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Recognizing REO, Foreclosure and Short Sale Opportunities

It is difficult to understand all of the terminology that is thrown out today. Many people do not want to admit that they have no understanding of these terms or they do not understand the difference between them.  Here are some short explanations that might help: 

  • Bank-owned properties are called REOs, meaning real estate owned by the lender.
  • Foreclosure - A situation in which a homeowner is unable to make principal and/or interest payments on the mortgage, causing the lender to seize and sell the property as stipulated in the terms of the mortgage contract.  The process of foreclosure can be rapid or lengthy and varies from state to state.
  • In a Short Sale the bank writes down the debt and the buyer buys the property assuming the debt.  The bank and the Seller avoid Bankruptcy and Foreclosure Expenses.  The Buyer gets financing on terms frequently better than conventional financing.  But the seller is likely to get hit by Recapture tax, and the Lender is going to have to take a loss.

Bank owned properties take the least amount of time to close on a property. They can be listed with a real estate agent and purchasing them works just like a regular sale. The advantage to bank owned properties is the bank has no attachment to the property and they want to get it off the books as quickly as possible. Usually this results in a good deal for the buyer.

 Foreclosures can be a bit problematic. Sometimes the bank or mortgage holder will auction off the property. It will be necessary to have your financing secured and a ten per cent deposit at the time of the auction. One thing to be aware of on foreclosed properties is the condition of the property you are purchasing. Many times the foreclosure process takes so much time and the homeowner might be angry that his property is being taken away. The house might not be in good condition. There may have been burst pipes, damage to the plumbing, wiring or the like. A thorough inspection by a qualified contractor should be done before the auction or a condition of the sale at auction

With short sales, be prepared for a possible wait when making an offer on a pre-foreclosure/short sale home; very few can close in 30 days or less and in my experience they take over nine months to close. If the owner has not completed a bankruptcy procedure, the bank has the right to go after the difference between what the property is selling at and what the owner owes. It is very hard to do a short sale without the cooperation of the owner.  It does have advantages for everyone but a great deal of patience is required.

The reward can be an excellent property purchased at a great price, but the frustration level may be greater than the reward. Each side should have a real estate agent experienced in short sales, along with lawyers, and other professionals. Each of the steps along the way can be made easier by seeking out the experts in their fields.