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Charo Bhatt's Blog

By Charo Bhatt, CRS, SRES, CDPE | Broker in Fremont, CA

REO vs Short Sales What You Need to know Before You Buy

It can be argued that the best deals in real estate are foreclosed properties. REOs and short sale

properties have flooded the market, and buyers are taking advantage of the lower prices of

distressed properties. REOs are some of the hottest properties right now, with many being

sold within days or even hours of becoming available. Why are they so appealing? Quite

simply; they are priced to sell. But it’s important to understand what is involved with REOs and

short sale properties and to know what you’re getting yourself into if this is the route you decide

to take.


REOs are properties that banks have foreclosed on after the homeowners have not been able to

make payments. The current influx of these properties comes from so many homeowners in

recent years choosing adjustable rate mortgages, then not being able to make payments once

interest rates increased. Banks are left with the burden of maintaining the properties and selling

them in a down market. In areas where thousands of properties have foreclosed, the expense can

be enormous. In order to unload the homes, banks often price them below market.


Short sales are a bit different than REOs. These are properties that a homeowner owes more than

the value of the property and the lender has agreed to sell for less than the amount owed on

the mortgage and forgive the seller their remaining debt. If a bank believes it can avoid less of a

loss, they will sell the property short rather than putting it into foreclosure. Buyers usually have

the opportunity to purchase these at current market prices or a little below.

 

Foreclosures, REOs and short sales can absolutely be some of the best deals out there, but they are

more complicated to buy than traditional homes. If you’re thinking of looking in this market, here

are some suggestions that might help your search:

 

• Find an experienced agent – Get a real estate agent who is specifically familiar

with REOs and short sales and the processes involved in buying them.

There are important details and steps when purchasing these properties and it’s

important that you work with an agent who knows how to get you the best

deal possible.

 

• Know where and how to look – REOs and short sales are usually listed on the

Multiple Listing Service and can be found on the majority of websites that feature

properties for sale. You can see which properties are in the process of foreclosure

on RealtyTrac.com or find homes that have already foreclosed on sites like

Zillow.com,Trulia.com and CaliforniaMoves.com. Many lenders also

have their foreclosed properties listed directly on their websites.

 

• Hope for the best, prepare for the worst

– In all likelihood, you will not be “wowed” when walking through the door of a

foreclosed property. Most are sold “as is” and it’s often the case that in the

months leading up to foreclosure, homeowners disregard maintenance and

let the condition of the home deteriorate. Expect to see homes stripped of

appliances, light fixtures and any other items that can be sold. In the worst case

scenarios, homes fall victim to vandals and transients who take advantage of a

vacant property. You might have a better chance of finding short sale properties

in better condition because once the bank decides to sell it short, it’s listed on the

MLS and buyers are able to tour it. The homeowners tend to move out more quickly,

giving the home less time to deteriorate. Keep in mind that lenders will not lend on homes

that are considered unlivable. So either the bank will need to fix a home with

major water damage, missing flooring, broken windows and exposed wiring, or

you will need to look for another property. Make sure to include the amount you will

likely need to pay in improvements when setting your budget.

 

• Be patient – Transactions usually take a little longer when working with banks.

Normally, you may hear back on an offer from the seller the next day. But that’s

not always the case when working with banks. An offer may have to be passed

around for several people to review and approve. Banks only work during normal

business hours and won’t be considering your offer on the weekend or in the

evenings. Expect a few days or a week to hear if your offer on an REO has

been accepted. The wait for a short sale can be much

longer because, unlike standard sales, there is no set closing time. If a lender

thinks it can get a higher price from another bidder, put the house into

foreclosure and sell it as an REO, or hold off until an upturn in the market, it won’t

mind waiting months on end to close. Complications also arise if more than one

lender is involved. The second lender  may have specific demands in order to

receive as much back from their initial loan as possible. So if you are trying to

purchase a new house around the time you’re selling your current one, a short

sale property is likely not the way to go. Short sales can be more convenient for

those looking for an investment property or first time buyers who are not in a hurry

to move.

REOs vs. Short Sales –

What You Need to Know Before You Buy

• There are other fish in the sea – Don’t worry if you don’t get the first or second

property you make an offer on. There will be others. Experts say we could

see many months, if not longer, of foreclosures come on the market.

Focus on a city or neighborhood that you want to buy in and make sure your

real estate agent knows what you’re looking for. Foreclosures can come

and go quickly, especially those in good condition. Be ready to pounce,

but don’t be too disappointed if you miss out. Another property will likely

become available soon.

 

• Ask for help – You may be able to find help with your down payment on a

foreclosed property. Many cities now have programs for first time buyers

and those buying below-market properties. Look into what programs

are available in the city in which you’re looking to buy. Also remember that

just because you are buying from the bank it doesn’t mean the price is set.

There is always room for negotiation, even with closing costs. It never hurts

to ask. And as always, before you start looking you should first get preapproved

for a loan. Foreclosure or otherwise, your offer will hold more weight with the seller

or bank when they see you are serious about buying.

 

It’s been a long time since we’ve seen such a large number of foreclosures on

the market and people are jumping at the chance to take advantage of the lower prices.

But these transactions can be much trickier than standard sales. When it comes to working

with banks, it’s a whole other ballgame as they say. A foreclosed property could be

one of the best investments you make, but also the most complicated. If you take time

to research and talk to real estate experts in your area, you will likely find yourself

reaping the benefits of your investment for years to come.

www.HomesByCharo.com

www.InstantHomeValue.Info

510-381-2105

Source: Coldwell BAnker, NRT


 

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