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As I have often said, I love real estate.   I love everything about it – especially the things I learn that flip a light on in my brian (we call it having a light bulb moment).   Yesterday was a “Light Bulb Moment” for me.   I attended a certification class on Short Sales, Foreclosures, and Real Estate Owned (REO) properties and learned so much valuable information.   I have had my experience in dealing with all three transactions from both sides working with Buyers and Sellers, but the information I gained yesterday seemed to really blow me away.   It was taught by a man who has some expertise in the area as well as about a 30 year career in real estate; so I would say he has been around the block a time or two with the highs and lows of the real estate market.   He brought to light the question, “Is Getting the Best Deal in a Short Sale, Foreclosure, and REO property always in the best interest of a potential Buyer?”   Well, from a Buyer’s Agents perspection, my answer would have been yes before yesterday, but now I would agree and say No.   Why not?   Before I explain this, lets back this up a bit with some additional information to help you better understand.  

First, lets explain the difference between the three:   Short Sale is when the home is still owned by the homeowner but they are in a pre-foreclosure status.   Pre-foreclosure means they are behind or not making the mortgage payments anymore.   They are starting to receive letters from the lender stating their status is becoming delinquent.  The term Short Sale means the homeowner owes more money on the loan than what the sell of the property will likely produce.   A short sale provides a window of opportunity for the homeowner to try to sell the property to pay off as much of the debt as possible.   The lender will work out with the homeowner the deficient according to their lending rules.    Short Sales are complicated processes which require long periods of time to close. A Buyer who decides to buy a home in Short Sale should be prepared to wait anywhere from 3 to 5 months depending on the status of the home and then there is no guarantee the Seller’s lender will accept the deal.   I have had one fall thorough at the closing table, so a Buyer needs to be prepared to have a back-up plan – thank goodness we did.

A foreclosure is when the lender has exhausted all communication with the homeowner and has turned it over to the sheriff’s department to seize the property and evict the homeowner.   We tend to think they are just take backs from the bank, but no these are seized properties by the bank through legal proceedings.   We see a lot of foreclosures on the market, but I doubt or would hope that not all of these true foreclosures were legally seized but no one knows.   A Buyer purchasing a foreclosured home directly from the bank needs to be prepared to get the property “Sold As Is” with no guarantees.   The bank knows nothing about the condition of the property and makes no warranties to its condition.   I suggest you get your inspections and ask your own lender before you go to contract on a foreclosure if your lender will accept a “Sold As Is” property since lenders are very picky these days about loaning money on homes.   Make sure your lender approves this first.

An REO property is a true take back from the bank.   It is called a Deed in Lieu of Foreclosure which means the homeowner agrees to give the property back to the bank in exchange for the bank’s cancellations of the mortgage note. Not all lenders can afford to do the REO process but if they can it is the best alternative for both parties involved.  The Seller walks away owning nothing and has no further responsibility, and a Buyer buying this home is dealing with a new owner “The Bank”.   They tend to be easier to deal with regarding repairs and price.   Good way to get a good deal and not have to worry so much about not closing the home or having any major hassle.

Now for some cold hard facts that affect you when buying a short sale, foreclosure, or REO property.    As I have said before, it is the Realtor’s job to get the best price possible for the buyer client on any home they choose, but one thing a Buyer should know is that homes in short sale, foreclosure, or REO status are already at a lower than market price when they are listed.   The reason is that banks are not in the business of selling houses and maintaining home inventory.   They are in the business of making money, so when they get back a home it is their job to get it sold as fast as possible.   Listing agents for these properties who work to help sell the bank’s asset management properties do a market analysis to see what the market value is for the home  under comparable conditions but price the home lower to get it sold faster making it a great deal to start with.  

However, when a Buyer makes an offer on one of these homes they always go lower because it is owned by the bank.   What they need to remember is a bank has a bottom line just like anyone else selling a home.   They are not going to give anything away and anything in good quality condition will be sold at a good price.   So, if you get something from the bank at a rock bottom price then let me warn you that the condition of the property will likely be bad.  

 The other thing I want to mention is that when a Buyer tries to get the home for too much less than the listed price which is already low they are setting the ceiling for the neighborhood and in some cases hurting themselves for future comps.   I know of one situation where the Buyer got a foreclosured home $30,000 off the already low foreclosed price and they were so happy telling me that they had paid the least for their home than anyone in the neighborhood.   What they did not realize is they had  killed the comps and two years later when they came to me to sell their home the market had not changed much and the price they paid was about the same as the price we would have listed it for.   When they asked me how could this be because the house should have gained equity, I had to tell them that they killed the comps and the next Buyer who came into the neighborhood after them decided they wanted to pay less on their foreclosured home too which created a sprial effect.   The potential seller told me “Well, I guess I never thought I would hurt myself on the selling end.   I was just worried about getting the lowest price on the buying end.”   We must always remember that everything we do has a cause and effect.   This was a perfect example of how Buyer’s drive the market on price.

So the next time you think about buying a short sale, foreclosure, or REO property, be realistic and get your Realtor to do a full market analysis and see where the true market price should be and where the real list price is and determine if this is enough to get you  the house at a good “fair” price that will enhance your selling power in the future – not diminish it.   We all want  a good deal but we need to look ahead and see what is really in our best interest going forward.   After all, its our money and as we have all heard, “Cheap is not always Best”.  

Visit my website at www.CynthiaWilliamsHomes.com or visit me on Facebook or Twitter at CWilliams_Rltr