller who is looking for solid and compassionate advice or a buyer looking to expand your search, Reméo Realty can help you.
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