Considerations in Buying Bank Owned Properties or Short Sales

Buyers for real estate today all are looking for the same thing, a great deal! We hear over and over, "I want a bargain"! Many buyers even limit their search for real estate to only bank owned properties or short sale listings.

REO, stands for Real Estate Owned and refers to a property that is owned by the bank, who has taken the property back through the foreclosure process.

A short sale is a situation where the Seller still owns the property, but they cannot sell the property for what is owed against it in order to pay off the mortgage(s) and closing costs.

There are pros and cons to purchasing REO and Short Sale properties. They often sell below market price, however, in the case of REO's (bank owned properties) there may be little information on the property and the Bank is not required to sign Seller disclosures.

Purchasers need to keep in mind when dealing with REO properties, they are negotiating with a Bank. Banks are totally non-emotional. They are only interested in the "bottom line". Due to the large number of REO properties, banks have their own infa-structure in place to negotiate and accept purchase offers. Lenders are motivated to move these propeties "off their books". Put your best foot forward early. You may be competing with several offers and the bank is going to accept the offer that is the best price with the least amount of hassles and has the highest % of closing. Do not expect the Bank to make repairs or make concessions. You may get a bargain price, but the property may need work.

Short Sales properties may also have a lot of deferred maintenance. The Sellers are having trouble making their mortgage payments, so they are probably not able to continue to maintain the property.

The Short Sale process can be frustrating for buyers. Unlike the REO process, most banks do not have a systems in place to deal with the large amount of short sale properties. Lenders who hold the mortgages in their own portfolio may be easier to deal with as they have the authority to make decisions more quickly. Lenders who have sold the mortgages may need the approval of the investors before accepting an offer.

Patience is key in working with short sales. It may take months before your offer is accepted, so all parties need to set realistic expectations and be prepared. There is no guarantee that your offer will be accepted even after months of waiting for an answer. It is not uncommon to have a Lender reject the offer without a reason.

Short sales propertis that have more than one loan against the property present additional challenges with a purchase. They generally require approval from more than one lender. In most cases the offer may fall "short" of paying off the first mortgage and nothing at all for the second mortgage holder.

An offer to purchase a short sale property should include an addendum that allows the buyer to withdraw from the short sale contract without penalty if the Seller is unable to verify Lender approval by a certain date. Buyers should also be aware that until they receive Lenders approval in writing, the Lenders will be reviewing multiple offers.

One slight advantage on a short sale is that the purchaser may be able to get more detailed information on the property if the Seller is still living in the house.

Bargains abound in today's market, but there is a saying: "buyers beware" and be prepared. Make sure your Realtor is knowledgable in the REO and Short Sale process. Read and understand the contract and addendums that may be returned from the Lender. The "devil's in the details" and many times Lenders add small details that may be costly to the Purchaser if they overlook or miss reading or clearly understanding the consequences of a counteroffer.

Good luck in taking advantage of today's real estate bargains and use a company that can be trusted.