Should I buy a “Short Sale” or “REO/Bank Owned” property?
First, what is a ‘short sale’? A ‘short sale’ is a pre-foreclosure scenario where the owner of a property approaches their lender and asks if that lender will release their lien on the property for something less than full repayment of what is owed to them. For example, if the Owner paid $200,000 and borrowed $160,000 but the property is now worth $160,000 and they owe $150,000. A Buyer offers them 160k for the property and after the seller’s closing expenses they will have $145,000 to pay off the first mortgage lien. Basically the question is asked of their lender: Will you (the bank) release your lien on my property for $145,000 thus allowing me to convey clear title to this third party?
There are far too many things to be careful of in a short sale to list here. There are a few general statements though:
- First be careful that the owner is short sale eligible. The bank will not approve a short sale request if the owner has liquid assets. If the owner is non-compliant with requests from the bank then they will not approve the short sale request. Many times owners who know they are not going to see anything from a sale are not eager to ‘waste’ time on it.
- Do not have any ‘side agreements’ with the owner. This may constitute mortgage fraud.
- If the owner insists that you perform your “as-is” inspections before the short sale is approved then be certain you are comfortable with their ability to maintain the property. The owner has a responsibility to maintain the property in substantially the same condition it was in at the effective date of the contract, which sounds great but if the owner cannot pay his mortgage and he is not getting any money from the sale, odds are they may not be spending much effort in maintain the property. It is far more desirable to have the inspections AFTER the mortgage holder has approved the short sale.
- If there are more than one lien holders then it may just not be worth the trouble. All lien holders must agree to release their liens on the property for the sale to occur and they must all agree to the same time frame. If there are more liens such as second mortgages, condominium or HOA liens, code enforcement or construction liens then odds are not good that everyone will be happy with their short pay off.
How about buying a bank owned property or a REO?
First, how did the bank obtain the title? Most of the time this is the result of a court ordered auction of the property but some times the bank took title through a deed in lieu of foreclosure. If they acquired title through a deed in lieu of foreclosure then ALL liens survived the transfer. If it was through a certificate of title then only certain liens survived the transfer but since this is an adverse possession one must be careful of other title issues like robo signing. When looking at REO keep in mind that:
- The condition of the property may make it ineligable for typical financing.
- The GSE’s (Government Sponsored Entities) such as Fannie Mae and Freddie Mac have special loan programs called Home Path and Home Steps. Ask your mortgage Broker if you qualify for these. If you do qualify for these they also have home improvement loan programs as well.
- The GSE’s (Government Sponsored Entities) such as Fannie Mae and Freddie Mac have ‘first look’ periods (15 days) where only offers from owner occupants are considered.
- Remember that the bank now owns the property just as you or I would and the same rules which apply to us apply to them.
- The property was owned by someone who couldn’t afford to pay the mortgage so expect there to be some deferred maintenance.
- The title is always the big concern in REO’s. PAY A LAWYER TO REVIEW THE TITLE.