Dan and Traci & Consultants’ Blog

What is the Process When Buying a Short Sale or REO?

When purchasing a Short Sale or REO there are factors to consider that a traditional sale does not present.

To Get Started

To buy a short sale or Real Estate Owned (REO) property, as when buying any type of home you should first get approved for financing.  This allows for you to look at homes that are in your price range.  More importantly, a bank will not even look at your offer without a letter from your lender stating that you have the ability to finance the property or you can prove that you have assets available to purchase all cash.  The buyer must document with their offer proof of funds available for the down payment or all cash offer.  Any seller will be impressed with such a complete offer presented to them and your offer will be considered above others if it is competitive.  Short sale and REO transactions can be extremely time sensitive and it is vital to be able to perform in a quick manner.

After you speak with a lender and know what price range that you are able to afford, the next step is to find a home to buy. When you are looking at short sales and REOs it is important to know that these are not traditional sales and that they have unique challenges.  A great obstacle to be aware of is the fact that the final decision maker is an institution that makes decisions based on how it serves their business and does not make emotional based decisions. The bank is only interested in selling the asset at the highest price with the best terms in the shortest amount of time possible.

When Buying a Short Sale

When a borrower is upside down on their mortgage, have a valid financial hardship, and need to sell they sometimes will qualify for a short sale.  There is no guarantee the bank will approve the short sale, but often it is the best course of action for both the bank and the seller.

If you are looking at a short sale you should find out details such as, how many banks have lent money on the property, what is the deficiency, is the seller willing to sign a note is the bank requires that to release the loan, and where are they in the short sale process?  For example, it is important to know if a previous buyer had made an offer on the home and then decided to not buy (this happens often and is important to know

because it allows for the short sale negotiating process to begin) and you will want to find out if a Brokers Price Opinion (BPO) has been ordered and completed. A lender uses a BPO in short sales and REOs to verify the fair market value of a property. When making an offer on a short sale, the buyer should understand that this process can be much longer than in REO and traditional sales.

When Buying an REO

An REO is a bank owned property.  This is when the foreclosure process has been complete and ownership of the property reverts to the lender and the property is listed for sale.

When you are looking at REO property you should know that when making an offer, you are dealing not only with a listing and or selling agent, you are dealing indirectly with an asset manager who works with the banks to sell their properties through a listing agent.  When an offer is submitted, your price and terms will be submitted to the asset manager via the listing agent.  The asset manager will then either make a decision on the offer or submit it to an investor that owns the loan to make a decision.  Often times there are delays in this process because many people past the listing agent are involved in the decision.

REOs are priced according to market conditions. In most cases the asset manager has hired several real estate agents to perform a BPO and have ordered an appraisal to determine the listing price. The lender wants to sell the property as soon as possible so they will likely price it aggressively to get a ratified offer within 30 days of listing.  When making an offer, you should consider that the property is probably priced at or below the bottom of the market price. The lenders will probably not accept an offer that is far less than the listing especially in the first 30 days of marketing.

Typically in REOs, offers are transmitted through an online system by the listing agent.  In this system the listing agent inputs the offer price, seller requested subsidies, the name of the buyer, financing information, and a few comments about the offer.

Although lenders expect some negotiation, understand that because they price aggressively, often there are many offers on each property and sometimes they are sold for above list price.  It is VERY unlikely that they will accept an offer for much less than what it is listed for (especially during the first 30 days).  Offering far less than the current

asking price, unless the home has been on the market for many months and no activity, is typically a waste of time.

How to Navigate These Sales

To purchase a short sale or REO, contact an agent who specializes in these properties or an agent who has successfully represented a buyer in REO and short sale transactions. They will be able to guide you through the process and ensure that nothing is overlooked.  Many obstacles can be overcome before it becomes an issue and an experienced agent will be able to foresee most problems so they won’t be a surprise.

Once you have decided that you want to purchase the home, have your agent present your offer.  Due to the competitive real estate market, be sure that your first offer is your best offer since there may not be an opportunity to change the offer.  The offer will then be submitted to the owner of the property along with your pre-qualification or proof of funds available.

If a bank owned property gives you a counter-offer, be ready to respond within a few hours as other offers may beat you to punch.  Sometimes a bank would rather work with a buyer who can act fast even if someone else may have a higher offer.  If it looks like the buyer may be difficult to work with or the offer is too high a may encounter an appraisal issue, that will end up causing a delay in settlement and will cost the bank more money in the long run.  So, write a clean offer with good terms and be available to act quickly on the ratification.

Congratulations, you are well on your way to creating home ownership or investment opportunities!

About the Author:  Dan Rochon is Team Leader for Dan and Traci & Consultants with Keller Williams Realty and co-owner of Keller Williams Realty in Alexandria-Kingstowne, Va.  He is licensed in Va, Az.  His wife, Traci Rochon is licensed in Va, Md, and DC.  Together they and their team specialize in serving short sale and REO clients.  Dan Rochon is a Certified Distressed Property Expert, which is an exclusive designation awarded to select real estate agents that have taken on extensive training in working with short sales.

Follow Dan and Traci at www.Twitter.com/DanandTraci

Happy New Years! The congress and President Bush sent homeowners that are upside own in their mortgage and need to sell their property a New Years gift.  On December 20, 2007, the President signed into law H.R. 3648, the Mortgage Forgiveness Debt Relief Act of 2007 into effect.  This law was originally introduced by Rep. Charles Rangel [D, NY-15].  This will help homeowners to do a short sale with less negative consequence.

 What is a Short Sale?

If you are unfamiliar with a short sale and the downside of one; a short sale is when a bank allows a property that they have lent money on to be sold for less than the amount owed on the mortgage and the lender takes a loss.  A bank is likely to consider approving a shortsale because if a homeowner is uable to make payments and the bank forecloses on the property, it likely will cost them much more than approving a short sale.  Also, property that the bank repossess is a liability for the lending institution instead of an asset and reflects badly on the bank.

When a seller negotiates a short sale, there may be some negative impact on the seller’s credit, but far less than being foreclosed on or filing bankruptcy.  To determine the exact effects of a particular situation, seek advise from a qualified tax advisor and real estate or bankruptcy attorney.

 What were the Rules?

Under the previous policy, debt forgiven from renegotiation was considered income for tax purposes, resulting in a tax liability.  To say this simply, if a bank loans you $400,000 for property and allows you to sell it for $350,000, you would have to declare the $50,000 difference as income to the IRS and pay ordinary income tax on it.  You would avoid foreclosure but were obligated to pay a tax bill.

 How has the Law Changed?

The Mortgage Forgiveness Debt Relief Act of 2007 changes the rules for certain homeowners.  Those that successfully complete short sales for their primary residence will no longer be obligated to pay ordinary income tax on the deficiency as long as the amount of cancellation of debt does not exceed $2 million.  These new guidelines should greatly help those that are upside down and can no longer pay their mortgages to sell their properties.

The new law applies to only one primary residence that, “has been owned and used by the taxpayer as the taxpayer’s principle residence for periods aggregating 2 years or more”.  For homeowners that are upside down in payment and need to sell, this will help ease the pain of an unfortunate process.

This new law will help reduce the overload of housing inventory and give homeowners on a financial down-turn a way to start fresh without the scar of foreclosure or bankruptcy.  This law has received strong support from the housing industry and should assist many homeowners in a difficult position and should help to stimulate the housing market.  Propery owners in Northern Virginia have options other than foreclosure.