What are REOs?
REO stands for “Real Estate Owned” and is a term used to classify a property as owned by a financial institution, government agency, or government loan insurer after an unsuccessful sale at a foreclosure auction. When an REO is offered for sale, the owner has usually already received the appraised value or a valuation through a broker’s price opinion and has discounted the listed price based on the valuation price. The listed price is usually firm since the owners feel the value is there and a discount was given. If the listing does not sell after 30 or 60 days, the owner may then decide to reduce the price and will stay firm at the new discounted price.
The sale process for purchasing an REO will be the same as with a conventional sale. You will still need to prepare an offer with your offered price and terms, and the owner will respond by accepting, rejecting or countering. Once agreement between buyer and seller is reached, the normal escrow process will begin and follow the same steps as a conventional sale.
What are Short Sales?
With today’s economic climate and homeowners struggling to make ends meet, many homeowners find themselves upside down in their properties, owing a mortgaged amount that is higher than the property’s current market value. It is a hard decision, but many are choosing to walk away from their loan obligations and are attempting to sell their properties as a “short sale”.
What is a “short sale”? Basically, a short sale can be attempted by a seller when he no longer makes his monthly mortgage payments and wishes to sell his property before it goes into foreclosure. The seller will list his home for an amount that is less than what is owed to the lender and usually at a price that will attract attention from buyers. You will often see short sales as the lowest priced listing in the area. Keep in mind, this price is the price a seller thinks will attract attention and offers from buyers. It may not necessarily be a price that the lender will accept.
With short sales, the seller must first negotiate an agreement with a buyer leading to an acceptance of an offer or counter offer. Once an agreement (purchase contract) has been made between buyer and seller, the listing agent will prepare a package of several documents, including the purchase contract, to go to the lender. In the package is also a request for approval to sell the property at a lower price than what is owed to the lender, and requesting the lender forgive the balance of the loan.
The lender will review all the documents in the package and will usually take 30-60 days to respond to the offer. During this time, the lender will schedule a broker price opinion or appraisal to obtain an estimate of the property’s value. With an estimate of value, the lender can make a reasonable decision and determine if it is best to sell at the short sale price, or foreclose on the property and sell at market value.
While the lender is reviewing the offer, there may be other offers submitted for the purchase of the property, but they are usually held in a backup position. The lender may accept an offer if it meets their minimum requirements, or counter an offer, or may reject the offer. Once the lender approves an offer, the lender usually wants to close within 2 weeks or as soon as possible. Therefore, it is important for the buyer to start the loan process and conduct his inspections and due diligence in the same manner as he would with a purchase of any other type property.
Short sales can be a simple process, but one that requires extra paperwork and lots of patience. Short sales may not be for buyers that have limited time constraints, or buyers that do not have the patience to wait for a lenders response.
There are also factors sellers may wish to consider before attempting a short sale. The lender may require the seller to sign an unsecured note for any amounts deficient to pay the loan in full. The note may require that the seller begin paying the deficiency in monthly payments after the close of escrow.
Additionally, the seller should contact a tax attorney or certified public accountant to determine if there are any tax consequences created by his participation in a short sale. Some lenders will issue a 1099 to the seller for forgiving the loan deficiency. The forgiven amount could be taxable to the seller as income, and therefore, it is critical that the seller contact a tax attorney or certified public account for advice in these situations.