What Is A REO? What Is A Short Sale?
Thursday, September 08, 2011
We’re here to answer your questions!
Q: What is an REO? What is a short sale? How are they different?
A: A REO is an acronym for real estate owned. It means that a lender has acquired a property through a foreclosure. A foreclosure happens when the homeowner stops making their payments and the bank takes the house back. Another name for a REO or foreclosed home is a bank owned home. While it does not take long to buy a REO property, it usually needs repair (since the homeowner didn’t have the money to make the payments, they probably haven’t been maintaining it well either) and the bank provides no warranties whatsoever. When you purchase any home, you want to do a thorough inspection, and this is especially true when purchasing bank owned properties. You will save a lot of money on the initial purchase price, but you could also spend quite a bit on repairs. In some cases, you get lucky and find a REO that is in pretty good shape and doesn’t require too money on repairs.
A short sale is when a homeowner owes more on the mortgage than the property is worth. For example, a homeowner bought a house for $400,000. In this example let’s say they put a 20% down payment on the house, equal to $80,000, so the loan amount is $320,000. When this homeowner is ready to sell the house, they realize that all of their neighbors homes (all recent comparable sales) have sold around $300,000. In this example, the home owner is “short” $20,000 on the mortgage. If they don’t have this money available to pay off the mortgage, then they need to get the approval of the mortgage holder to approve the sale price and the $20,000 loss (deficiency.) The approval process from the bank can take a very long time…sometimes up to 6 months. So if the buyers are hoping to be moved in within 90 days, they shouldn’t be looking at short sales. In our local real estate market, when a buyer and seller have agreed to terms of the contract but are waiting on approval from the bank, we change the status in the MLS from “Active” (for sale) to “Kick Out.” If and when the bank approves the short sale, the status will change from “Kick Out” to “Pending.” A pending sale means that the property is under contract to purchase. Once the purchase is complete, the status changes one last time from “Pending” to “Sold.”
The other way that the “Kick Out” status is used is when a buyer wants to purchase a property but they need to sell their own home first. If the seller agrees to this arrangement, they can continue to market the property under the “Kick Out” status. In this case, it’s not the bank that can kick out the contract, it is the seller that can kick out the 1st buyer if another buyer comes along that wants to buy the property right away. In this case, there is usually a short time period where the 1st buyer can move forward with the purchase, if they have the funds or if they can qualify for the larger mortgage to do so.