Foreclosures, REO's and Short Sales

Thinking About Buying a Foreclosure or Short Sale?

Pre Foreclosures - Short Sales

These are properties where the owner is already late on their payments but the bank has not yet initiated foreclosure action. Many homes are wrongfully being promoted as "short sales" simply because the owner will need to bring a check to the closing. However in a true short sale, the owner asks the lender to take less than what is owed to pay off the mortgage, because the home's value has declined to a point where the owner can't afford to pay the remainder when the sale proceeds are short.

Homeowners who are over-leveraged and in the position of having to sell their home way below what they paid for it will find themselves in a better position to negotiate a short sale with their lender if they start the discussion before they are actually in default. If the house is not sold quickly or if the owner doesn't act fast enough to redeem themselves, the house will be foreclosed on and lost. In addition to losing any equity, the owners credit is ruined for about 3 years. Couple Buying a Home Since it costs the bank quite a bit of money to foreclose, it is sometimes possible for them to take a loss with a short sale & net more than they would if they had to foreclose. Pragmatic lenders realize a short sale can be a win/win situation for all parties since the lender can save on legal and court costs, the new buyer gets a better price & the seller will not suffer as severely as they might with a foreclosure (the negative impact to their credit with last only 18 mo. instead of 3 yrs.).

If you or anyone you know would be interested in either getting a great deal on a short sale, please call me. We can set up a time to explain all the details & see what option might work best.

Buying bank-owned properties
There is a lot of interest in buying bank-owned properties (REO's) these days. In fact, buying a property that has already gone through the short-sale and foreclosure stages is a much better option for buyers who need to close quickly. Offers typically get a response within a few days rather than 6-8 weeks. The downside is that the property has some flaws. If it didn't, it would have already sold. So buyer beware, do your due diligence homework.

What’s an REO?
REO stands for “Real Estate Owned”. These are properties that have gone through foreclosure and are now owned by the bank or mortgage company. This is not the same as a property up for foreclosure auction. When buying a property during a foreclosure sale, you must pay at least the l left oan balance plus any accrued interest, legal and other fees accumulated during the foreclosure process. You must also be prepared to pay with cash in hand. And on top of all that, you’ll receive the property 100% “as is”. That could include existing liens and even current occupants that need to be evicted. A REO, by contrast, is a much “cleaner” and attractive transaction. The REO property did not find a buyer during foreclosure auction. The bank now owns it. The bank will see to the removal of tax liens, evict occupants if needed and generally prepare for the issuance of a title insurance policy to the buyer at closing. Do be aware that REO’s may be exempt from the normal disclosure requirements that normally requires sellers to tell you about any defects they are aware of.

Is it a bargain?
Don't assume that any REO must be a bargain and an opportunity for easy money. You have to be very careful about buying a REO if your intent is to make money off of it. Even though the bank is typically anxious to sell it quickly, they are also strongly motivated to get as much as they can for it and will attempt to get market value by pricing it close to other homes in the neighborhood of similar size. When considering the value of a REO, you need to figure the time and cost of any repairs or remodeling needed to prepare the house for resale. Even if you do the work yourself, what is your time worth? Don't forget to estimate your holding costs, including loan payments, taxes, insurance, utilities, etc., during your holding period. The bargains with money making potential exist, and many people do very well buying foreclosures. But there are also many REO’s that are not good buys and not likely to turn a profit. A seasoned REALTOR will know what to look for in finding the ones with potential.

Ready to make an offer?
Typically the lender's REO department will use a listing agent to get their REO properties listed on the local MLS. Before making your offer, ask your Realtor to contact the lender or their agent to find out as much as possible about the condition of the property and the process for submitting offers. Since banks almost always sell REO properties “as is”, you’ll want to be sure and include an inspection contingency in your offer that gives you time to check for hidden damage and terminate the offer if you find it. This often gets tricky when the power and water is turned off. As with making any offer on real estate, you’ll make your offer more attractive if you can include documentation of your ability to pay, such as a pre-approval letter from a lender. After you’ve made your offer, you can expect the bank to make a counter offer. Then it will be up to you to decide whether to accept their counter, or offer a counter to the counter offer. Realize, you’ll be dealing with a process that probably involves multiple people at the bank, and they don’t work evenings or weekends. So be patient and give yourself plenty of time.

Thinking About Buying a Foreclosure or Short Sale?

Audry Wolff is a REALTOR with CENTURY 21 Club Realty, Mesa, Arizona