REO or Short Sale Which one is Better for You? REO Please

Over the last 6 months, Redfin has seen the number of bank owned and short sale properties go from 15% to 60% of our total offer submissions in Southern California.

First off let’s define what a real estate owned (REO) or a lender owned property really is. It is really simple. REO is a class of property owned by a lender, generally a bank, but it could be an investor as well. This occurs after an unsuccessful attempt at a sale at a foreclosure auction. This happens more often than not because most properties at these auctions are worth much less than what is owed to the bank. If there isn’t equity in the home, most speculators or investors at these auctions won’t even touch them. The minimum bid in most foreclosure auctions equals the outstanding loan amount, the accrued interest and any costs associated with the foreclosure sale including attorney’s fees.

Secondly let’s define what constitutes a short sale. In real estate, a short sale is when a bank or mortgage lender agrees to discount a loan balance due to an economic hardship on the part of the mortgagor. The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender in full satisfaction of the debt. In such instances, the lender would have the right to approve or disapprove of a proposed sale. However, there are times when the bank will take the proceeds and issue a 1099 to the seller to be reported as income. Extenuating circumstances influence whether or not banks will discount a loan balance. These circumstances are usually related to the current real estate market climate and the individual borrower’s financial situation.

Comparing the two types of property types, I prefer REOs to Short sales. When making an offer on an REO, the offer is presented to the lender or asset manager. Realize that the lender and an asset manager are not synonymous. If it is lender owned the lender has nominated an asset manager. For the interest of this discussion they are the same. Generally, responses from the lender are within 48-72 hours. If the bank decides counter to your offer, they will do two things. For starters they will alter the minor terms, i.e. by change the duration of the contract, designate escrow companies and or assign who pays for what fee. Secondly, they will ask you to make your highest and best offer. The rational behind this request is that the REOs must show to their shareholders that they are doing every thing in their power to get the most out of this property. The lenders by this time have a general idea of what they are going to accept as a sale for this property. But even if they seem price sensitive, negotiate. REOs do not do repairs and they do not credit money. Once the price is set at the beginning of negotiations there is no going lower. It is easier to start low than to negotiate lower so start at a comfortable low price.

Finally, buyers will have the opportunity to do any and all inspections. However, some asset managers are now requiring that you make non-refundable earnest money deposits. If that is the case, be very careful banks can be sneaky. Make sure that you pay attention to the special addendums they are requiring you to sign. Read them very carefully. Six times if you have to. Banks are exempt from making certain disclosures so be prepared to buy a REO home in its current state without a warranty from the lender seller.

The rest of the transaction moves pretty normally, from underwriting to funding. All in all, do your homework and REOs can be a great place to find a deal but keep in mind once you buy it there is very little recourse against the bank.