Today’s hottest properties are perceived to be “Foreclosures”. Everyone wants to look at “foreclosures” and buy for pennies on the dollar. The terms “foreclosure” and “pre-foreclosure” seem to be applied to many different types of properties, but what exactly does “foreclosure”, “REO”, “short sale” and “auction” mean? Which are the best bargains? How do potential buyers locate and bid on these properties? What restrictions should a buyer anticipate?
What is a Foreclosure?
It refers to any property which has been used as security for a debt and has been sold to satisfy the debt when the property owner defaulted on payments or other terms in the mortgage document (such as not paying the property taxes). Usually the property is sold to the entity which is owed money. The party foreclosing on the property may be a mortgage lender, a private individual who had “owner-financed” the property, the county sheriff, local property taxing authority, the IRS, a homeowners’ association or a tradesman with an unpaid lien against the property. These entities usually turn around and try to resell the property by listing the property for sale or placing it in an auction.
Foreclosure properties are generally sold “as-is, where-is” which means that what you see is what you get, including the trash in the yard and abandoned furniture in the house. Buyers can and should inspect properties carefully before making any offer, or make any offer contingent upon a satisfactory “due diligence” period of time. Most foreclosure sellers seek to sell for “market value” but are realistic as to current market conditions.
What is a REO?
It means “real estate owned”. Banks and credit unions may refer to properties taken back by foreclosure as “REO”, for short. All REO’s have been foreclosed on, but it’s important to remember that all foreclosed properties may not be REO’s because they’re not always owned by financial institutions.
Buyers must bear in mind that the seller of an REO property is a corporation, working Monday through Friday, 9am to 5pm and we don’t know which time zone they are in. There is no personal involvement on the part of the REO seller and buyers may feel they are watching moss grow on a rock. Something IS happening, but it’s so slow it’s difficult to tell. Many REO’s attract multiple offers and the seller tells all bidders to submit their “highest and best” offer. They mean it. They will look at all the offers side by side and determine which one nets the most AND has the greatest chance of closing easily and smoothly.
REO sellers like simple offers – cash with proof of ready funds, 30-day closings and no contingencies other than a “due diligence” inspection. Most REO sellers are very fair about giving potential buyers time to inspect the property and notify the seller of unanticipated issues. Most REO sellers also charge buyers $50-$150 a day for any delays past the agreed-upon closing date.
What is a Short Sale?
It means the sale of a property not yet foreclosed, which yields less money than is owned to all the creditors having a security interest in the property. Many mortgage lenders prefer to receive a partial settlement instead of incurring the costs of legally foreclosing, possessing, managing, insuring and marketing the property themselves.
Sellers’ lenders (all of them) must agree to receive less than full payoff or the Short Sale cannot occur. Obviously, the junior lenders would like to see some money rather than receive nothing and they may play hard ball to do so. Some Mortgage Insurance (MI) companies, which insured lenders against loss in the event the owner defaulted on a loan, are now demanding that defaulting owners sign promissory notes to repay the amount the MI company has to pay out.
Short Sales are extremely time consuming, involving many parties and require a great deal of patience and flexibility on the buyer’s part. Short Sales are NOT for buyers needing a home quickly.
What is an Auction?
It applies to a method for selling property to the highest bidder. The properties being auctioned may or may not be foreclosures or REO’s. The properties may or may not be “distressed”, the sellers may or may not be “motivated”. Properties may have a “reserve” price below which the seller will not sell. Some auctions are “absolute”, meaning the highest bidder wins, no matter how low that bid may be.
What’s your experience with these types of properties? What do you prefer?
Tags: ann bone, atlanta real estate, auction, banks, foreclosure, Metro Brokers, real estate deals, REO, short sale
October 12, 2009 at 6:27 am |
Good explanations Ann, unfortunately a lot of our sales will be from short sales,REO’s and foreclosures. Of these three I find short sales the most difficult to handle as it requires a lot of patience and time.
October 12, 2009 at 6:40 am |
I find myself loathe to approach any of these options. Of the three, I have not yet had success with a short sale–seems my buyers have not had the time nor the patience to wait. Of the two we have pursued, on both occasions the buyers withdrew after lengthy times of no action. As for the foreclosure department, the “as-is, where-is” condition of the homes my buyers and I have investigated scared the buyer away. I have been most successful finding great values in real estate for my buyers from sellers who are realistic about the market and need to sell but are not in default. It’s a great time to buy real estate all around.
October 12, 2009 at 10:06 am |
Due to my negative experience with short sales (I have yet to get one to the closing table either because my buyers don’t have te patience to wait it out or the listing agent is inexperienced with short sales) I have listed and sold foreclosed homes in the past but recently I find that buyers want the low price, but don’t want the hassle of the repairs or the uncertainty of the foreclosed properties. I too am finding the best value for the money are the sellers who need to sell, but are not in default or headed to default. My buyers feel more secure with knowing they are dealing with a person and not a corporation or bank.
October 12, 2009 at 11:02 am |
Foreclosures have been my only busiess pretty much this year. I have worked one short sale, unsuccessfully, due to the bank’s unrealistic goal of getting more money from my buyers. It’s important to sit down and talk with your clients about both types of transactions before anything else. I will say that working foreclosures gets easier with experience. You tend to learn what the banks are looking for in the contract. I think the most important aspect is educate your clients many times throughout the transaction and create open communication between the listing agent/assistants from beginning to end. Good article Ann, I will be sure to let my clients read it!
October 12, 2009 at 2:31 pm |
Great article Ann. Constant provision of the difference between the three is an absolute in this market… somehow most believe reos and foreclosures are the same and shortsales are now something to run away from. Shortsales are definitely time consuming… I just took the task of listing one.. wish me luck! I am open to suggestions on how to expedite successfully.
