So you are wondering what is the difference between purchasing a foreclosure, short sale, or bank owned property is in the DC Metro area? These days the terms seem interchangable so in part one of this series I will define the actual terms. So here’s a brief breakdown that should simplify some of the language.
Short Sale – In this case, the homeowner has usually stopped paying the mortgage. In addition, the home is worth less than what they owe the lender. If they’re able to (1) find a buyer and (2) get the lender’s blessing on the deal, the lender will accept a portion of the total loan payoff amount. The lender is left short, hence the name. Short Sales are sometimes great bargains for buyers, but know that buying a short sale can sometimes takes months. The home comes without any disclosures about condition, and typically is sold As Is. Buyers can inspect the house but Sellers/Lenders won’t do any repairs.
Finally, you have to play a waiting game. Lenders are overwhelmed, they were never set up to operate as a real estate brokerage in the first place, and will probably take a month or more to even acknowledge receipt of a Buyer offer. To add insult to injury, if you don’t submit a complete package of documents, you’ll be waiting even longer while the lender requests docs one at a time.
Foreclosure – basically this has a legal meaning. If you get 3 or more months behind on your mortgage payments and the lender will issue a Notice of Trustee’s Sale. The Notice states the homeowner has 90 days in which to bring the mortgage payments current or the Trustee will auction the home, often on the court house steps. Trustees are often attorneys and sometimes the auction takes place in their offices. A homeowner facing foreclosure may try to sell the house to pay off their lender. If the sale proceeds won’t entirely pay off the mortgage amount, then it’s going to become a Short Sale.
REO – Also known as Banked Owned. One way or another, the lender now owns the home. Maybe the homeowner just mailed in their keys and disappeared. Maybe the bank was really misinformed and didn’t approve a short sale Purchase Contract when presented with one. Maybe the home wasn’t bought at auction. In any case, the lender owns it. They’ve already taken a loss against the original loan balance on the property. REO properties carry all the downsides of Short Sales except that you’re more likely to get an answer within days or weeks on REO properties. However, the bank is unlikely to take much below list price. They’re already taken a big loss and usually these properties are listed pretty close to the rock bottom of what the bank will accept.
Many, many potential buyers in the DC metro market lately want to look at “short sales”, “foreclosures” or “bank owned homes”. However quite often buyers are not sure what these terms mean exactly, but they know the 11 o’clock news (or their sister’s cousin’s baker’s uncle) says short sales & foreclosures are a great deal.
Here are some buyer tips when considering a Short Sale Purchase which will continue to be a large part of the real estate inventory in our market.
- Have a seasoned Real Estate professional, hopefully that has some experience helping sellers complete Short Sales, on your team. They already know the process of dealing with banks, submitting winning offers, and the timeframes involved.
- Listen with an open mind. Discuss the sold comparables with your Realtor until they make sense and take them to as Gospel. It is not about what you think the house is worth it is what the current market dictates.
- Don’t play chicken with the bank. So come out the gate with your highest and best offer. You may not win the contract but you know you gave it your best shot especially if there multiple offers.
- Patience is a virtue. Don’t forget banks are not Real Estate companies so they may take months to actually approve the sale.
Stay tuned for part two of the series, which would discuss foreclosures and bank owned properties in today’s real estate market. If you need a qualified real estate professional with knowledge about short sales, give me a call. 703-497-3936