Short Sales, Foreclosures and REO's 

Short Sale FAQ 

1. What is a Short Sale?

A short sale occurs when a seller owes more money to their lenders than what the property is worth (less closing and selling costs) and as a result, if the seller reaches an agreement to sell their home to a buyer, the seller will need to negotiate with their lenders to convince them that they should take less money than they are owed.

2. What are cons of a short sale for a home buyer?

• There will a lengthy delay in getting approval of the sale from the seller's lender.  Typically a buyer will wait 30-90 days to get a response from the bank's over-worked loss mitigation department.  Most likely, the bank will counter back at a price that is close to what they are owed which can often be significantly higher than the asking price.
• Even after negotiating a price with the seller, the lender is under no obligation to accept the offer and quite frequently will try and renegotiate the terms of the offer. 
• The other complication for a short sale is that if the seller has significant other assets, the lender may not be willing to accept a short sale unless the seller agrees to make good on the deficit.
• Nationally only 3-4% of all short sales are approved by the lender.

3. Why are Short Sales often priced way below market?

The current trend for listing agents of Short Sale listings is to dramatically lower the list price in order to get people to see their listing and hope to get some offers.  However, the reality is that the list price is purely fictional as the listing agent knows that the bank will probably not accept an offer unless is it significantly above the current list price.  The seller is willing to agree to any deal since they just want the property sold and don't care how much the lender gets for the property.  Also with the current change in the tax laws, short sale sellers for the next 3 years no longer have to pay taxes on any forgiven mortgage debt.

Foreclosure FAQ

1. What does it mean when a property is in foreclosure?

When a home owner fails to make a timely payment of the mortgage, the lender files a Notice of Default (NOD) with the county.  Typically the owner has 90 days to cure their default by bringing their mortgage current.  If the home owner fails to bring their mortgage current, the lender will the invoke their right to hold a trustee's sale. The trustee's sale is where the trustee will auction off the property to the highest bidder.  This process usually takes 30 additional days. Once the trustee's sale has been invoked, the owner must pay off the entire mortgage in order to prevent the sale of the property.

2. How does a Trustee's Sale work?

The bank will authorize a company to auction off the property at the county courthouse.  The bank must post a 3 notices advising of the sale in a newspaper for at least 21 days prior to the sale.  On the day of the trustee sale, the trustee will ask that all potential bidders for the property to register and prove that they have cashier's checks or cash to make a bid of the property.   An open auction is then held between the qualified bidders.  The opening price is usually the amount owed to the lender(s).  If you are successful in winning the property, you must settle up with the trustee on the spot with cash or cashier's checks.  At that time, you will receive the deed to the property free of any junior liens.

3. Can I buy a property where a Notice of Default has been filed?

Obviously if the property is on the MLS,  a home buyer should not have a problem buying a property where a NOD has been filed other than issues if it is a short sale.  However purchasing a NOD property from a homeowner that is not on the market is fraught with potential liability for the buyer.  If after the sale, the seller can show that the buyer and/or their agent, took unfair advantage of the seller, the buyer can be liable for any profits they made from the sale and significant other penalties.  In some cases some buyers can also goto to jail.

4. What are the problems with buying a property through a trustee's sale.

• You must pay all cash for the property at the auction and thus financing must be obtained prior to the auction.  Most lenders will not loan money for this purpose until after you acquire the property and thus you have to use hard money lenders or have your own cash.
• There is no opportunity to inspect the property and it will be sold in AS IS condition.  Often when a homeowner is being foreclosed on, they will strip anything of value from the property (fixtures, sinks, flooring, doors, built-in appliances etc) and they have no incentive to maintain the home in good condition.
• Most properties that goto to a Trustee's sale have little or no equity and thus the opening bid is often more than the market value of the property.
• For the properties that do have some remaining equities, you will be competing with professional investors for these properties at the sale.

REO FAQ

1. What is an REO property?

A REO property is a home that is currently owned by a bank/lender.  These properties are usually a result of a trustee sale where there were no other bidders other than the lender.  The lender then lists the property with a real estate broker and has the property on the MLS.

2. What are the pros of buying an REO property?

The primary advantage for buying an REO property is that the lender is a motivated seller and are often willing to sell the property for slightly less than the market price.

3. What are the cons of buying an REO property?

• You must buy the property in AS IS condition and the bank will not do any repairs
• The bank has limited obligations for disclosures and thus the buyer must rely on their own inspectors to uncover deficiencies of the property
• Negotiations with the bank can be a long and laborious process.  The bank will insist on the buyer using their contracts and no alternations to the contract will be permitted

Conclusions on Short Sales, Foreclosures and REO's

Overall, the biggest advantage for a buyer is that a good deal can be had if the buyer is willing to be patient and not focused on buying one particular home.  However dealing with a bank is much more difficult than dealing with an individual homeowner.  The banks will typically more flexible with a property that is located in an area with lots of REO's or properties in foreclosure. 

If you have any further questions, please do not hesitate to contact me anytime.