Dean Graziosi

During the preceding three months, anyone who has tried to buy a property would have been advised to look at foreclosed properties. The first time investors with some understanding of the market would have definitely understood that there is a lot of help from the foreclosed properties. Most of the properties are much below the fair priced bracket and are great buys. However, few would have known the differences between short sale and REO properties, or known where to get the best deals. Knowing about it and actually getting the best deal is the gap filled by an experienced agent.

REO means Real Estate Owned. These are properties are owned by lenders, mostly by the bank, posted after an unsuccessful attempt at auctioning. Once the bid is put up, (usually up to the outstanding amount) and there are no takers for the property, the bank has to transfer the ownership legally to its name. Once there are distress signals from the property like delayed or missed payments, the value of the property is quickly determined.

The price of the property is understood by obtaining the Broker Price Opinion (BPO) or by issuing an appraisal. Once the value is determined, the property is put through short sale or a foreclosure. In the case that the property goes through the short sale or foreclosure process, it is not listed under a REO. In the cases where the property doesn’t go through the foreclosure auction, it is listed as a REO. The bank repossesses the property and allows it to go through the normal channels of selling.

The bank will usually remove the liens and other expenses; this “new” product would now be sold through another set of auctions or through professional sellers. As real estate investors or first time homebuyers, it makes a lot of sense to go after these properties. The value to be paid is well below the existing market price and the title of such properties is also very clear.

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When a lender agrees to accept an offer in an amount lesser than the amount of the mortgage, the opportunity for a short sale has been created.  Short sales occur when the seller is in delinquent status or about to enter delinquent status. 

Short sales have come to dominate the marketplace.  Like foreclosures, short sales greatly impact the overall value of housing as they tend to drive prices down. 

The investor stands to benefit the most in a short sale.  The seller has no equity, is faced with the loss of the residence and a damaged credit rating and the mortgage holder usually takes a loss.

The typical short sale includes five basic components.

·                     The seller signs a listing agreement with a real estate agent.  The agreement to sell is contingent upon approval by a third party, the mortgage holder. 

·                     The agent finds a buyer and secures a contract for the purchase and sale of real estate.

·                     The seller accepts the offer contingent upon third party approval.

·                     The offer is submitted to the seller’s lender who accepts the buyer’s offer.

·                     The transaction closes when the buyer delivers the funds and the existing lender releases the lien and the seller delivers the deed.

Short sales take time to close.  Many buyers become frustrated.  The buyer must understand that the mortgage holder is taking an unwanted loss.  These lenders do not bear many of the standard expenses a conventional seller might carry.  As such, the buyer is expected to buy the property in “as is” condition.

It is the buyer’s responsibility to perform all inspections prior to validating the purchase and sale agreement.  This includes pest, roof, sewer and water, plumbing, electrical, chimney, septic and fireplace inspections.  The old adage “let the buyer beware” definitely applies to short sales.  Buyers need to protect themselves with strong contingency language regarding these inspections.

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The National Association of Realtors indicates that approximately 35% of current real estate transactions are short sales.  Meanwhile, one in every 355 residential properties is mired in the foreclosure process.  That accounts for a lot of real estate and highlights the real estate investor’s need to know about the short sale process.

Not all lenders will agree to entertain a short sale.  Basically, the lender is agreeing to take a loss.  Usually this decision is submitted to a committee who must decide if the prudent move is to sell at a loss or hold the property until real estate values increase or if there is any other way to avoid a loss.  The latter decision puts the lender in the unenviable position of maintaining and being responsible for a vacant home.

There are four conditions that advance the likelihood of a short sale.

·                     The property value has decreased – In today’s real estate market, it is difficult to find an area where this has not occurred, but it is a requirement for the lender. Lender decision makers react favorably to documentation supporting this claim.  A current market analysis from a licensed real estate agent should be submitted to the lender.

·                     The mortgage is in default – If the mortgage is not in default but default is inevitable, the lender may well consider the short sale.  This is commonly called the pre-foreclosure stage.

·                     The seller has suffered setbacks – the seller must have suffered hardship and submit a letter explaining the circumstances.  The greater the hardship is the stronger the case for the lender approving a short sale.

·                     The seller has no assets – the lender must see that the seller is in dire financial straits with no other means to repay the obligation.  The seller can strengthen the position by submitting up to date balance sheets.  In some cases, certain assets will still qualify the seller for a discount form the lender.

If a seller cannot furnish supporting documentation for these four criteria, the chances of a short sale are dim.  Experienced real estate agents can help structure factual support for these concerns. 

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