Foreclosures, Short Sales, and REO's
It's no secret the foreclosure market is at an all time high. And it seems more and more properties continue to face home foreclosure. With this situation often times an investment opportunity arises for a client in the right situation.
Foreclosures, short sales, and REO’s may all be considered distressed sales. At the same time however all three are very different from each other in how they should be looked at and handled.
All of these categories may sometimes amount to great investment opportunities; however without knowledge about handling foreclosures, short sales and REO’s, you may find yourself in dangerous territory. For an example, while most short sales are foreclosures, not all foreclosures are short sales and to further confuse matters, REO’s are not short sales either, but some intended short sales can end up as an REO.
What is a Foreclosure Property?
A foreclosure property is a home that is currently in foreclosure (a notice of default has been officially filed). This means the owner has stopped making payments and the lender has officially given notice that unless the payments are made current, it will auction the property.
Lenders do have the ability to foreclose for other reasons; however the most common reasons are when a borrower is several payments behind. If the home owner does not bring the loan up to date, the lender will sell the property to the highest bidder. The final step the lender takes after a certain period has passed is to try to auction the property at a public sale. Not all homes that fall into foreclosure go to auction because owners do have the right to make up back payments for a set duration. This time period varies from state to state.
Many investors and home buyers see profit in buying foreclosures because they can often buy the property for the amount owed, potentially retrieving any equity the home might have.
What is a Short Sale Property?
A short sale occurs when a home owner is in foreclosure, but the lending entity agrees to sell the property for less than the amount owed before it goes to public auction.
Unlike a foreclosure, investors typically buy the home for even less because investors are not even paying off the amount of the existing loan. Even though most short sales are the result of owners falling behind in their payments, sellers don't have to be in default for a short sale to occur. With consent from the homeowner banks can be approached for a short sale without even the loan being in default. A banks incentive to agree to a short sale is to avoid an auction.
What are REO’s - Real Estate Owned?
- A REO is similar to buying a short sale with the exception being that the property is already owned by the lender.
- Most of the time the property was acquired by the lender through a foreclosure action.
- Lenders will often sell repossessed homes for less than the loan balance.
- Lender owned properties are called REO’s, meaning Real Estate Owned by the lender.
Most of the time lenders end up with the property after the public auction bid was not enough to cover the amount owed. REO homes are many times considered the best way to buy distressed properties due to the fact that the seller is already out of the equation. It's just the investor, the investor's agent, the lender and the lender’s agent who are negotiating the transaction.
Not for the faint of Heart!
Buying a distressed property is not an easy transaction, it often times takes lots of patience, preparedness, and capital. Most of the time there are long waiting periods, while the lenders are making decisions on what they will take, and when they have made their decisions they will want to move fast, so the investor will have to be prepared to move quickly to satisfy the bank’s needs. There are several documents and procedures that must be followed. If you prepared to handle these ordeals then distressed properties often times have large payoffs in the end.
If you would like more information on Foreclosures, short sales, or REO’s, and where to go from here then please fill out the form below or feel free to contact us at any time.