Short Sales, REO, Foreclosures
Currently, the behavior of the California Real Estate market is largely determined by what we call “Distressed Sales”, including pre-foreclosures, short-sales, and foreclosed properties, and it’s impossible to understand the market today without at least a cursory understanding of these special classes of Real Estate sales. For buyers, distressed properties can offer some potentially excellent buying opportunities. Sellers need to know what their property is up against when they try to sell it in a market dominated by distressed sales.
The issues surrounding distressed sales are complex, and some of these complexities are puzzling to even the most seasoned specialists. However, we can at least cover the basics of distressed property sales in enough depth to allow us to see generally how they play into the current market situation, and where they offer opportunities for buyers and challenges to sellers.
When a homeowner first gets behind on the loan payments, the lender records a Notice of Default at the County Recorder. This recorded notice is public record, is published in the paper, and is available to anyone who has access to the county records. You can actually go down to the county building and take a look yourself, or you can use one of the many on-line services, like foreclosure.com, to search the records of many counties all across the country.
When a Notice of Default has been filed, the property is sometimes referred to as being in Pre-Foreclosure. Properties that are classified as Pre-Foreclosure haven’t been foreclosed, they aren’t owned by the bank, they are simply properties burdened by loans that are in default. At any time up to 5 days before the actual foreclosure, the loan can be made current by paying the entire past due amount, and the property will no longer be in pre-foreclosure.
The potential opportunity here is for a buyer to approach the homeowner before the bank gets any more involved. If buyer and seller can negotiate a price that allows the seller to avoid foreclosure and the buyer to get a bargain, then everyone wins. The purchase price must be high enough to cover the outstanding loan balance(s) as well as the seller’s closing costs.
If it’s clear that a property is not going to sell in the current market for enough to cover the amount owed, the lender may elect to accept less than what is owed. This is known as a Short Sale. Generally a seller has to prove hardship to the lender in order for a Short Sale to be approved. If a property is listed for less than what the bank is owed, it must be noted in the listing that the transaction will be a Short Sale. The lender then must approve the final purchase price before the sale is allowed to close.
Short Sales can often be long and arduous processes, however, some lenders seem to be awakening to the advantages of a short sale vs. a complete foreclosure and are making efforts to speed up the process. Nevertheless, a buyer must be prepared for a lengthy wait between acceptance of the offer by the seller and approval by the lender and the subsequent closing of the sale.
A short sale can yield advantages over a foreclosure for both buyer and seller. The seller gets to avoid having a foreclosure become part of the seller’s credit report, and the buyer often gets a property that was presumably cared for by the seller up until closing, and the buyer also gets the benefit of the seller’s legal necessity to provide a variety of disclosures about the condition of the property and various other crucial factors.
If a Notice of Default is filed and the default period comes to an end, the lender will eventually foreclose on the property. In California, most foreclosures take the form of a Trustee sale, which is essentially an auction on the Courthouse steps. All potential buyers must pay cash for the property, and there is no escrow period or opportunity for thorough investigation. The lender has an automatic bid for the amount of the loan, and if no one is willing to pay more than this, the lender becomes the new owner of the property, which is what typically happens.
Sometime after the lender takes over ownership of the property, the lender will attempt to sell the property on the open market through a Broker. Property in this situation is known as REO, or Real Estate Owned (by the bank), and this is how most foreclosed property is sold.
When a Broker lists a property that is bank owned, there will be a notation in the MLS indicating that the property is REO. This has several implications for the potential buyer. On the positive side, the bank wants to get rid of the property and has requested that the Broker list it at a price that inspires a quick sale. An astute and well-prepared buyer can often find bargains, but these sales are not without risk.
Since the bank simply acquired the property from the seller, the bank typically has no knowledge whatsoever about the history or condition of the property and will provide no meaningful disclosures. If the house would have sold as a short sale, the previous homeowner would have been the seller, rather than the bank, and would have been able to provide information about the property to the buyer before or during the escrow period. The bank will claim to know nothing whatsoever about the condition or history of the property and will make the buyer sign a form acknowledging that fact.
Needless to say, the bank has no interest in making any repairs to the property, no matter what might be found during investigations. Often REO properties can be in severe states of disrepair by the time they get to market, having been abandoned or otherwise neglected by the previous owners. Fortunately, some lenders are starting to make at least the most minimum of repairs, but it can require some serious negotiation on the part of everyone involved.
There’s Only One Market
Here’s the surprising conclusion to all of this: Since all the listed properties in the market are competing against each other for the attention of buyers, the fact of whether or not a property is distressed has little bearing on the reality of how it fits into the market. The entire market is always shifting to match the distressed sales, so that if a seller of a non-distressed property wants to sell the property now, the property is going to have to be priced to compete with the short sales and foreclosures, and astute agents are helping their sellers do exactly that.
A buyer may initially think that shopping for “foreclosures” is going to get the buyer the best deal, but being a short sale or REO does not necessarily make a property a good buy. Since a non-distressed house that is priced to sell might still be occupied and/or maintained by the owner, that property is going to have advantages over a foreclosed property, and if the non-distressed property is priced to compete, it can often end up being a better deal than the competing REO.
The good news for buyers is that the presence of so many distressed properties has forced the entire market downward and made almost everything more affordable, but if you want to understand the value of any property, distressed or not, you need to look at the entire market at once and evaluate how that particular property fits into the entire picture.
In any case, you need someone on your side, and that’s why we’re here.
Remember, even in a short sale or foreclosure, the seller pays the commission, so having your own Buyer’s Agent almost always comes at no cost to you and can often save you large amounts of money while protecting your interests. No matter where or how you find a property, call us first.
Also, if you’re serious about buying property, you don’t want to miss the articles on Buyer Agency.
If you are serious about buying property in Monterey County, call us at (831) GET-HOME, or contact us, and enjoy our first-class fiduciary service today.
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