REO (Bank Owned)  Foreclosure Sales VERSUS Bank Short Sales

It is important to know what you are getting into, when you start asking a Realtor to show you bank short sales and REO-Bank owned homes.

These can often be some of the most financially rewarding purchases, but they are not meant for everyone, or every situation, or for every loan type a buyer may be getting.

If you are not working with another Realtor, and you are wondering what will work with your loan type, we can get in touch with your lender and figure it out.  We can also refer you to a lender for your particular situation.  No need to try to figure it out yourself if buying real estate is new to you.  Even more experienced purchasers may need help in this department.  Lending has become a lot more stringent than it once was and rules and programs are constantly changing.   

REO is an abbreviation for REAL ESTATE OWNED property. This means that the subject property in question has been foreclosed on and has been taken back by the mortgage lender of the trustee. The mortgage lender or trustee have taken it back because the borrower has defaulted on his/her debt to them.

A REO home has been foreclosed on, offered unsuccessfully at auction to cash purchasers. If the property does not sell at auction, it is then placed back on the market with a Realtor.  It is pretty common that homes go to auction for more than market value in today's market because of how much is owed on the home.

The thing that many Buyers appreciate about REO’s is that they are generally priced aggressively for a quick sale. A bank or mortgage lender does not want to have a house or property on its books for long. The bank prices to sell and incrementally reduces the price until they accept an offer.

This is also considered a more safe purchase type than dealing with a purchase at auction.  Auctions at the Courthouse require CASH.   This is true because when a bank repossesses a home it allows for a good, clear title. In addition, buyer’s have easy access to conduct any inspections that are relevant to the purchase. These things independent or combined offer an enormous risk reduction to the purchaser.

Many Buyer's think they can finance a home purchase at auction.  No, you need to show with certified funds for the entire purchase amount. 

Bank Short Sale

A bank short sale is when the Seller of the home is currently in default on the mortgage and is at risk of getting foreclosed on by the lender. The Seller is essentially asking the Lender to take less than what is owed to avoid having to foreclose and take the home back. It is costly for lenders to foreclose on a defaulting borrower so banks have been willing to work with Seller’s that are defaulting on a loan that can prove they are in financial distress.

The idea is that the Seller is trying to do everything to help the bank avoid taking a larger loss than needed. Banks appreciate this attitude and have grown more accustomed to dealing with this type of situation since the market has been in a decline.

The banks take their sweet time responding to offers and make it a pretty uncomfortable position for a buyer. The wait can last up to 5 months for a response on any offers. This amount of time is taken because the bank has to go through a series of steps to agree to take a loss on a property. I won’t go into the details but just touch base on the process.

The bank (generally) does not start the process until the Seller has at least one offer to consider. They first review the Seller’s financial situation to see if they are really in financial distress.  If they aren’t….the bank certainly will not take a loss if the Seller is capable of making the payments.   The financial information goes through review and approval.

Once the bank decides they will complete a short sale and they recieve an offer, they hire one, or many independent contractors to complete BPO’s(broker price opinion). They want independent contractors to tell them the approximate market value of a home so they can take the best action for that situation. Remember that the banks are generally outside of the market area and would otherwise have no concrete idea of the current market value.

At that point, they look at the offer(s) that are in. They look at the net proceeds and determine which sale will result in less of a loss and determine whether any loss is necessary. Certainly, if the bank determines that the market value would actually allow for a profit and a short sale not needed, they would likely just foreclose on the property and put it on the market themselves.

The entire process is generally based on priority. Priority is given to those that are about to go to auction. If the auction date is creeping up, then that sale gets moved up in the priority ranking. Because so many short sales are being considered the process is extremely time consuming. A bank may chose to delay the auction date to accomidate a short sale, they may opt not to.

No guarantees. As a buyer, you could wait 5 months to be told NO. You can imagine how upsetting that can be.

Bank short sales are very tricky and can cause a lot of grief and wasted time. If a bank short sale is listed on the market, it may NOT be at a feasible price. If they are priced WAY below market, it can be assumed that a bank will reject it. However, you still have to wait out those months to get a rejection. That makes it CRUCIAL to have a realtor working for you that can help you determine if your offer, the listing price, or the circumstance would be worth your time.

What both of these sale types have in common:

They are normally sold “as-is”.

They are both sold for under current market value.

Your competition is huge.

Your financing may dictate which homes you can buy.

They are both not emotional to the bank. Strictly financially based decisions.

They both require that you submit proof of assets for a cash purchase, or an approval letter from your lender.

You MUST work with a Realtor who has experience in CLOSING these sale types.

 The Differences

Short sales can be very emotional for Seller’s that are losing everything

Short sales can be listed at a grossly exaggerated list price that will not be accepted by the bank.

Short sales can take months for a response on any offer

REO’s take a matter of days to get a response

REO’s need to be looked at urgenty when they hit the market, bank short sales do not.

Short sales continue to promote other buyer’s offers while they are waiting for a response from the bank.