Update
for the 2022 real estate market
- When
I created this page 10 years ago around 2011, bank owned (REO)
and short sale properties were at least available, with most
major cities having these for sale on the MLS. Today, in the
2021 Real Estate market, when I checked the MLS on 11/28/2021,
there were only 4 (active) properties that are Bank Owned
(with 3 of those in Laguna Woods) and only 3 homes listed as a
Short Sale. I do still get calls from people hoping to find a
"foreclosure" (bank owned) or Short Sale, in the
hopes of finding a home at a discount. This is throwback-thinking
to a time when distress properties were in good supply and
these were usually lower priced than the standard market. As
you can see however, there is really zero inventory in
"distress" sales at this time. The high home prices,
low inventory, and high buyer demand of today's market means
that even homeowners in distress can easily sell their homes
conventionally for more than they owe. The few homes that do
foreclose are usually bought at court-house auctions for all
cash by property flippers, so they never make it to the retail
market. Keep that in mind as you read this web page and
realize that the comparisons below for standard, bank owner,
and short sale types, were much more meaningful about 10 years
ago than they are today.
I'm
often asked to define the three primary types of home sales and how they
differ. REO vs Standard sale vs Short sale. Which type of sale is the best deal? How long does each one
take to close? Should I be focusing on one and avoiding the
others?
I put this web page together to help answer many of these
questions. Should you have others, please feel free to call me. I will be
happy to discuss property sales with you and how you can take
advantage of each type of sale!
Three
types of sales
The
three most common types of property sales in the market today
are: Standard sales, Bank Owned sales (REOs), and Short Sales. Following is a description of each type
of sale, plus buying strategies to help you decide which type
will be the best for you.
1)
Standard
sale or "equity" seller
This is the
type of sale that most people are familiar with. The seller
still has equity in the property, so this type of sale is not
a "distress" sale. The advantage of a standard
sale is the ease of purchase (no long wait time) and the cooperation of the seller, who is usually willing to
work with the buyer for repair credits, termite repair,
closing costs, etc. Also, standard sale properties are usually
kept in the best condition. Many sellers take extra care to
prepare the property for sale by doing repairs, painting,
cleaning, etc
The down side of standard sales is
that they may be the most expensive option of the three. Standard
sellers typically pad their list price in order to try to get
the highest price possible. There is often room for negotiation
however, and this is especially true if the home has sat
unsold for an extended period of time, if the sellers are in a
hurry to relocate, or if they are otherwise motivated by
financial pressures.
2)
Bank
Owned or REO sale
A bank owned
or REO (Real Estate Owned) sale is the sale of a home that
has already been foreclosed and has returned to the lender.
The original owner is no longer part of the transaction. This
transaction is strictly between the lender (who is now
the owner) and the buyer. REOs are considered to be a
type of "distress" sale, in that the loss of the
home by the original owner was involuntary. These types
of sales are sometimes referred to as a foreclosure sale.
With REOs,
the lender/owner is exempt from having to complete certain
disclosures such as the TDS (Transfer Disclosure Statement).
The properties are generally sold "as is", so it is
up to the buyer to thoroughly inspect the property before committing
to the purchase. The advantage of an REO is price. REOs are
typically priced to sell, so a buyer often winds up with a
very good deal. The down side is often, condition. Many REOs
are left in poor condition, due to the neglect (or resentment) of the former owners.
3)
Short
Sale
This type of
sale is often confused with a bank owned sale or a
foreclosure, but it is neither. In a short sale, the homeowners still
hold title to the property and they are trying to
sell short (for less than what is owed on the home). The reason they are selling may be because they are
"upside-down" on the
property, or they may have suffered a significant financial hardship,
rendering them unable to make the mortgage
payments. Selling the home through a short sale may allow the
owners to avoid a foreclosure, plus it may have less of a
negative effect on their credit. Short sales are also
considered to be "distress" sales, since they
involve the loss of the home due to a financial hardship.
In a short
sale there are at three parties involved, the seller, the buyer,
and the lender(s), who must approve the sale and agree to
take the shortage. If there is more than one lender, they also
have to approve the transaction. This further complicates (and
lengthens) the short sale process. The advantage of a short
sale may be the price, as short sales are usually listed below
market value. The flip side is that it typically takes
considerably more time to close than a bank owned or standard
sale. Short sales (despite
the name) typically take the longest time to close. Much
of the time involves negotiating with the lender(s) and
getting approval for the sale. Also, there may be several
additional costs involved, as any deficiencies must be paid
off before title can be transferred. These additional costs
have to paid in cash (outside of the buyer's loan) and the
costs can be substantial. Remember also, that lender
approval is never guaranteed!
You may
occasionally see a home listed as an "approved"
short sale. This indicates that the primary lender has
approved the sale price for a former buyer (one who may have
"walked"). Generally, the lender will still approve this
price for a subsequent buyer, but this is not guaranteed.
Therefore, "approved" is a bit of a misnomer. If the
lender feels the market may have improved, they may order
another BPO (Broker Price Opinion, a type of appraisal) on the
property. If the BPO indicates a higher price, the lender will
typically counter for the higher price, even if they approved
the former price before.
