Short sales, pre-foreclosures, Deed in Lieu of foreclosures, REO’s…

We all hear the terms in from Realtors, Banks, Emails, advertizing, T.V. you name the source and somewhere in there they are probably talking about the “housing market” the “housing Crash”, bank “bail-outs” and one or many of the terms mentioned above. We wanted to take a little time to quickly explain what those real estate terms mean.

What is a Short Sale?
A short sale is a home being sold for less than the bank is owed. Banks are sometimes willing to sell for less than they are owed because they are not in the business of owning property and would rather get the loan and property off of their books. There is a special approval process which can make the process of buying a short sale long and not guaranteed to go through.

Typically the short sale process starts off just like any other purchase, buyer and seller negotiate and accept a written offer. However, the contract contains a short sale addendum which states that the contract is accepted but is “Subject to lien holder approval.” The lien holder is the bank who owns the mortgage on the home. They are being asked to take a loss on that loan/property, so they need to approve the price for that transaction. Without approval from the bank, the transaction will go nowhere and likely the home will continue on to foreclosure.

The process of getting lien holder approval can be time-consuming and bureaucratic. There is also a risk that your offer is rejected. For many homebuyers, the uncertainties of the purchase process may deter them. If you are considering pursuing a short sale, I encourage you to work with a real estate agent who is familiar with the process and can walk you through all the steps expertly. You also need to be comfortable with the following risks.

• Closing dates may be delayed – This is almost inevitable in a short sale. Some banks may respond in a week or two, while others may take 4-6 weeks to respond. A normal closing takes 30-45 days. A short sale could take anywhere from 1-6 months to close, and it is difficult to gauge accurately but average time frames are more often 3-6 months. Make sure that your life circumstances allow for this sort of uncertainty.
• Your offer is rejected – Because of the extended review timeframe, it is not unusual for a bank to take 6 or more weeks to review and reject your offer. We recommend you continue to look for homes even if you have an offer in negotiation for a shortsale as you may find something better or acceptable in the mean time.
• Multiple lien holders – Many homes have two mortgages. If the mortgage holder is the same bank for both, you are lucky and still have a single decision maker. However, if there are two banks involved, then they both need to agree on a payoff amount. The two banks will negotiate how much of a loss each of them takes. If one bank doesn’t approve, the transaction goes nowhere. These are some of the hardest transactions to get closed.
• There is nothing you can do to speed things up – The process is bureaucratic, and often your agent is powerless to make things move faster. Multiple calls to the listing agent or banks for a response does not speed the process up. Most of the time the agents are not able to speak with the decision makers at the banks at all and are waiting in suspense just like the buyer. You must be able to be patient with this process as both your agent and the agent representing the other party are motivated to make this sale go through before they both loose it to foreclosure.
• Is it really a good deal? – Just because a bank is willing to lose money on their mortgage does not make the home a “good deal”. When you write the offer and start the process it can be below market, but by the time it’s approved the market may have further declined and it may not be a great deal after all. The only way to know if a house is a great deal is to research the local market. An experienced agent can help with this process.

What is a pre-Foreclosure?
This is a generic term for a home where the owner has fallen behind on mortgage payments. The home may or may not be in the formal foreclosure process. It can take four or more months of late payments for the foreclosure process to begin. If you buy a home in this state, the seller will end up paying up the delinquent payments at closing, provided that there are enough proceeds from the sale.

What is a Foreclosure?
The primary method of foreclosure in California involves what is known as non-judicial foreclosure. This type of foreclosure does not involve court action. When the deed of trust is initially signed, it will usually contain a provision called a power of sale clause, which upon default allows a trustee to sell the property in order to satisfy the underlying defaulted loan. The trustee acts as a representative of the lender to effectuate the sale, which typically occurs in the form of an auction. Unlike many states where trustees are appointed by lenders, title companies primarily serve as trustees managing foreclosure sales in California. California has a requirement known as the one-action rule. If a foreclosure is completed by non-judicial means, a second action to recover a deficiency judgment is not permitted. Using a judicial foreclosure, a lender may recover a deficiency judgment in certain circumstances. But since this process takes longer than non-judicial foreclosure, it is rarely used. California non-judicial remedies have stringent notice requirements.

• Property Auction/Trustee Sale –As a buyer, you can purchase properties at both trustee sales and sheriff sales. However, this process is NOT for novices. While you may find great deals, you have little or no time to actually evaluate the property that you are buying. You could be at risk of various problems that are normally investigated by Realtors and Title Professionals in normal sales transactions. These problems can be serious such as: Title problems, Superior loan pay offs, IRS liens, utility liens, HOA fees, tenants or former owners still occupying the property,  pest and/or structural problems .It also frequently requires cash payment for the entire price of the property. If you pursue an auction, be sure to engage professionals to help guide you through the process. Only seasoned investors should consider this option.
• Deed-in-Lieu of Foreclosure – Sometimes mortgage companies allow a homeowner to simply surrender their deed to the lender, freeing them from both the mortgage payments and home ownership without having to go through the actual foreclosure process. These properties become “bank-owned”.

What is an REO?
REO is a abbreviation for Real Estate Owned properties in other words it is Bank-Owned Property

Property that has been foreclosed on or the lender accepted a deed-in-lieu of foreclosure and it does not sell at auction has now become bank owned property. It is then listed by a Realtor who is hired by the bank to market and sell the property. To sell the house as quickly as possible the lender will remove any liens on title, and clear any other issues that may slow down the sale of the property during escrow. This does not mean they will make repairs or any improvements on the property. Generally, lenders are very motivated to sell these properties, as they are in the business of lending money, not owning real estate. REO’s tie up their capital reserves and hamper their ability to lend money. Also, the management of these properties can become very costly. When buying a bank-owned property, there are often bureaucratic hoops to jump through with the bank, a real estate agent who has facilitated REO sales can help you navigate this bureaucracy and prevent further delays.