Urban Vue Properties ~ Blog

 

 

 

 

 

 

 

 The current buzzwords in the residential real estate industry are “REO’s” and “Short Sales.”  This is no surprise, though, since the market is currently inundated with these types of homes.  Short sales have become so common that our local New York City area MLS recently added a “short sale” category to the search database, allowing real estate agents to include or exclude these types of properties from their property searches.  Even more telling, a recent search of available homes in a particular neighborhood in Queens, New York produced 110 homes for sale.  Only 9 of these homes were NOT short sales.

 

Here’s a little primer on the Lingo.  A REO (real estate-owned) property is owned by the mortgage lender.  In this situation, the property has been foreclosed on by the bank because at the auction to sell the property, no buyer stepped forward willing to purchase the property at the price sought by the bank. The bank has taken title to the property and is now attempting to sell it.  A short sale property, on the other hand, is still owned by the seller.  The property may be going through the foreclosure process, or the owner may have just begun to become delinquent in paying the mortgage, or the seller may not be in default at all.  In any event, the bank ultimately agrees to be paid “short” on the “sale” of the property (i.e, the bank agrees to accept less than what the seller owes on the property).  The short is necessary because the value of the subject home has fallen and the seller does not receive sufficient funds from the buyer to pay off the balance of the mortgage.  By allowing the short sale, the bank avoids a foreclosure proceeding and all the time and expenses that go along with it.

 

Housing prices have dropped significantly.  Mortgage rates have too.  So what’s the mass appeal of these types of distressed properties when buyers have their pick of the litter?  This obsession, if you can call it that, is driven by the search for the almighty deal. 

 

Regardless of the shopper, buyers unquestionably want bargains.  This natural desire is as strong with the real estate buyer as with any other type of buyer.  Many buyers have convinced themselves that they can get this bargain by purchasing a short sale or REO.  Some even refuse to view any property that isn’t a short sale or REO.  Other are so focused on the mere concept of getting a deal (or a steal) that they have bypassed homes that meet all of their criteria, are move-in ready, and fairly priced.

 

Granted, some short sales and REO’s may be profitable in those situations where the properties are sold under market value.  But in most cases, short sales and REOS are better suited for investors, not the typical homebuyer looking for a place to lay their head.  But bargain hunters don’t despair.  If you’re a buyer who isn’t buying because you’re searching for a deal, limiting your property search to short sales or REOs might be right for you if: 

• Patience is a virtue that you possess.  The short sale is a process that is anything but short.  In fact, because this type of purchase is subject to the approval of the seller’s lender, closing can take anywhere from several weeks to several months (with the latter being the norm given the current backlog due to the flood of short sales and REOs on the market).  The process can become even longer if the seller has multiple loans on the property, because that second lender is also going to have conditions that need to be satisfied.  Similarly, REOs are also subject to bank approval.  Although the bank has already approved the price at which it will sell, because banks are flooded with tons of offers from potential buyers in search of a deal this process can also take an indefinite amount of time (although, not as long as a short sale).  If you need to close by a certain date or plan to time your purchase with the sale of a home you currently occupy, fugetaboutit – the timing likely won’t work the way you envision.

 

•  You Recover Quickly From Having The Rug Swept Out From Under You.  Until there is an accepted offer by the bank on a short sale the seller and lender will continue to entertain offers from other buyers. So having the seller say they accept your offer and will submit it for bank approval means nothing.  If a higher or better offer comes in, the bank will likely accept that offer, which means you may have spent a ton of time waiting … for nothing.

 

•   Waiting Months to Get A Response Doesn’t Perturb You, Even If The Response Isn’t In Your Favor.  Even if you wait up to four months just to get any response from the bank, there’s no guarantee that the lender will accept your offer.  The bank can outright reject your offer.  If you’re lucky, they may tell you why but sinc ethey have no obligation to do so you may never know why.

 

• You Don’t Have A Need to Know About The History of The Property.  With REOs, there is usually very little information about the property and no seller disclosures. The previous owners and occupants have been booted.  The bank likely has no substantive details about the condition of the property or any problems that need to be remedied.  Buyers may fare a little better with short sales in this regard.  If the seller still occupies the home, they can provide potential buyers with more detailed information about the home.

 

• You Don’t Wince at the Sight of a Missing Roof, Pigeon Poop and Rooms Filled Floor To Ceiling With Debris.  Short sales and REOS are sold in “As Is” condition.  So what you see is what you get. And sometimes what you get is more than most can handle.  We have purchased many distressed properties.  One such REO was previously occupied solely by a hoarder.  Every room (from the attic to the basement) was filled top to bottom with every manner of junk: papers, boxes, furniture, food, major appliances, and clothes. The fees for garbage removal alone were approximately $15,000 – and this particular home was only 1200 square feet!  Another home had a partial roof, no working plumbing and was in the possession of squatters.  But in this instance the squatters were pigeons that had for months used the walls and the floors as their personal restroom. If knowing that you will live in a house that recently had some pretty gross stuff going on doesn’t bother you then you can pursue your short sale/REO dreams. 

 

• You’re A Handy-Man (or Woman).  Short sales typically have deferred maintenance issues.  Short sale sellers have difficulty staying current with their mortgage payments.  It’s typical and likely that upkeep and maintenance issues on the house are not high on the list of priorities and have been neglected.  The physical condition of REO properties tends to be much worse than short sales.  We’ve all seen the properties with their boarded up windows, unkempt landscaping, and front doors overrun with junk mail, circulars and newspapers.  Also common are stories of foreclosed homeowners intentionally damaging properties before the bank gets possession.  Common are damaged walls, broken windows, water damage and debris-filled homes.  If you are a handyman or contractor who doesn’t mind getting down and dirty you can repair and restore the house to your liking at a substantial cost savings.

 

•  You’re Not A Handy-Man (or Woman), But You Have Unlimited Time and Cash Flow Set Aside To Hire Others.  Most short sale and REO buyers are so focused on getting a deal that they don’t think past the aspect of saving money on the acquisition of the property.  This is a huge pitfall of buying these types of distressed properties, and unfortunately, far too many buyers have seen the “profit” they made at the time of purchase devoured by the cost of curing violations and performing necessary repairs.  Before you buy that short sale or REO, you should investigate how much it will cost to make any needed repairs or renovations, and whether you can devote the time to supervise the work needed to be done.  Hiring an inspector is key.  Getting estimates from contractors is also wise.  No one likes a $30,000 surprise.

 

Though not appropriate for everyone, buying a short sale or REO can be a way to get a home for less than market value.  So yes, you can get a steal. But before you jump on the short sale and REO bandwagon make sure you can weather the nuances attendant to these types of transactions.