Phil Hoover at the Boise Blog (they tell me that’s in Idaho) suggested that foreclosed properties aren’t always the best deals in town. You will find no argument from Steve and me, yet this seems to be a common misconception among many would-be buyers currently trying to sniff out an opportunity for instant equity.
Much like agents like to toss acronyms about (MLS, NAR, GRI) forgetting that not everyone in the real world understands our curious language, we tend to speak in tongues when it comes to distressed property sales: REO, short sale, foreclosure, NOD. These terms are so much of my daily life, that I often forget that not everyone really understands their meanings. I was recently discussing a home for sale with a (very savvy) client. Upon my mentioning that it was a short sale, my client asked, “What does that mean?” So, first a little primer.
Homes for sale in the San Diego real estate market today come in many different flavors, and can generally be broken down as follows:
- Traditional, non-distress sale: Owner needs to or wants to sell and has equity. At closing, seller will receive proceeds from the sale.
- Traditional, distress sale: Owner needs to sell due to personal circumstances. Time is of the essence, they are highly motivated (not selling is not an option).
- Short sale: At closing, proceeds from the sale will be insufficient to cover the costs and encumbrances including costs of sale (title, escrow, agent fees) and money owed to lenders, the tax collector, and other lien holders. In these cases, the seller will look to the lender(s) to accept less than what is owed as repayment. The lender may forgive the debt or they may require future repayment of the balance due. This may have credit rating and state income tax implications, but thanks to recent Federal legislation, the forgiven debt might not be subject to Federal income taxation.
- Potential short sale: Depending on the final sale price, the seller may or may not be in a short position. We call these “squeakers.”
- REO (or Real Estate Owned): The lender has foreclosed on the property and was unable to sell the home (for an “acceptable” price) at auction. The bank is now the owner, and they are trying to clear the inventory.
- NOD (or Notice of Default): This is not a type of sale, but a circumstance which may apply to all but the REO and Traditional/Non-distress sales. A Notice of Default is recorded by the lender when an owner has failed to make scheduled loan payments over a period of time, usually three months, but this can vary. A NOD marks the beginning of the foreclosure process.
Steve is working with a buyer right now who only wants to see bank-owned and short sale listings. No matter how often he reminds the buyer that there are equally attractive opportunities in the form of traditionally listed properties, he only wants to see the REOs and shorts. Alas, the customer is always right, so that is what he gets. But, as Phil pointed out, REOs and short sales come with a lot of baggage, and a buyer shouldn’t assume that these situations present the best value proposition. They often don’t.
First, these distress sale properties are rarely in excellent condition, and the buyer will most likely be taking them in their present state; what you see is what you get. There is a slightly better chance that you can negotiate repairs in the REO situation (and we have successfully done this on numerous occasions), but this will come in the form of a credit, usually toward price, so don’t expect a turn-key home delivered to you at closing.
Secondly, banks do not perform at Mach speed. They are big, they are bureaucratic, and, mostly, they are very, very busy. A response within thirty days of offer submittal is cause for breaking out the party hats. In fact, our most recent short sale listing left buyer, seller, and agents living in a three-month cone of silence. Some lenders are better than others, and REOs tend to move more swiftly, but every distress sale adventure is a surprise package. If timing is an issue, these are not the homes for you.
Finally, if your purchase is contingent on the sale of another property (you have a home to sell), forget about it. You are automatically disqualified; thank you for playing.
Homes are sold for many reasons, and the sellers each have different reasons and different degrees of urgency. “Motivated” sellers come in many flavors. A stereotype may sometimes, even often, prove true, but when a buyer limits themselves to only one type of sale situation, they may be selling themselves short.
(Standard disclaimer applies: We are not attorneys or accountants. You should always seek the advice of these professionals if you are a homeowner who finds yourself in one of these distress sale situations.)
Amended to add this link to a related (much more comprehensive) article: 3OceansRealty. Geez, what a copy-cat I am! I need to get out more.