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What is an REO? ... What is a Short Sale? ... What’s the story with a Bank Repo? ... How does this work?

These are great questions. Thank you for asking. The easiest way for me to explain is in a sort of chronological order of events. Let’s get started…

Short Sale: Some property owners have a mortgage balance that exceeds the value of their property. Once the property owner has learned of this unfortunate situation, they often attempt what’s commonly referred to as a Short Sale. This means that at closing, the payoff to the bank or lending institution will be short of the total amount. This ‘short sale’ must be approved by the lending institution. Lending institutions differ in their requirements for an affirmative decision to proceed with a short sale. Many require that the seller prove hardship.

Short sale properties tend to fall into two categories. The majority of these properties are marketed at a price that the agent and owner chose. They select a price that should encourage offers and then hope that they can convince the bank to accept an offer once one has been presented. Some agents and owners have the foresight to obtain agreement on a short sale price prior to advertising that price. This is certainly a better situation for a buyer as all short sale contracts contain provisions that make them “subject to approval by the lender”. The lender can simply say no. If that happens, the buyer’s only recourse is to cancel the contract and escrow and look for another property.

REO is an acronym for “Real Estate Owned”. If a property owners stops making their mortgage payments, and no short sale is arranged, there are really just two options. The owners and lending institution can agree to a “deed in lieu of foreclosure." In this scenario, the lending institution agrees to accept a deed to the property. At this point the property becomes an REO. In the second scenario, short of another workable agreement, lending institutions will foreclose. At the end of the foreclosure process, the lending institution owns the property free and clear of all financial encumbrances. The mortgages no longer exist.

REO properties are also referred to “Bank Owned Properties” and “Bank Repos”. When you make an offer on a Bank Owned property, you are negotiating directly with the lending institution that owns the property. Most REO properties are listed with real estate agents and submitted immediately to the Multiple Listing Service.

How does all this work? How much (or little) can we offer?

The actual transaction for the sale of bank owned homes is similar to any escrow with a few exceptions. The first exception is that the seller is Corporate. Lending institutions do not make decisions the same way that individuals do. There are layers of management for approvals. Each lending institution has specific criteria for negotiations. Having said that there are some guidelines that seem to hold true for most lending institutions:

• They sometimes take longer to respond to a counter offer than an individual would so be prepared for that.
  
  
• They do not want to make repairs. Some will pay for pest inspections, others do not want to. Some will offer credits for repairs, others will not. Regardless of how inspections and credits may be negotiated, all lending institutions want the sale to be “as is." They are not in the business of home improvement.
  
  
• Lending institutions negotiate for an escrow period of 30 days or less. Longer escrow periods simply do not appeal to lending institutions.
  
  
• Lending institutions attempt to price the properties to sell. Usually they pay for an appraisal before listing the property. They compare the appraisal with the Broker Price Opinion that’s provided by a real estate agent. If the property does not sell within a reasonable time period, the bank will obtain second opinions from realtors or appraisers. At that point, they may reduce the price. Most of the sales that I have reviewed, at least in this area, have a minimal difference between the asking price and the sales price. If there are multiple offers, homes sometimes sell for more than the asking price. Please send me an email, or call me, if you would like statistics for the local REO sale transactions that have closed in the past 120 days. Please give me a specific county, city or zip code that you want the search to include. Then you can specifically note the asking and selling prices for these transactions and the differential.
  
  
• A Loan Pre-approval letter is usually required before a lending institution will review an offer on one of their properties. A pre-approval letter differs from a Pre-qualification letter. You will want to contact a lender and start the process before you make an offer. If you are not currently working with a lender, you are invited to call me for a referral.

You may have additional questions and you may want to buy one of these properties. I hope that you do. If so, I hope that you will call me with your questions. If you would like a proficient guide through the complexities of this new market, please contact me.