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Today’s hottest properties are perceived to be “Foreclosures”. Everyone wants to look at “foreclosures” and buy for pennies on the dollar. The terms “foreclosure” and “pre-foreclosure” seem to be applied to many different types of properties, but what exactly does “foreclosure”, “REO”, “short sale” and “auction” mean? Which are the best bargains? How do potential buyers locate and bid on these properties? What restrictions should a buyer anticipate?
What is a Foreclosure?
Foreclosure refers to any property which has been used as security for a debt and has been sold to satisfy the debt when the property owner defaulted on payments or other terms in the mortgage document (such as not paying the property taxes). Usually the property is sold to the entity which is owed money. The party foreclosing on the property may be a mortgage lender, a private individual who had “owner-financed” the property, the county sheriff, local property taxing authority, the IRS, a homeowners’ association or a tradesman with an unpaid lien against the property. These entities usually turn around and try to resell the property by listing the property for sale or placing it in an auction.
Foreclosure properties are generally sold “as-is, where-is” which means that what you see is what you get, including the trash in the yard and abandoned furniture in the house. Buyers can and should inspect properties carefully before making any offer, or make any offer contingent upon a satisfactory “due diligence” period of time. Most foreclosure sellers seek to sell for “market value” but are realistic as to current market conditions.
What is a REO?
It means “real estate owned”. Banks and credit unions may refer to properties taken back by foreclosure as “REO”, for short. All REO’s have been foreclosed on, but it’s important to remember that all foreclosed properties may not be REO’s because they’re not always owned by financial institutions.
Buyers must bear in mind that the seller of an REO property is a corporation, working Monday through Friday, 9am to 5pm and we don’t know which time zone they are in. There is no personal involvement on the part of the REO seller and buyers may feel they are watching moss grow on a rock. Something IS happening, but it’s so slow it’s difficult to tell. Many REO’s attract multiple offers and the seller tells all bidders to submit their “highest and best” offer. They mean it. They will look at all the offers side by side and determine which one nets the most AND has the greatest chance of closing easily and smoothly.
REO sellers like simple offers – cash with proof of ready funds, 30-day closings and no contingencies other than a “due diligence” inspection. Most REO sellers are very fair about giving potential buyers time to inspect the property and notify the seller of unanticipated issues. Most REO sellers also charge buyers $100-$150 a day for any delays past the agreed-upon closing date.
What is a Short Sale?
It means the sale of a property not yet foreclosed, which yields less money than is owned to all the creditors having a security interest in the property. Many mortgage lenders prefer to receive a partial settlement instead of incurring the costs of legally foreclosing, possessing, managing, insuring and marketing the property themselves.
Sellers’ lenders (all of them) must agree to receive less than full payoff or the Short Sale cannot occur. Obviously, the junior lenders would like to see some money rather than receive nothing and they may play hard ball to do so. Some Mortgage Insurance (MI) companies, which insured lenders against loss in the event the owner defaulted on a loan, are now demanding that defaulting owners sign promissory notes to repay the amount the MI company has to pay out.
Short Sales are extremely time consuming, involving many parties and require a great deal of patience and flexibility on the buyer’s part. Short Sales are NOT for buyers needing a home quickly.
What is an Auction?
It applies to a method for selling property to the highest bidder. The properties being auctioned may or may not be foreclosures or REO’s. The properties may or may not be “distressed”, the sellers may or may not be “motivated”. Properties may have a “reserve” price below which the seller will not sell. Some auctions are “absolute”, meaning the highest bidder wins, no matter how low that bid may be.