October 12, 2009 at 4:09 pm |
I would get a title search done ASAP and request a Short Sale package from each and every lien holder the title search turns up. Get the seller to work completing those packages so that each lien holder can be ready when an offer comes in. Hopefully, the seller hasn’t too many liens on the property and doesn’t have to spend too much time on getting his documentation gathered. Until these packages are submitted to the lien holders, only advertise the listing as “potential short sale” – let other agents know that much of the seller’s work still remains to be done.
Good luck!
October 13, 2009 at 3:51 am |
thanks Ann… I;ll get started on that right away.
October 13, 2009 at 9:05 pm |
Be patient and keep your client informed of progress.
October 12, 2009 at 8:28 pm |
Great article Ann! Very informative.
I have a short sale property listed and I have a question about your suggestion to get a title search. As the seller agent initiating the title search; who is responsible for payment for the title search?
Also, through recent contact with my seller’s lender, I inquired about their policy and procedures regarding having the short sale approved prior to submitting an offer; and was told they would not accept the short sale package without an offer. Is this a common practice or does the policy vary with different lenders?
October 14, 2009 at 9:07 am |
The cost of doing the title search at listing time SHOULD be paid by the seller, who will be the beneficiary of a successful short sale. It’s usually about $150 and any real estate attorney would be able to assist with this. If the seller pleads absolute poverty, an agent COULD pay for it, but I would wonder just how committed a seller is to the process if he/she isn’t willing to even get the process started.
Yes, individual lenders vary widely in their policies. Some won’t even look at the package without an offer as they consider it premature or potentially wasted effort in the event no offer ever comes in. Some progressive lenders go ahead and gather the completed package from the seller, a BPO (Broker Price Opinion) from one or more agents and are prepared to respond quickly when/if an offer does come in. Lenders seem to be very short-staffed in their “short sale negotiation” departments.
October 13, 2009 at 7:39 pm |
Very good article. I’ve done a couple REO sales and one short sale (both as the selling agent) and the key is certainly patience. Its also very important to throughly prepare the client for the process so they know what to expect and don’t get frustrated when things move very slowly.
I have a question about a client who is considering buying a property at the courthouse steps at the foreclosure auction. What are the pitfalls I should warn him about? I believe that once it is purchased on the steps that there is no opportunity to do an inspection or title search or anything else. Is this the case? How do the agents get compesated on these types of transactions?
October 14, 2009 at 8:56 am |
Rich,
I’ve emailed you a more complete explanation of the “buying on the courthouse steps” process, but the short answers are: You’re correct that buyer will not have an opportunity to inspect or even view the property before the auction UNLESS THE PROPERTY WAS ALREADY ON THE MARKET FOR SALE. Buyer SHOULD have a title search done (about $150) before buying on the courthouse steps because he gets all the liens with the property. Cash on the table – bring certified funds.
Good luck!
October 15, 2009 at 7:43 pm |
Excellent article and tips from all! I am fairly new to the business and new to Metro Brokers and seem to be attracting the buyers hunting for foreclosures (bargains). My only successful short sale was a 6 month process, with 5 months of my buyer threatening to sign a lease. What I believe actually got us to the closing table was all parties (both agents, sellers, attorney, lender) working as a team to pacify the bank…and me informing my buyer every step of the way. After all was said and done, the bank cut our commission and closing attorney fees to give that final stamp of approval. After 6 months, we were all just ready to close!
October 16, 2009 at 9:06 pm |
I currently have one of my short sale listings “Pending”. Overall, the short sale approval process was a breeze, thanks to my sellers being very truthful and staying on top of their lender each and every evening. Each day we would both pick up the phone and call the lender’s Loss Mitigation Department. Even if they didn’t have any news…they would hear from us. We had our approval within 30 days and were ready to close….just when the buyer’s lender now says they cannot give him the loan terms he was promised. So that has caused us to go into panic mode and help this buyer find a new lender. We are now waiting on the new appraisal to come back and hopefully we will have this one closed very soon. It would have been a very smooth Short Sale…but it just had to be messed up by the opposite lender. My point is that if we have good, truthful, willing to help sellers….we can do this! We must educate the buyers as well…they must be patient and be willing to wait out the approval process. We must also know how to write the contract to protect our buyers on Short Sales, such as due diligence periods and financing periods. We can do this! Yes it is hard and yes, I have got in my car and screamed…but in the end I will have a paycheck!
A sale is a sale and what else do we have to do with our time…?
October 19, 2009 at 12:08 pm |
Ann i noticed all the comments on how difficult short sales were and they are when you don’t have a relationship with the lender or even the seller/owner of the property. As a builder and with several new homes that i have been able to get the lender to take short sales i suggest the agent go after NEW HOMES. they are easier and quicker to get done and the homes will not be destroyed (at least ours won’t). Good luck
October 19, 2009 at 3:58 pm |
Hi Ann!
I’m going out on a limb asking this question but here it goes….Because short-sales are quite lengthy, would it be okay if we got someone to submit a (dummy) contract so to speak, just to get the process going and put a due diligence period on there that could protect the buyer submitting the contract to get their earnest money back? I’ve sold a few short sale listings this year and as the listing agent, and depending on the seller’s lender, they did take several months. The goal is to know exactly what the bank will accept. Wouldn’t that be better than sitting on the market for a long time, with the listing saying, “potential short sale”? So many realtors are shunning potential short-sale listings because of the time, so maybe to get the process jump started, we could do that and once approved, change the listing status to approved short sale. And the “dummy” buyer can terminate the contract and the seller can agree to give back their earnest money. Just asking…
December 25, 2009 at 12:19 am |
There are good companies out there actually trying to help people. But unfortunately there are also bad ones that are trying to take advantage of situations. I purchased 2 forclosures and have been happy with my purchases.