A foreclosed property is one where the owner has been unable to meet monthly mortgages payments and the property is now owned by the bank. A foreclosed home is also referred to as an REO, or a Real Estate Owned property.
Although some REOs may be vacant or need repairs, they frequently look just like other homes on the market. Typically, they are sold in as-is condition, but they are often in move-in condition which may make they appealing to many buyers. Be aware, however, that the buying process of an REO is not exactly the same as other home purchases. Working with an agent skilled in the REO transaction will be a huge help answering questions and streamlining an REO purchase experience.
Banks are always motivated to get these properties off their books, and they usually hire a real estate agent to list it for sale. That means you can expect to find REOs listed alongside homes being sold traditionally in the same neighborhood.
Pros to Buying a Foreclosed Property
- You can often expect to pay below-market price for the property.
- You can secure financing for your purchase with a traditional mortgage the same as you would a “normal” home purchase.
- You can do inspections, purchase title insurance and make your mortgage arrangements before completing the purchase.
Cons to Buying a Foreclosed Property
- You will find that many banks will only sell these properties “as-is”, meaning you will be responsible for paying for necessary repairs.
- Banks rarely negotiate the price they’ve set on foreclosed properties. They’ve researched the market and have set a price that they find reasonable and are very unlikely to go lower. However, since most REO properties are priced below other homes for sale in the same neighborhood, this isn’t necessarily a bad thing for you as the buyer.
- The purchase process frequently takes longer than a traditional home purchase.
The Difference between a Foreclosure and a Short Sale
As explained above, an REO is a foreclosed property that is now owned by a bank. A short sale is a transaction that happens when an owner owes more on the mortgage than the home is currently worth and the bank agrees to a sale less than the mortgage balance in order to avoid a foreclosure. These properties belong to the current home owners, not to the bank. The number of short sales has increased in recent years so you are likely to run into properties like this during your home search. Like REOs, short sales can be complicated, so you will want to work with an agent experienced and trained in negotiating these transactions.
Short sales look like other listings, but they likely have a lower asking price than other comparable properties. The term “short sale” is a contradiction because the sales process can take longer than a traditional purchase. However, because more and more short sales are appearing on the market, lenders are streamlining their procedures making it less time consuming. Data shows the amount of time necessary to close a short sale has decreased in recent years.
Possible Short Sale Challenges
- Second mortgages: It is possible that a second lender might not agree to the same terms that have been set by the seller and the primary lender.
- Mortgage Insurance: The mortgage insurance company is another entity that must agree to the short sale
- Other liens on the property: A lien is a claim by a third party on a property for money owed. Liens must be addressed before the home can be sold whether or not the transaction is a short sale.
- Government-backed loans: If the seller’s loan was an FHA or other government-backed loan, it can cause delays and challenges because the government must approve the sale arrangements.
- HOA’s: Home Owners Associations may have transfer fees, document costs and unpaid dues. All of these must be addressed and a lender may or may not agree to pay these expenses.
You need patience and persistence in closing a short sale. A couple smart tips for short sales include hiring an agent experienced in this area and getting prequalified for your mortgage. Have a home inspection done, but be aware that you will likely be responsible for all repair costs, so weigh that against the reduced price of the property. You also need to know who is paying the agent’s commission and if you have to make up any differences there.