Let’s talk about buying Foreclosures/REO’s and Short Sales. Also known as “Frustrations of home buying when it is not as easy as expected”.

Buyers are constantly asking us about buying Bank Foreclosures (REO’s, Corporate Owned, Lender Owned) and Short Sale listings. Each can be a good way to find a “diamond in the rough” but both are potentially risky. So let’s talk about the pros and cons of buying both. We’ll start with REO’s (Real Estate Owned properties). REO’s are being sold by the bank who originally loaned the owner the money to buy the home. That owner ended up being unable to make the mortgage payments, so the house went back to the bank. Essentially, it was repossessed.

First off, I’ll go through some of the negatives (Cons) and then I’ll end up with the positives (Pros).

Condition of the home and property.

What are the odds that the desperate homeowner would continue to maintain the property, if they were not able to make their mortgage payments? Probably slim. So that house may be in a state of severe disrepair, and the Bank is unaware of the condition.

Full disclosure of condition.

The Bank can’t disclose to a buyer the problems with that home, as they don’t know the problems because they never lived there. Hmm… So a Buyer must be extremely diligent in their investigations of the home to make sure it is in good shape. Inspection expenses can add up quickly and those inspections may still not catch every problem.

A seller who is selling their house must disclose all maters of a material nature that are wrong with the house, and they are legally liable for those disclosures for 3 years from the date of close of escrow. They can be sued if they misrepresent anything. The bank who is selling a house does not have the same disclosure requirements.

Buying an REO is very much a “Buyer beware” scenario.

Now, a little bit about Short Sales purchases.

A short sale is the process of selling a home for less than the owner owes to the bank. The bank needs to agree to “sell short”, and take a loss. The reason the bank may agree to do this is because the process of foreclosing costs the bank tens of thousands of dollars, and takes up to a year and a half in some cases. It may be in the best interest of the bank (their stockholders specifically) to agree to the short sale and not risk further potential loss.

During a short sale, the owner retains the occupancy to the home and makes all the selling decisions, just as if they were selling the home and making a profit, EXCEPT that the bank has the final word on whether or not they will allow the house to sell under the terms agreed upon. This is where we see “Subject to lender approval of short sale” on the contract.

The main problem with a short sale is the time involved. The banks are overloaded with work, and it can take OVER A YEAR to get them to respond to the offer, and sometimes they will use the time and then deny the sale anyway. Oops. And once the short sale process begins the bank assigns a “negotiator” to the transaction. Frequently, those negotiators quit or are transferred to another department at the bank midway through the transaction, and the process begins again from scratch. Ouch. This can happen several times in one transaction which leads to delays of more than a year. This is an excellent way for both Buyers and Sellers to get burned out. If a Buyer decides to go ahead and invest their time in the short sale process, it is possible that the interest rates for their loan will rise, thereby costing them thousands of dollars when, and if, they finally get the sale approved.

Now that you have seen the “Cons”, read on for some of the “Pros” But buying an REO or a Short Sale can be very rewarding, as well. Here are the “Pros” now that you have read the “Cons”.

Emotions.

With an REO a Buyer does not have to deal with the strong emotions of a Seller. The bank really doesn’t care, and only views the property as dollar signs in their ledger. On the other hand, a Seller who lived in the home for 25 years may not like that a Buyer wants to remodel and paint. Emotions from Buyers and Sellers can run high during a sale, but during a foreclosure transaction the banks don’t care.

Pricing.

If a bank loaned someone $500,000 to buy a house and that house now only appraises for $300,000, the bank will typically entertain offers around that $300,000 mark. It is purely a business decision for them. And if a property needs repairs, and those repairs can be substantiated with bids from licensed contractors, a bank can decide to give a credit with no emotion. They will say, “Take it or leave it”.

Short Sale.

Great deals can be had in buying a short sale for those who are patient, and do not care if they buy the property or not. Short Sales are NOT good for people who really NEED a house by a certain date.

Once a Short Sale has been entered into, a potential Buyer can do their investigations of the property condition, appraisals, etc. After the Buyer has their costs (to make the home livable) formulated , and the bank has agreed to the sale, it is possible to ask for credits or repairs from the bank. Sometimes the banks will do it, others they won’t. But it OK to ask firmly for those credits. Just don’t be tied to the outcome. Remember, if the bank is forced to foreclose on the house it will cost them around $50,000 to do so. Ouch.

Often, it is not what you ask for in the way of credits, but how you ask. You need an agent who knows how to negotiate well.So while buying an REO or a Short Sale may seem like the best, easiest thing in the world for a Buyer it is imperative to go into the transaction with plenty of information.