Anyone who has watched the news over the last few years has undoubtedly heard the terms “short sale” and “bank-owned property”. While these situations have always existed, the recent financial crisis has produced a flood of inventory that fall into one of these two categories and, as a result, successful Realtors and homebuyers have had to adapt to the particular challenges associated with these transactions.
You are likely to have seen a short sale or two, or been curious as to why that bank-owned home is priced so amazingly low. While there are good deals to be had for the more resilient homebuyer, there are a few catches.
First let me explain how a home comes to be a short sale or REO (bank-owned property).
A SHORT SALE is, simply put, a home listed for sale at a price that is less than what the current owner owes on their mortgage. It is being sold “short” of what is owed. This is a home in pre-foreclosure, and the seller may be behind on their mortgage payments or property tax bills. Typically, these sellers bought the home at the peak of the market, with a small down payment, for a price that would be unrealistic in today’s market.
If BOTH the seller and the bank approve the price being offered, the seller must then demonstrate sufficient financial hardship to the bank(s) to qualify for a short sale. This is usually not initiated until an offer is made, so be prepared to wait many months for a response to your offer!
The challenge is that there are oftentimes multiple loans on the home from more than one bank, and getting approval from all of the parties involved is a long and arduous process. As banks are not in the business of forgiving debt, some statistics state that less than one-third of short sale transactions ultimately close. If they do, they are often strictly as-is with more financial and investigative burdens placed on the buyer than in traditional sales.
The bottom line is…since the seller still owns the home, and banks are inundated with thousands of distressed sellers, there is little motivation (or sufficient staffing) for them to approve and expedite a short sale.
BUT THERE IS HOPE!
If the short sale home you loved never sold, and the seller has missed three mortgage payments, it is likely to be foreclosed upon and become BANK-OWNED. NOW the banks are interested in expediting a sale 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 in the mix.
REOs (we use this term interchangeably with bank-owned) are priced to sell, but a distressed homeowner likely had no incentive (or funds) to maintain the home properly. Be prepared for some fixing up, as REOs are also sold strictly as-is, with none of the usual disclosures and reports we receive in a standard transaction.
Regardless of the condition, the competitive pricing on REOs often results in multiple offers, so you may be competing with many seasoned investors offering more than the asking price, paying all cash, and making contingency-free offers. On these homes, negotiating terms, offering below the asking price, or utilizing unconventional financing is not usually successful unless they have been on the market for an extended period of time.
The bottom line is…be prepared to move quickly and aggressively on these well-priced homes, allocate extra funds for repairs, know that you’ll often be competing with seasoned investors, and that you’ll be purchasing your home from a large, bureaucratic entity—not a warm-blooded owner.