Short Sales vs. REO’s vs. Standard Sales

First let’s be clear regarding the real estate jargon.  A short sale is the sale of property where the amount procured will not cover the remaining balance of debt.  This situation occurs when a seller wishes to be released from the property before foreclosure takes place.  The benefits from a short sale are: negotiations can release the liability over the remaining balance of debt, it prevents further action from the bank regarding increased fees over unpaid debt, and the damage to one’s credit is reduced compared to the result from a foreclosure.

Source: stanrector.com

REO’s (real estate owned), referring to bank-owned properties are foreclosed homes that are on a bank’s balance sheet.  Hence, a bank contracts an asset manager to facilitate the sale of the property in order to eliminate the liability from the balance.  Since, a foreclosed home is not producing any interest for the bank, it is imperative for the bank to unload the property for cash or even generate an asset in the form of a loan with a new buyer.

Standard Sales are your regular, run-of-the-mill, sales which are conducted through agents or for sale by owner transactions.  These transactions involve the sale of property that is not under duress.  If a standard sale property is to your liking, you make an offer, negotiate the price, then begin the escrow procedures. Simple.

Now, to the point of this post… I have received questions regarding these specific titles placed on property sale types.  So, here is the rundown… Short sales and REO’s are good deals, REO’s more so than short sales, because property can be acquired at a discount (this is the obvious benefit).  Short sales, however, can be traps for prospective buyers because a negotiator (licensed to handle properties under duress) must facilitate a sale, that means your agent does not work this part of the transaction unless he/she is licensed to do so.  Simply, someone has to go to the bank and work out a deal where the bank is willing to accept a lower amount of money than the remaining balance of the loan.  There is no guarantee that the bank will accept the buyer’s short sale offer amount.  Therefore, a buyer in this case can be involved in negotiations over a three month span.  In my experience 90 days is a minimum period to expect for a short sale to close.  And, they do close because a bank realizes that it would be more costly to force a foreclosure (time cost and the balance will still not get paid off).  On the other hand, short sales are better suited for purchase because the property has not been abandoned- all the copper plumbing in still there, the boiler, and electrical wiring is still intact, etc…  So, if you have time, are a savvy investor, or an individual buyer that is not in a hurry for a bargain home then short sales are for you.

REO’s are much more work, are much more sought after, and highly contested properties.  As mentioned, a bank has foreclosed on these properties and they are ready to sell.  These properties can close escrow within 60 days (usually close faster), and the bank has already contracted an appraiser to price the home.  There are two different branches of issues to keep in mind when considering a REO.  First, they are deeply discounted (which is good, but not good), because they are abandoned homes that have-usually- been stripped of all the valuable commodities by the local riff-raff.  This means the banks, more times than not, want cash.  They are not willing to lend money for a distressed property and more importantly they do not want to be responsible or liable for any damages (water, termites, foundation) or any property violations (non-permitted additions)- meaning the properties are sold “as is” as they say in the business.  Secondly, even though REO’s are dismantled and riddled with risk, houses will often be bid-up and hardly ever sell for the listed price.  REO’s are where the sharks play, and one truly has to have a stomach for risk.  With REO’s cash talks, walks, kicks *%@, and anything else you can think of… so if this is your game be prepared to come in with cash, have a crew that can fix anything, and put the property back on the market for a profit.

Finally, I don’t have to explain the benefits and drawbacks of buying standard sale homes, but I will say that there are GEMS out there if you really look and are willing to pay a bit of a premium.  I know, you don’t get the satisfaction of hitting the home run with short sales and REO’s, however, that ultimate game is to make money (think Mr. Wonderful from Sharktank).  With a bit of patience, finding and purchasing standard sale properties can produce income (when the math makes sense) and obviously appreciate in value over the years.  Standard sales are not for real estate moguls (even though all cheap real estate is being bought up right regardless of the type of sale it is), they are more for long-term investors willing to put some cash away, earn interest, and allow the real asset to mature.

Thanks.
Any questions and comments… let me know.

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