New “Distressed Properties” Terms
There are many confusing terms out there
today regarding "distressed properties". We'd like to take a
moment to layout the different terms used in Real Estate such as Short
Sale, Foreclosure, REO, etc. to help you understand what you are
seeing. Many Realtors use some of these terms more for
marketing purposes because the general public associates those certain
words with good value. This is not always the case. Each
home should be evaluated on a case by case basis.
What is a Short Sale?
A short sale
occurs when a lender agrees to take less than the full loan payoff for
an owner’s property. In most cases, the owner is in
default and is not making their payments for whatever reason.
Short sales, in most circumstances, are the
first step to avoid foreclosure. Although the lender(s) will recover less than
the total loan amount in a short sale, they may prefer this in lieu of
foreclosure. The costs of foreclosing on a property may be more than the
bank's loss by taking a short sale. Also, the property may not sell at
auction and then the bank would be forced to take it back as an REO (Real
Estate Owned) property, which then they would have to maintain, list and
sell themselves.
Short sales are very complicated and the outcome
is not guaranteed. There are so many variables that I can not even cover
everything in a couple paragraphs. The bank (lender) is not
obligated to take a short sale and in most cases the process to get one
approved is cumbersome and frustrating for the Buyer, Seller and the
Realtors. Many times these requests are not approved by the bank and
the property ends up going to foreclosure anyway. Banks are overwhelmed
with short sale requests and the approval process can take months.
Each bank evaluates each individual request on a case by case basis.
Many times there is more than one lender involved. Not only do the banks
consider the borrower's personal and financial situation, but they
also consider an appraisal of the property, market conditions, the banks
financial situation, their current portfolio and in many cases have to consult
with an outside investor who purchased the loan at some point. Given all
of these varying circumstances, you can imagine why this process takes so
long. Most buyers do not want to wait out this long process and deal with
the uncertainty. If a short sale is approved, it can be below market
(depending on the bank appraisal), but by the time it's approved the market may
have further declined and it may not be a great deal after all.
If you are considering selling your home as
a short sale, please consult with a CPA and an Attorney first!
Realtors ARE NOT qualified to give you the type of information you need to
decide if a short sale is right for you. Depending on the types of
loan(s) you have and your financial situation, it may or may not be the best
option for you.
What is a Pre-Foreclosure?
A pre-foreclosure is basically a short sale
or the sale of a home in which a Notice of Default (NOD) has been
filed. The owners of the home are in default of the loan and are
trying to sell the home before it is taken through foreclosure. It's just a
marketing term to attract attention to the property as being a distressed
sale. Realtors use this term to create interest in possibly
purchasing a home below market value. This may or may not be the
case. Further research needs to be done on each home to determine the
value.
If you are an Investor who will not be
occupying the property, there has been an NOD filed, AND the owners still
reside in the property as their primary residence - a Realtor, by law, CAN
NOT represent you as the Buyer. You must handle the transaction on your
own. A Realtor can only represent the Seller in this
case.
What is a Foreclosure?
Foreclosure is the process whereby the lender takes possession
of the property.
When a home owner fails to make the payments
on his/her mortgage, the lender can begin foreclosure proceedings. This is a
very specific legal process with set timelines and outcomes. In a Short
Sale situation, the home owner’s name is still on title of the property and
they are the official owners who are trying to sell the property.
In a foreclosure, the lender takes possession of the house and as a
result, the homeowner is no longer a party in the sale.
Foreclosures are NOT sold by Realtors.
Foreclosure properties are auctioned at a Trustee Sale at the Court House
in the County where the property resides. Foreclosure properties must be paid
for in full, with a cashiers check at the time of the auction. Only
seasoned investors should consider this option. When you purchase a home
at a Trustee Sale, you could be at risk of various problems that are
normally investigated by Realtors and Title Professionals in normal sales transactions.
These problems are serious!!!! Problems such as: Title problems,
What is
an REO?
REO is an abbreviation for Real Estate Owned properties.
If no one purchases the property at the
Trustee Sale, then the home becomes an REO property, owned by the bank. The
main reason homes don’t sell in a Trustee Sale is because it doesn't work out
to be a good investment for a potential real estate investor.
A home that has been "foreclosed"
and has become a bank owned property can then be listed by a Realtor who is hired
by the bank to market and sell the property. To sell the house as quickly
as possible the lender will remove any liens on title, and clear any other
issues that may slow down the sale of the property. Generally, lenders are very
motivated to sell these properties, as they are in the business of
lending money, not owning real estate. REOs tie
up their capital reserves and hamper their ability to lend
money. Also, the management of these properties can become very costly.
This is the best opportunity to find a good deal.
Note: there are many homes out there for
sale that are not distressed properties. The owners have a lot of equity,
are motivated to sell and have priced their homes to move quickly.
Distressed properties are not always the best way to find a great deal.
For more information or if you have any specific questions,
please feel free to call (602) 308-8277 or email us anytime at Lynn@PropertySourceRealty.com