The
following table summarizes the differences in home sale
types
(Please
remember that the answers
are generalities - There may be exceptions with
individual sellers).
| Question |
Standard
sale / equity seller |
Bank
owned / REO seller |
Short
sale seller |
| Average
response time for your offer? |
Fast
- Sellers will respond quickly to your offer. |
Fast
- Lenders are anxious to sell REOs and will respond
promptly. |
Usually
slow. Your offer may get accepted by the seller and
the listing agent right away, but it will then be
submitted to the lenders and getting a response from
them will be slow to extremely slow |
| Length
of time to close? |
Fast
- Usually a 30-day escrow period if buyer is
purchasing with a loan. |
Fast
to very fast - REO sellers will often ask for a faster
close time than for a standard sale. |
Slow
- Most of the wait time with a short sale involves
getting lender approval (and this is all before
escrow is opened). |
| Contingent
offer OK? |
Yes,
but not always accepted. |
No |
No |
| Cash
offer preferred? |
Yes
-The lack of a loan contingency is an incentive for
the seller. |
Yes
- Lenders prefer the faster close with a cash buyer. |
Yes
and No - Cash is not a huge incentive on short sales.
The main
concern of the lender is the purchase price and how
much the lender is being shorted. |
| 3.5%
down, FHA loan OK? |
Yes,
though cash buyer or buyer with higher down payment
will be preferred. |
Yes |
Yes |
| Pricing? |
Usually,
the initial list price is padded, since sellers want
to see how much they can get. They are more willing to negotiate
as the home sits unsold. |
Aggressive
- Lenders usually price REOs to sell. |
Mixed
bag - Agents sometimes use "teaser" pricing
to draw an initial offer. Regardless of agent's price,
final price must be approved by the lender(s) so list
price is less meaningful than with bank owned or
standard sales. |
| Which
is the best deal? |
There
are exceptions, but standard sales are usually the
most expensive to purchase. |
REOs
are priced well and are usually the best deal. |
These
can be a great deal but watch out for hidden
costs. such as payoffs to 2nd lender,
delinquent HOA dues or taxes, negotiator fees, etc. |
| Which
is the easiest to work with? |
Standard
sales are usually the easiest and most
cooperative. |
REOs
are generally easy to purchase, but are demanding on
time frames, plus are sold "as is". They can
also be competitive and you may find yourself in a
multiple offer situation. |
Short
sales are difficult because of the extended time
frame, lender negotiations, and additional
out-of-pocket costs. |
| Length
of contingency period? |
Standard
17-day period typically used. |
17
days or less. Lenders sometimes specify a shorter
period, for expediency. |
Standard
due diligence period, once escrow has been opened. |
| Competition
from other buyers? |
Depends
on price and availability. In areas with high numbers
of short sales, a standard sale of the
same model will be very desirable, increasing the
competition. |
High
- REOs are in demand. |
Mixed
- Competition can be strong if list prices are low,
but a glut of short sales on the market, plus many frustrated
buyers, ensure that there will be an ample supply of
homes available for purchase. |
| Are
disclosures provided? |
Yes
- Required. |
Not
all - Some are not required for an REO sale, such as
the TDS (Transfer Disclosure) |
Yes
- Generally the seller will still complete
disclosures. |
| Condition
of home? |
Good
- Standard sellers usually take extra care to
prepare the home for sale. |
Usually
sold "as is". Some have been damaged or
have been left in poor condition by the former owner.
Others may have been cleaned up by the lender. |
Mixed
- Many short sale sellers will continue to take
reasonable care of the home during the sale, though
some abandon the home. Almost all are sold "as is". |
| Can
you get a
credit for repairs? |
Yes,
though the actual amount of the credit is
negotiable. |
No
- For the
most part, the sale is specified as "as
is". |
No
- The
seller is in a "distress" sale and will
usually not contribute to repairs. |
| Seller
help with buyer closing costs? |
In
many cases, yes. Many standard sellers will agree to
pay some of a buyer's closing costs as part of the
deal. |
Maybe.
Some lenders are OK paying closing costs as part of
the deal. Others won't. |
Usually,
no. |
| Easy
to show? |
Yes,
though showing times must be coordinated with the
sellers. |
Yes,
very easy - Most REOs are vacant |
Depends
- Most short sale properties are still occupied
by the sellers and they are generally cooperative.
Some Short sale properties are vacant, so easy to
show. |
| This
type of sale is best for a buyer who: |
-
Is
OK paying market value for the home
-
Wants
a home that is in good condition
-
Is
asking for some concessions
|
|
|
| Watch
out for..... |
Seller not fulfilling
repair commitments or doing second rate repairs,
removing items that were thought to be included
(window coverings, certain appliances), moving damage. |
Extensive addendums with
lots of small print that may include: shortened
contingency periods, automatic contingency removal,
and/or ability to cancel escrow if they get a better
offer! |
Lots of extra costs, like
pay-offs to 2nd TDs, delinquent property taxes and HOA
dues (these costs must be paid outside of the loan).
