What are they?
· Short Sales: A short sale occurs when a home is sold for less than the amount of its outstanding liens. These are typically represented by first and second deeds of trusts, the latter of which could be from home equity line of credits (HELOC). Other types of liens can arise from unpaid homeowner association fees, unpaid property tax, unpaid federal or state income tax, and judgments from lawsuits. If the homeowner needs to sell, but has the financial resources to pay any balance deficiencies there is little difference between that and a normal sale. Frequently the seller lacks these resources and the short sale price must be approved by the lender and any other liens must be resolved to provide a clean title to a buyer.
· Bank Owned Properties: These are properties for which a bank has acquired ownership, typically through the foreclosure process.
In today’s economy financially stressed homeowners may not be able to keep up the payments on their secured lending resulting in a default being filed by the lender. This is accomplished by a legal filing against the property known as a Notice of Default. When this occurs, the owner has 90 days to reinstate the loan by paying all back payments, late fees, and legal fees. Otherwise the lender can declare a Notice of Sale, under which the home is sold at a foreclosure auction – normally to the lender for the amount of the note - a minimum of 30 days afterward. For the next six days the homeowner retains the right to redeem the loan by paying off the balance in full including all late fees and legal fees. It’s at that time that the lender takes ownership of the property normally wiping out all subordinate liens. Such properties are known as “foreclosures”, “bank owned properties”, or “real estate owned (
REO’s).
As many as 50% of all current sales may be properties in a short sale situation or a bank owned property. Liquidating these properties has resulted in unprecedented recent price decreases, providing excellent buying opportunities.
The main advantage of purchasing short sale and bank owned properties are the reduced prices. Following are some of the pitfalls.
· “As is” condition. There is little if any money for maintenance or repairs other than the most basic. A buyer should expect to take the property in an “as is” condition and pay close attention to his/her inspection report.
· The approval process for a short sale may become a protracted process. It requires significant documentation to be provided by the homeowner and potentially other lien holders. The lender will also require an independent broker’s letter to assure that the price is within reason. This documentation will not be reviewed without an executed purchase agreement. Submitting it requires special knowledge and training by the seller’s agent to assist the seller and work with the lienholders (see CDPE ). The transaction must be approved by all to close the transaction with a clean title. However lenders are becoming more adept at handling these transactions, and if the transaction cannot close escrow by the contracted date, the buyer always has the option to walk away.
· A bank owned property will close quicker because the bank already has clean title and can quickly decide to accept or counter an offer. It does not need to decide whether to accept a short sale situation. However banks would much prefer to approve a short sale, than actually take possession of a property in today’s environment. It’s better for the credit of the borrower and less expensive for the lender.
So is a prospective buyer better off looking for bank owned properties rather than short sales? All things equal we believe that a buyer should not rule out any property if it meets their needs as a homeowner or investor. But in order of searching we suggest that one starts with listings of bank owned properties, then listings of short sales, and finally listings of normal sales.
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