Commonly Asked Questions Regarding Short Sales and REOs

Commonly Asked Questions Regarding Short Sales and REOs

Short sales, bank owned properties and the distressed property market

  • We are commonly asked about short sales and bank owned property as after the recent financial crisis, there has been inventory that has come in that fall under these two categories.
  • Many people are curious to find out why the bank owned property is so low. They seem to be deals but there are a few catches regarding this kind of property that you will need to know about.
  • QUESTION: How does a home become a short sale or REO property (bank owned property)?
  • 1. A short sale is a home listed for sale at a price that is less than what the current owner owes on their mortgage.
  • 2. It is being sold “short” of what is owed.
  • 3. This is a home in PRE-foreclosure, and the seller may be behind on their mortgage payments or property tax bills.
  • 4. Commonly the sellers bought the home at the peak of the market with a small down payment, for a price price that would be unrealistic in today’s market.
  • 5. Next, the seller and the bank must approve on the price being offered. Then the seller has to demonstrated sufficient financial hardship to the banks to qualify for a short sale.
  • 6. This may take many months since this is not started until an offer is made. Then that is when the seller has to demonstrate sufficient financial hardship to the banks to qualify for a short sale. On your end, you will have to wait many months for a final decision from the bank.
  • 7. Here’s the challenge: Commonly, there are multiple loans on the home from more than one bank and getting approval from all the parties involved is a long and difficult process.
  • 8.Statistics show that less than 1/3 of short sales close. Banks are not in the business of forgiving debts and that is why this process is difficult.  If they do, they are often strict and the financial and investigative burdens are placed on the buyer than traditional sales.
  • 9. Often the banks are busy with so many distressed sellers and since the seller still owns the home, the banks are not motivated to move the sale along quickly.
  • Information about Bank Owned Properties
  • 10. The other option: If you notice that the short sale home never sold and the seller misses three mortgage payments, it will likely become foreclosed upon and become Bank owned.
  • 11. The banks want to quickly sell as the home is an asset on their books that they are paying to maintain. Liquidating their asset now becomes a top priority, and there is no longer an individual seller.
  • 12. REOs (we use this term interchangeably with bank owned) are priced to sell, but a distressed homeowner likely had no incentive (funds) to maintain the home properly.
  • 13. Tip: Be prepared to do some fixing up for this property. REOS are sold strictly as is. They don’t have the usual disclosures and reports received from individual sellers in a standard transaction.
  • 14. Another tip is that you will need to be prepared to move quickly. Banks impose shorter contingency periods for inspections and for your loan to be approved.
  • 15. Often there will be multiple offers since the REOs are competitively priced. You may end up competing with investors who are willing to offer more than asking price, may pay all cash and may make contingency free offers.
  • 16. Some strategies like negotiating terms and asking below the asking price or using unconventional financing is usually not successful unless the REO has been on the market for a long time.
  • 17. Be prepared to move fast on these homes. You will need to allocate funds for repairs and know that you will be purchasing not from the owner but a bank.