REO vs Short Sale – What’s the Difference?

In today’s real estate market, some argue that the best deals are foreclosed or short sale properties. REO and short sale properties have flooded the market and many buyers are taking advantage of these lower priced “distressed” properties.

 

In the current economy, many homeowners are falling short on their mortgage payments resulting in an influx of Short Sales and REOs on the market. These “distressed” properties are growing in popularity for buyers looking to get a great deal. It is true that there are opportunities for excellent value on a home, but be warned that these transactions are more complex than typical real estate transactions. By doing your research and realizing your options, you can successfully navigate this often confusing process.

 

Here’s the run down on Short Sales and REOs to help you understand your risk, potential gain and the overall process involved with these transactions:

 

Short Sales

 

Properties categorized as Short Sales on the market are in the earliest stage of distress called “preforeclosure.” In this situation, the property owner is behind on his or her mortgage payment and wants to sell, but cannot sell it for enough money to cover the remaining principal on the mortgage(s). The property owner then asks the mortgage lender if he/she would be willing to accept less than what is owed. This is the period of “preforeclosure,” when the lender decides whether it will accept a lesser amount than is owed. If the lender decides to sell the property as a short sale, they will usually price it at or a little below market value offering possible advantageous opportunities for buyers.

 

When submitting an offer for a short sale property, the contract is actually submitted to the seller (not the bank) first. IF the seller agrees to the offer, THEN the contract is submitted to the lender for approval. Depending on the lender, this approval process could take a few days or 6 months (some have even been longer). Buyers need to have a clear understanding that the process can be a very long time. And, at the end of the process, there isn’t a guarantee there will be an approved offer even if the seller agreed at the beginning. The lender must agree to take a loss on the amount that is deficient on the loan.

 

If the lender declines a short sale agreement or there isn’t an offer before time runs out, the property is put into a foreclosure auction. Foreclosure auctions can be intimidating, and rightly so. This is because you are not necessarily entitled to inspect the property before you place a bid and you will not necessarily be awarded a clean title to the property … even if you win it.

 

REO

 

A property that does not sell at a foreclosure auction returns to the possession of the lender and becomes a REO (Real Estate Owned) property. If you’re getting confused, keep in mind that REOs are also commonly referred to as “bank owned” properties. The advantage to REOs is once they are returned to the lender, their title becomes cleansed, which means claims and problems that could hold up a buyer are removed. In addition, REO properties become open for inspection. And the best part – they are almost always aggressively priced. This is because lenders want to get rid of REOs as soon as possible. Right now, REOs are some of the best deals out there, but also the most competitive to get.

 

Another key factor in buying a bank owned property is that the lender is not required to provide a full disclosure statement on the property. Most often, banks do not know historical issues with a property – Has there been a mold problem? Has the roof leaked? Have there been termites? Are there boundary disputes? The list goes on and on.

 

While the buyer is allowed to have an inspection before closing on a bank owned or short sale property, it is sold “AS-IS with right to inspect” which means any hidden issues might not be revealed in a typical inspection and any issues found will not be repaired by the seller / lender. Furthermore, there is no recourse to the buyer of the property against the bank if any hidden dangers are found after closing.

 

In a nutshell

When searching for a property, buyers need to take all these factors in to play and make sure that the “discounted” price accurately reflects the true price of the home. Sure, the buyer receives an upfront price deduction. The question is – after the buyer has finished repairing all the issues and fixing the property up, is the value at the end a better deal?

 

One very important point – don’t count out traditional listings from the mix. There are some sellers that purchased before the real estate “boom” that have properties listed comparable to the REO and short sale listings – without the headache of dealing with a bank or waiting!

 

Finding a real estate agent who is experienced with these atypical transactions can be the key to success.  Gaining a proper understanding of what entails buying a short sale or foreclosed property is also vital to a successful and positive experience.

Tags: Foreclosure, Short Sale

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