Most commonly known as foreclosures, but more correctly referred to as REO property and short sales, the one thing they have in common is they are ‘DISTRESSED’ sales. These are properties that are being sold either by the bank or by the owner who is usually trying to avoid having his property go through the foreclosure process.
Foreclosure is the process of repossessing a piece of property usually because the borrower has failed to make timely payments. Foreclosure is not a type of property, but a process.
REO stand for Real Estate Owned. This is property that is owned by the bank, usually having been repossessed through the process of foreclosure. The bank now owns the property and typically lists it for sale using a local real estate broker. Some of the issues that are faced by buyers of REO property include:
• dealing with properties that have been neglected or even damaged
• properties priced lower than the typical market value resulting in unpleasant bidding wars with multiple buyers
• difficulty in obtaining financing for these fixer-upper properties
The upside is there are some properties that can be purchased for a lower price than a non-distressed property. The banks have no incentive to hold on to these properties and are getting them off their books as quickly as possible.
A short sale is when a property is still owned by the borrower and is being marketed for a price that is less than the loan amount. This is called being ‘upside down’. The seller enters into a contract with a buyer to sell for an amount less than the loan amount and the contract is contingent upon the lender accepting the negotiated purchase price as full payoff on the outstanding loan. Some of the issues faced with short sales include:
• lengthy waits for lender responses
• multiple approvals required
• properties resulting in foreclosures before approval is obtained
It is still possible to buy real estate on the county steps at auction. The low bid would typically be set at the amount of the mortgage. In the current environment where the mortgage is typically higher than the value of the real estate, there may not be any bids that reach that low bid amount, therefore the owner of the mortgage, the lender, ends up owning the property and it becomes REO.