Do I Dare? The Truth About Foreclosures, Short Sales, and REOs

The terms “foreclosure,” “short sale,” and the acronym “REO” tend to get a bad rap in real estate. Be it inexperience or misunderstanding, because people aren’t sure what each stand for, a great deal of agents and homebuyers steer clear of these kinds of sales. Since it isn’t uncommon for misunderstandings to lead to unnecessary fears, let’s remove some of the taboo, and shed some light on these terms so you can decide whether one of these types of properties is for you.

Let’s face it, when many people hear one of these terms, thoughts of a home in complete disrepair with a big red X on the door come to mind, or assumptions about an undesirable neighborhood arise. That’s not always the case. These types of sales are all based on seller circumstances but as we know, misfortune doesn’t discriminate. Sure, you may find a small home in need of new plumbing throughout, but you might also find a gorgeous home with little to no work needed, for which you wouldn’t otherwise qualify. In some cases, if the homeowner can’t afford the mortgage, they may not have  maintained the property for years, on the other hand there are also many cases of hardship, where a homeowner becomes ill or loses a job and can no longer pay their mortgage for the home in which they’ve done nothing but take pride.

Foreclosure – When a homeowner is no longer paying their mortgage, and the loan becomes delinquent, the bank or lender will contact the owner to see if they’re able to pay it off in full. If they cannot, the process starts with a Notice of Foreclosure where the lender will take possession of the property to sell it and recoup as much of the debt as possible. A foreclosure dramatically affects the borrower’s credit score and stays on their credit report for seven years. Foreclosures are sold at auction, of which the procedure and laws vary by state and country. For example, in Massachusetts the auction is held at the property location, while in Florida they’re usually held at the county courthouse. Foreclosure homes are typically sold “as-is” or “sight unseen,” meaning that the mortgager will not be paying for any updates or repairs and the buyer will not be able to inspect the property prior to purchase. Foreclosures are also typically paid in cash to avoid financing contingencies and hasten the process. To get a better idea of what the laws are where you live, check here if you live in the U.S. In Canada foreclosures are less common due to stricter lending requirements, and the preferred process that keeps the lender from involving the court system is called Power of Sale.

Short Sale – With a short sale, if a homeowner is having trouble paying their mortgage and they owe more than what they can get for it through a sale in the current market they, or a representative for the borrower, contact the lender to see if they qualify for this option. The lender will ask for information to begin a short sale package which includes financial statements and a hardship letter from the seller. This process is less damaging to the seller’s credit score and usually shows that the seller took responsibility by trying their best to get the lender’s money back. If they haven’t already done so, the seller will find a real estate professional to list the property. The real estate agent must disclose that “the terms are subject to the mortgage lender’s approval” and usually the property is sold “as-is” due to  the seller not having the ability to pay for repairs and the lender not wanting to lose any more money on the property. Contrary to its name, when looking to purchase a short sale property keep in mind that it’s not called a short sale due to the length of time it takes. In fact, it’s the opposite.  The term means that the sale price will likely fall “short” of the debt owed on the property. Though purchasing a short sale can be similar to a regular home buying experience, some major differences are the length of time to close, the amount of paperwork involved, and the fact that you’re dealing more with the lender than the seller as they need to be the ones approving the offer.

Real Estate Owned (REO) – This type of property is not sold at a foreclosure auction; the bank already owns it. Often during a foreclosure auction the lender sets the price trying to recuperate not only what is owing on the home, but also the interest and legal fees that have accrued, which can take the price far over fair market value. This can sometimes deter bids, so the property remains in the bank’s possession. The bank will then hire a broker to help sell the property, which could come to market at a discounted price or with incentives like a reduced down payment or faster approval.

REOs are not always a bargain, as the banks are looking to make money. If you’re purchasing one, use the services of an experienced real estate agent who will check the title or deed that serves as evidence of ownership, and recommend you get a home appraisal and inspection.

Now that you know there isn’t a condemned property behind every door with these types of sales, there might be a little less trepidation, right? Whether you want to purchase one of these property options or you’re still on the fence, know that these types of sales come with baggage and are not for everyone. Some are the stuff of dreams for home flippers or investors who can budget for worst case scenarios based on square footage, others can be the perfect financial opportunity needed for first-time homebuyers to break into the market. Either way, with the right, experienced real estate professional working on your behalf, a foreclosure, short sale, or REO property might be perfect for you.

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