The buyer may be asked to help to pay part of
the short sale negotiator fee if the listing agent is
using one. |
 What
are you looking for in your new home? Call me at (949)
290-3263 or email me at
ronforhomes@gmail.com and
let's discuss your Real Estate needs!
 |
Buying
strategies |
|
Standard
sale / equity seller
Standard
sellers almost always "pad" their list price. Many
do so to test the market in order to see what they may be able
to get for their property. With sellers, time is often the
critical factor. Generally speaking, the longer the property
sits unsold on the market, the more motivated they become and
the more they will be willing to lower the price. With that, a
low offer on a home that is new on the market is not likely to
succeed. Standard
sellers will simply wait for a better offer. They do get
discouraged over time however, and a lower offer on a property
that has sat for several months may have more of a chance of
success.
-
Offer
close to list price if the home is new on the market
-
Offer
lower than list if the home has sat on the market,
especially for an extended period
-
Ask
for repair credits or additional concessions to help
"sweeten" the deal.
Bank
Owned / REO sales
Lenders are
very anxious to unload REO homes form their portfolio and as
such, they are generally priced to sell. Because of this,
buyers should be aware that many REOs receive multiple offers.
Buyers may find themselves in competition with other buyers,
so they should be prepared to bid aggressively or look for
additional home choices. REO sellers will prefer a cash offer
over an offer with a loan because a cash buyer can close
quickly plus has no loan contingency. REO sellers will not
generally accept an offer that is contingent on the sale of
your home.
-
Make an offer that is lower
than list but still reasonable (don't "low
ball").
-
Be prepared for several
counter offers.
-
Act quickly, as REOs are
competitive.
Short sales
Remember that short sales are
always uncertain - There is always the possibility that the
lender will reject the short sale and will simply foreclose on the
property. With that, it pays to have additional options. Many
buyers prefer to place offers on several short sales at once
with the hope that one will get approved sooner than the
others. While this strategy may be frowned upon by the real
estate industry, it is nonetheless common practice by many
buyers.
-
Find out if the list price
is a "teaser" price by checking
"comps".
-
Make your offer according to
the above. Also, get your offer in quickly, so that your
offer will be the one that the agent submits to the
lender.
-
During the lender submission
process, continue to view other home possibilities and
make additional offers.
-
Be prepared to wait, even if
your offer has been accepted and has been submitted to the
lender(s).
While
you're reading the article, here are links for the different
type of sales
Other
types of property sales
Here
are some of the other types of home sales.
Auction
Sale
The
property has gone through the foreclosure process and is now
being sold at a public auction, usually through a web site.
Very often, the list price is merely the auction opening
bid, so the price can be very miss-leading. It very
typical for the price to bid up quite a bit higher than list
price, so use caution.
Occasionally, some real estate
agencies hold their own "auction" on a standard sale
property, in an effort to attract a lot of buyers. The list
price starts off very low and they will
often state that buyers are to fill out an offer form. The highest bids will then be contacted to fill out a purchase
agreement. These types of auctions are really just agent
selling schemes to create buyer frenzy and to get buyers to bid much
higher than they normally would. Be carefully of being lured
into one of these promotional auctions.
Probate
sale
This
is the sale of a property in which the owner(s) have died and
the home is being sold be the former
owner's successors. It is similar to a standard sale, with the
exception that a special probate purchase agreement must be
used. There is also a court date set during escrow to confirm
the purchase and to possibly provide an opportunity for the
sellers to entertainer higher bids on the property. The
court process could require 60 days or longer to complete
during escrow, but overall, it is similar to a standard sale.
One note - Find out of the sale is subject to court over bid.
If it is, other buyers may appear at the court hearing and put
in higher bids.
Corporate
Owned sale
This
is a sale that is similar to a Bank Owned sale. In a Corporate
Owned home sale, the original owner has accepted a buyout from
their employer. The owner is usually a relocation company who
has been hired to sell the property. Corporate Owned sales
often have sales addendums similar to Bank Owned sales. These
addendums may request an expedited contingency period, an
"as is" sale etc., so pay close attention to all
terms.
HUD
home sale
The
is essentially a bank owned home that is being sold by HUD
(Department of Housing and Urban Development). A
HUD home is a 1-to-4 unit residential property acquired by HUD
as a result of a foreclosure action on an FHA-insured
mortgage. HUD is the property owner and it is offered as a
bank owned sale or REO) property to recover the loss on the
foreclosure claim. See Bank Owned Homes above for information that also applies to a HUD home sale.]
Court
house foreclosure sale
This
property has gone through the foreclosure process and is now
being sold at a public auction, usually through a web site. Few properties are ever sold at auction, with the
majority returned to the lenders to be sold later as an REO.
The reason for this is that they are often priced over market
price, due to the amount owed on the loan. Second, purchasing
at auction requires all cash, or a cashier's check, for the
full amount of the purchase. Because of this, many of the
homes sold at auction are purchased by investors with the
intent to re-sell or "flip" the property
Related
links
|
