I’ve handled many short sales and REO’s for clients over the years. In fact, this gorgeous Newcastle home was a short sale in 2011! A lot of people ask me about buying short sales, so here is a short guide to give you more context and information:

Short Sale and REO Definition

A short sale is the sale of a house at a price that doesn’t net the seller enough money to be able to pay off his or her mortgage, so the bank will be “short”.

The seller can sign a Purchase and Sale Agreement with a buyer, but it will ultimately be up to the seller’s lender to decide whether or not to accept that short offer. It can take months for the lender to make a decision.

If the bank does agree to a short sale, in some cases the seller is required to sign a promissory note for the shortfall or a portion of it. Some sellers can’t or won’t sign this, which then prevents the short sale.

If the bank refuses to accept a short offer and the seller quits making their loan payments, eventually the bank will foreclose on the house or condominium. At that point, if no one buys the property at the foreclosure auction, it will be owned by the bank, in a category of asset called “Real Estate Owned” or REO’s.

Short Sale and REO Causes

Short sales and REO’s have always been around, but as a result of individual hardship or faulty judgment. Now they are widespread – roughly one-third of the transactions in the Puget Sound area were short sales or REO’s in 2011. (This figure varies enormously by neighborhood, by town, by suburb, even by housing subdivision.)

In the run-up of home prices between 2001 and 2006/2007, when prices often increased 10% or even 15% each year, more and more people bought homes – often with mortgages that:

  • required zero down payment or small down payments, or
  • had interest-only payments for a period of time, or
  • had low initial interest rates that re-set after 3 or 5 years –

or refinanced their homes to pull out cash from the increased perceived value.

As home prices have dropped radically since 2007, it’s easy to see that owners quickly have found themselves “underwater” or owing more than the home is worth. If an owner needs to move or can’t make the payments, for WHATEVER reason, he or she has a major problem that may evolve into a short sale or foreclosure.

These aren’t the only options, so if you are an owner in this position, please contact me for a referral to experienced, outstanding attorneys, as well as a discussion of how we would approach a short sale if you decide that is what you want to do.

Short Sale and REO Advantages to the Buyer

Short sale prices are usually 10% to 15% below market value.

REO prices are often 15% to 20% below market value.

Short sales, with their uncertain time line, are great for buyers who already have a place to live and who are not too emotionally invested in whether or not they actually get the home.

REO’s have a much shorter time line; depending on the particular financial institution that owns the home, a buyer might even be able to close in less than 30 days. Frequently REO’s are in neglected, damaged condition. Because they are significantly discounted below market value, a buyer who WANTS a project can quickly gain equity and add beauty to the neighborhood, whether they intend to occupy the home or re-sell it. The FHA now recognizes the REO investor as a valuable part of the market.

Short Sale and REO Pitfalls for the Buyer

Short sales and REO’s are what we call “distressed properties,” so it’s not surprising that frequently

  • the utilities have been shut off, either for non-payment or because the bank/owner does not want to incur additional expenses
  • property taxes have not been paid
  • there may be contractors who were not paid for work done and have filed mechanics’ liens against the title

All of these are issues that can mean additional costs to the buyer. But they are simply factors to be researched and figured into the offer price.

Title review contingencies and inspection contingencies are always included in the offers I write for my buyers.

In order to conduct a full inspection of the property, we may have to make arrangements (and pay) for the utilities to be turned back on.

A buyer should be aware that when he or she buys a home at a distressed price, they are setting a new standard for prices in the neighborhood or condominium complex, thus reducing the value of the area. Every additional short sale or REO sale will further reduce the value of the area. In a declining market, this is a slippery slope! Buyers need to be aware of the current ownership and equity positions of other owners, and go into this situation with eyes wide open.

Strategies for Short Sales and REO’s

What is your situation?

Are you an owner who needs to make a move and might be underwater? I can help you figure out your current market value, but for your best interests you MUST talk to an attorney. Contact me now to get started.

Are you an investor looking for a short-term project, and then planning to rent out the property or re-sell it?

Or are you an investor with the patience to wait for the right house, which you’ll use as a rental once you get it?

Are you a buyer looking for a new home, and you currently have a month-to-month lease?

Have you already found a place, either online or by driving by, that you’re interested in? Do you want to offer less than list price? Contact me and I’ll research the property for you. Depending on how long it’s been on the market, and the offer history, we should be able to fine-tune a price that the bank will accept.