Short Sales, Foreclosures, REOs

There are a lot of new terms that are being thrown about the real estate world lately so I thought I'd do a post to define Short Sale, Foreclosure, and REO.

A Short Sale occurs when the owner of a property is having trouble making their mortgage payments and they find a real estate agent to list the property for less than the amount they still owe AND negotiate with the lenders that are involved to agree to this. This is PRE-FORECLOSURE. Short sales are becoming more popular with banks and real estate agents. However, if you are interested in a property that is listed as a short sale or "third party approval," make sure you have an agent that has worked with them before or has access to another agent or broker that has experience with short sales. There is a lot of additional language (protections for the buyer) that should be written into an offer for a short sale - the standard addendums for this have not yet been developed by the realtor associations. As a buyer, you should only be looking at short sales if your situation allows you the flexibility to wait indefinitely for one, two, or three months before you even know if the deal is going to fly with the bank. It also seems to me that these properties are being priced a little too aggressively - I suspect the buyer may be in for a nasty surprise after the one-three month wait period when the bank says they can't possibly accept such a low amount for that home. The reason that these transactions take so long and are so frustrating is because most of the time, the bank will not start to do their analysis until AFTER an offer is received on the property. Once an offer is received, the seller should ratify the offer, and the ratified offer gets sent to the bank along with the evidence of hardship package. Then, the bank will start their process of getting the appraiser out to the property, doing their market analysis, and getting the approval of all the investors involved in the loan. Sometimes, the listing agent has a relationship with the bank and will get a pre-approval of the list price from the bank. But most of the time, the list price is just designed to get that first offer on the property.

A foreclosure is a legal term and process. I personally know the least about this because it doesn't generally involve the real estate agent. This is the actual legal process when the house is taken away from the mortgagor who has failed to make his payments. The bank must provide a specific number of required notices to the mortgagor based on VA law before foreclosing on a property. Then, in Virginia, an auction at the courthouse steps must be held - which usually involves calling out a lot of properties fairly rapidly. There is also a required amount of advertising involved for the auction written into VA law. However, practically speaking, it can be very difficult to track down when the auction is occurring for a particular property. You have to find the attorney that is handling it and they can tell you. I think these foreclosure auctions would be much more successful if there was a statewide system made available to the public where you could see when and where particular properties were up for auction.

An REO is a Real-Estate Owned property. This is also referred to as a Bank Owned property. This is what happens when the auction at the courthouse steps did not have any bids that were high enough so the original bank essentially buys the property back via a trustee's deed. This is POST-FORECLOSURE. I have a lot of experience with these from the buyer and seller side of things. This is where buyers are getting the deals and the transactions are fairly easy to deal with. It is almost like a regular sale except the seller is not an individual but a corporation - which usually just means that the response times are a few days longer and there is more red tape in general. There are some differences written into VA law as well - no property disclosure/disclaimer is required and no HOA docs are required in the case of a bank sale after foreclosure. These properties are generally priced very attractively to start. And in the current market, banks still expect to negotiate with the buyers. I don't think it's usually the huge price knock-offs that people are convinced they can get away with - the bank usually negotiates up from the low-ball offers. There are addendums that the banks add to these transactions to protect themselves and they generally have a title company that they will do business with for the settlement. However, there is statutory law in VA that says the purchaser always has the right to choose the title company. I suspect that some of the bank addenda may have to change if this was ever challenged in a court of law.