The Differences between Short Sales and Bank-Owned (Reo's) Properties and How to Handle the Pitfalls of Each

     I am writing this as there are many people who do not know the difference between "Short Sales" and REO's (bank owned properties).   There are also Auctioned Homes but you really need to be an experienced buyer and need to have cash on hand.  So, we will leave that for another post.

As a short description of what happens:  an owner can get into a situation where he can no longer afford to pay his mortgage.  He appeals to his bank and the solution is to try and do a short sale.  The bank will give a certain period of time for this to occur before they start foreclosure proceedings.  If the short sale is unsuccessful the bank forecloses and as one option they may then sell it themselves as an REO or Bank-owned property.

Short Sales:
 
    A short sale is where you are buying the property from the owner, but their bank must approve the dollar amount they are receiving.  The reason for this is: the owner owes more money to the bank than the property is now worth on today's market so the bank is taking a loss hence you need their approval for how much loss they are willing to take.
    After you put in an offer for a short sale you may have to wait 1 to 3 months for an answer as to whether or not your offer was accepted or declined.  Please note: during this time they are continuing to collect other offers that may be better than yours.  They do not always counter your offer, so if there is a better offer than yours you simply lose.
    It is important that you work with an experienced short sale agent as you do not want your initial deposit money to be out of your hands.
    Because the property is being sold by the owner you may get full disclosure on the condition of the property (if the owner is still living there).  But realize you are dealing with someone who is in financial difficulty.  If you remember that you will realize that there is no money on the seller's side to buy you any inspections or to make any repairs.  I will give you another warning here.  After you make your offer and it is accepted, you will be paying for inspections.  If, after studying those inspections you decide not to get the home you will still be responsible for paying for those inspections!
    The owner or renters will often still be occupying the property and they may or may not be taking care of it.  (or it can be vacant).  Because short sales often have renters in them they can be more difficult (but not impossible) to get in to see.
    In a short sale you can expect to use the standard real estated contracts.
    Recently in this market I have seen that some short sale agents are putting properties on the market at a price far below what they know the bank will accept.  Here is the reason for that.  There is a fairly lengthy process between the owner and his bank to create and accept the short sale.  This process is NOT begun until the bank receives at least one offer on the home.  So in order to get this process started the agent for the seller is anxious to get an offer, whether it is a good offer or not.  However it is very depressing for the buyer when he thinks he put in a good offer on a short sale and it is tens of thousands of dollars below what the bank will even consider.  If you have an experienced short sale realtor they can make sure this doesn't happen to you.

Foreclosed, or Bank-Owned property

In an REO, or Bank-Owned property you are buying the home directly from the Bank or Corporation that now owns it.
    This is generally a much faster process and you will often get an answer back from the bank accepting or rejecting your offer within 5 days or less.
    Because the bank never 'occupied' the property they are exempt from many of the disclosures that you would normally expect from a seller.  This is OK, but it puts the responsibility on you to make sure you get all of your inspections on the home.  Please note: the bank will turn off the power and water.  These must be turned back on in order to get your inspections.  (They can't test your dishwasher without water and power!)  These utilities will have to be turned on by you in your name for the 2-3 days it takes to do the inspections and then you can have them turned off again.  Your agent can help you with this.
    Sometimes, (rarely) a bank will consider paying for some repairs.  In most of the transactions I have done with banks they would not pay for any inspections nor for any repairs.  Again, if you are accepted, and you order inspections and then decide not to buy the home, you will still have to pay for those inspections.
    When you hear from the bank they will accept your offer verbally.  This is not normally done in real estate but it is the way with bank owned property.   Your offer has definitely been accepted and all of your time lines have started.  Once again you need to be working with an experienced agent who can get your loan processing started even though you don't yet have a signed contract.
    Next will come a special addendum written by the bank.  This is a Bank-generated contract to protect them.  It will supersede anything written in your contract.  The most noticeable addition is a penalty charged to the buyer daily if they are late in getting their loan together to close the escrow on time.  Again, an experienced agent will show you how to avoid that risk.
    Although this can sound intimidating remember it is done all the time successfully and your agent can make it seem effortless.

    Since you are dealing with distressed circumstances it is possible to get a very good deal on either a short sale or a Bank-owned property.  It is not guaranteed however.  You need the assistance of an experienced agent who will keep you up-to-date with current market practices and home values.  Remember, if it is a nice home, in a nice area for a very good price, EVERYONE wants it.  People don't realize that even in this market we are seeing fierce competition for the great deals.
    
I have the experience you may be looking for.  You can check me out at my web site www.homesbyallyson.com and you can put in a FREE property or REO property search.
If you have any questions you can call me at 408-705-6578.
Sincerely,
Allyson Alessandrini
Prudential California Realty
Email: allyson@homesbyallyson.com