How to buy a home: Short Sales
July 21, 2010
This is part 3 of our mini blog series, How to buy a Home. In this blog we discuss the Short Sale purchase method along with key aspects you need to know, to become an informed buyer in today’s increasingly competitive and rapidly changing housing market.
SHORT SALES:
A real estate short sale occurs when a homeowner owes more than the properties current value but needs to sell and the existing lender accepts less than is due.
In a typical situation, the mortgage lender would require the seller to come in with the difference needed in cash. In a short sale, the homeowner can no longer pay the mortgage, has fallen behind and does not have the difference in cash needed to pay all amounts due. In a short sale situation, the lender(s) will agree to discount the outstanding principal balance and/or interest and fees due and accept a payoff that is less than that owed to help facilitate the sale.
Typically, the mortgage lender(s) will only accept a real estate short sale if you are at least one month behind on your mortgage payments, have a ready and willing buyer and you are unable to debt service all of your existing liabilities. In addition, if you’re financial situation has changed and you are currently making less money than before and you have no more savings, you will most likely qualify for a real estate short sale.
Unlike a foreclosure, short sale buyers typically buy the home for even less because they are not paying off the existing loan or making up the back payments. Short sale buyers are striking a deal with the existing lender to take less than what the lender has coming to avoid dealing with a foreclosure.
Buyers pursue short sales to get a good deal. Therefore, when you see a price listed for a home that you think is too low for the neighborhood, before you jump on that price, ask your agent to call the listing agent to find out if the short sale price is approved by the existing lender(s). Most times the selling price is only a guess by the listing agent and is usually set lower than the final price. The final price is usually higher once the existing lender(s) give their final discount and all the other outstanding costs are factored in like property taxes and HOA dues.
You might want to think twice about making an offer on a short sale home. It’s not as simple as you may believe, and very few can close in 30 days or less. Typically, the turn around time is several months to approval and closing. For buyers that are willing to risk a higher final price than that advertised and a closing date that could run several months, a short sale could result in a positive outcome and an under market price.
There is another purchase method which will be discussed in our next blog titled AUCTIONS.
How to buy a home: REO’s
July 14, 2010
This is part 2 of our mini blog series, How to buy a Home. In this blog we will define bank owned reo’s along with key aspects you need to know, to become an informed buyer in today’s increasingly competitive and rapidly changing housing market.
REO’s:
REO is an abbreviation for the term “real estate owned” which is a property that has reverted to a lender. Many people associate the term REO with bank owned, however, an REO could be held by any lending entity such as an individual, partnership, trust, corporation or bank.
In California, an REO property must go through a foreclosure process, typically three months and 21 days. The property is either sold at the courthouse steps to a third party buyer through an auction process or will revert to the lender and become an REO.
Beginning in the first quarter of 2007, sub-prime lenders like New Century and Ameriquest began to fail along with hundreds of other subprime lenders, many located in Orange County California. Eventually, alternate “A” quality lenders failed. The result was an extended credit crunch making it difficult to secure financing. At this point property values fell, creating negative equity, making it impossible for most to refinance and hold onto their homes. Coupled with job losses, many borrowers fell behind on payments, ended up in foreclosure and lost their home, which then became an REO.
In an effort to move these REO’s off the books, banks aggressively slashed prices creating an even faster downward spiral in values. This price slashing process destroyed appraisals, creating more negative equity and the foreclosure to REO cycle grew exponentially.
Buyers recognized the attractive lower pricing and began buying REO’s. The demand reached such high levels by 2008 that multiple offers or bidding wars become a common occurrence on most REO sales. By 2009, the volume began to decrease as governmental intervention attempted to slow the REO process through borrower workouts and breather periods.
Buying an REO carries many unknowns and risks. For example, the due diligence inspection period is typically 7 to 10 days as opposed to 18 to 30 days on a standard sale. This puts the buyer under the gun to quickly determine all deficiencies. The bank will not provide any disclosures as to property condition, which is sold “as is”, buyer beware. In addition, banks selling strategy is to list the home under the market, which creates a multiple offer situation, bidding war and a final price inflated near or at the market anyway. The property condition is usually fair to poor due to the home being vacated, abused and vacant along with poorly maintained, dying or dead landscaping.
Today the volume of REO’s is at about 30% of its peak in 2008/2009 with some who believe a second waive may be coming soon. Others believe that Governmental pressure, workouts and forbearances will be more common. Lenders understand that they must release all REO’s very slowly and methodically to avoid destroying the market which will adversely effect their own financial position.
Short Sales are another purchase method, which were rare and even viewed as a waste of time up until 2010. This method is growing daily and will be discussed in our next blog titled short sales.
How to buy a home: Equity Sales
July 7, 2010
When buying a home in Orange County, you will either purchase through an equity seller, a bank owned reo, a short sale, or an auction. Over the next four posts, each of these purchase methods will be defined along with key aspects you need to know, to become an informed buyer in today’s increasingly competitive and rapidly changing housing market.
Equity Sales:
Equity sales are also known as equity sellers. This term emerged in 2007 as the sub-prime market failed, which led to the subsequent credit crunch, increased numbers of distressed sellers and massive foreclosures.
Generally defined, all sales or all sellers that are not REO’s, short sales and auctions are considered equity sales. Equity sellers can be in a distressed situation, even late on mortgage payments and in default. They can hold title as individuals, trusts, corporations and partnerships. They can be either owner occupants or non-owner occupants. They may owe more than they will net from the sale but must also have the capability to cover the shortfall. The key distinction is that they have the ability to clear all debts and convey clear title without the need for an additional bank approval process and increased risk associated with REO’s, short sales and auctions.
Time to look and kick the tires, increased disclosures, reduced risk, easier terms, ability to secure conventional financing and better property condition are typically more characteristic of equity sales. Equity sellers usually offer a more liberal and simplified process through a longer “free look”, contingency or due diligence period. After this period, your deposit will go hard and become non-refundable. It is important that you have adequate time to complete your property inspection, termite, mold and other inspections as well as the appraisal and loan approval process, before your deposit is forfeited to the seller.
This all sounds well and good. You may ask…why would a buyer ever consider an REO, short sale or auction? Theis and many more questions will be answered in the next post in this series.
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