I get this request all of the time…”I want to buy a foreclosure…” However, most people don’t really know what it means to buy an actual foreclosure, so I’d like to explain the different terms used in Real Estate such as Short Sale, Foreclosure, REO, etc. to help everyone understand the difference of each situation. There are many different and confusing terms out there today regarding ‘distressed properties’. And many real estate professionals are using some of these terms more for marketing purposes because the public associates these certain ‘buzz words’ with bargain prices. Of course, that is not always the case. Please continue reading for a brief explanation of each scenario and the pros and cons associated with each.
What is a Short Sale?
We will begin with short sales, because they are very popular across the United States right now and are a huge buzz word in real estate advertising. A short sale is very often another term used for Pre-Foreclosure. A short sale is when a lender agrees to take less than the full amount owed on the home. Very often there are multiple lien holders because the home owner has taken out second and third mortgages and is no longer able to make the payments.
Short sales are very often the last effort the home owner will make in an effort to avoid foreclosure. Although the lender(s) will receive less than the total loan amount owed, they very often prefer getting a smaller amount in a shorter time period and with less effort than going to foreclosure. The costs of foreclosing on a property is very often greater than the bank’s loss by taking a short sale. Another reason the lenders prefer the short sale to a foreclosure is that the property may not sell at the foreclosure auction and then the bank would be forced to take it back. As an REO (Real Estate Owned) property, the lender would have to maintain, list and sell the property themselves. Banks are not in the real estate selling market and would prefer to stick to lending money…not selling homes. See more on this below in the REO section.
Short sales are very complicated, time consuming and the outcome is never guaranteed. In most cases the process to get a short sale approved is overly cumbersome and extremely frustrating for the buyer, seller and the real estate agents involved. Banks are completely over run with short sale requests and the approval process can take up to 4 months. The bank employs a Negotiator to evaluate each individual short sale request on a case by case basis. It is my experience that this is a high turnover position because I have never had a short sale transaction with only one negotiator!
From the banks perspective there are many factors that go into the decision making process and are also factors in the long time frames. Banks consider the home owner’s/borrower’s personal and financial situation, appraisal of the home, market conditions, the banks financial situation, and in many cases they have to consult with the outside investor who purchased the loan. Given all of these varying circumstances, you can imagine why this process takes so long. Many buyers are not willing/able to wait through this cumbersome process. For those that can, they most often buy a home well below market value and begin their home ownership with instant equity.
What is a Foreclosure?
The nitty gritty definition of a Foreclosure is when the bank/lien holder/mortgagor takes back a home that the borrower/home owner/mortgagee can no longer make the payments on. The foreclosure process and home owner rights are VERY different in each state. If you have a specific foreclosure question you should consult an attorney in the state where the property is located.
When a home owner fails to make the payments on their mortgage, the lender can begin the foreclosure process. This is a very specific legal and judicial process with set in stone timelines and proceedings. In a foreclosure, the lender takes possession of the house and the homeowner is forced to relocate.
Foreclosures are NOT sold by Realtors. Foreclosure properties are auctioned once a week at a Public Trustee Sale in the county where the property is located. These auctions are open to the public and anyone with CASH is able to make a bid on any foreclosed property. Foreclosure properties must be paid for in full, with a cashiers check at the time of the auction.
When you purchase a home at a foreclosure auction, you could be at risk of multiple legal, judicial and title problems that are typically researched and overcome by Realtors and title companies in normal sales transactions. These issues include, but are not limited to: title problems, multiple lien holders, IRS liens, tenants or owners still occupying the property, and/or structural, functional or pest issues. Since you do not have the opportunity or the right to visit and inspect foreclosure properties before the auction, only the most seasoned and savvy investors are encouraged to participate. Very often there are unforeseen risks that may run into the thousands of dollars to overcome.
What is an REO?
REO is a abbreviation for Real Estate Owned properties. If no one purchases the property at the Foreclosure Sale, then the home is returned to the lending bank and goes on the ‘regular’ market for sale through a Realtor. Typically, lenders are very motivated to sell these homes as quickly as possible, as they are in the business of lending money, not owning real estate. Another downside for the lenders in holding these properties is that the management of these properties can become very costly.
Buying an REO property can very often be the best opportunity to find a good deal for the general public. The reasons that REO’s are the best opportunity for the general public is that any buyer can submit an offer. Once the offer is accepted by the selling bank, the transaction is just like any ‘normal’ real estate transaction. The buyer has the opportunity to preview the property before writing an offer. The buyer can than utilize conventional and sometimes FHA financing. The also have to opportunity perform any inspections and due diligence necessary. The banks will very often have their own set of addendums and disclosures for the buyer to agree to and should be carefully reviewed by the buyer, buyer’s agent and potentially the buyer’s attorney.
I hope this clears up the confusion between these differing ‘distressed’ properties. There are many opportunities out there for everyone from the first time home buyer to the seasoned investor. If you have any questions or would like to get some information on a particular property don’t hesitate to contact me at any time.
Ask me how to set up a custom search that will only send you properties that are either short sale or REO.
bobby verenna
keller williams, dtc
303.995.8786
www.bikeracingrealtor.com
twitter: bobbyindenver
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{ 4 comments… read them below or add one }
Great explanation about the differences between a short sale, foreclosure and REO and what it means to consumers. The news media just preaches how buyers can get a great deal on foreclosures and neglects to explain the challenges.
Great article. Something I run into pretty often is that people often think that “Short Sale” means that the seller wants to sell the home and that it will be a short process. I explain to them that they are actually trying to sell the home short of what they owe and that the process should actually be called a “Long drawn out tricky sale.”
Mack Linan recently posted..Prepare to be Entertained
Mack, That’s a great point! I think we could push to have the industry rename these as: “Long, drawn out, tricky, short of the payoff, and if it’s the listing agents first short sale we could be in for a nightmare, sales” But the acronym doesn’t seam to work very well.
Bob Maiocco
Impressive blog, Bob! Very clear explanations of all three types of purchases. I’ve had plenty of buyers work with shorts sales and different banks respond differently. Without naming names, the big guys seem to have the slowest turnaround time and some seemingly very screwy processes. I understand CYA but it’s been getting a bit ridiculous!
Laura “Ole” Olesen recently posted..What’s all this Trail of Lights Fuss