Buying Real Estate Owned (REO) Property

When a lender forecloses on a property, obtains title in lieu of foreclosure or otherwise obtains title to real property as a result of an unpaid mortgage or lien, the property becomes what is called “Real Estate Owned” or REO property. Lenders typically sell REO property using the same listing and marketing techniques as ordinary home owners. These properties can represent a price bargain. There are, however, some things you should be aware of before getting involved in an REO transaction.

Although banks are often willing to take less money for a property than a homeowner might with similar property, they will typically do so only on terms that are beneficial to the bank. REO property, therefore, is often sold using addendums to standard real estate contracts that substantially change the terms to favor the seller. Most often, these REO contracts and addendums are presented on a “take it or leave it basis” much like a car dealer presents a dealer’s contract that cannot be changed by a car purchaser.

Among the terms found in REO contract or addendums are those that substantially limit the buyer’s ability to sue the seller if a problem with the property is discovered after the purchase is completed. Such terms make the inspection and investigation of REO properties by the buyer absolutely critical. Inspections and investigations can increase the buyer’s transaction costs. Limiting the buyer’s legal remedies can create substantial risk for the buyer. These increased costs and risks must be weighed against any potential reduction in price of REO property.

REO contracts and addendums often contain provisions that postpone the seller’s acceptance or otherwise reserve to the seller the right to cancel the contract if they obtain a better offer or decide for other reasons not to proceed. Such terms create uncertainty for the buyer because there may be no binding contract until right before closing. The buyer, therefore, may be expending money to determine the condition of the property, the state of its title, compliance with government regulations and so on without a binding contract. These matters must be carefully considered before becoming involved in a REO transaction.

A real estate licensee cannot give legal advice or offer opinions on the legal consequences of specific contract terms. For that reason, it is recommend that you seek the counsel of a qualified real estate attorney before entering into an REO transaction using forms provided by the seller. Although a licensee will work closely with the listing agent to obtain information about the seller’s forms and procedures, and pass that information on to you, they cannot be responsible for the legal consequences of entering into a transaction on forms developed by the seller and offered on a take-it-or-leave-it basis. You must judge for yourself whether the potential savings are worth the risk and uncertainty typically found in REO transactions.

Buying Short Sale Property

The term “Short Sale” is used to refer to those real estate transactions in which the listed sales price is insufficient to pay off all of the secured debt on the property. Secured debt includes mortgages, trust deeds, state/federal/property taxes, liens or other assessments. In most short sales, the seller must secure an agreement from one or more third-party creditors to accept from the closing proceeds something less than the amount of the debt due them. In other words, the debt is “shorted” or reduced. Therefore, the final decision on price and terms of the transaction, as well as the identity of the ultimate buyer, will be in the control of third parties whose consent is required in order for the seller to convey clear title to a buyer.

Since a Short Sale requires approval from one or more creditors who are not parties to the transaction, the seller’s agreement to sell must be made subject to (“contingent upon”) third-party consent. This generally means that if any of the creditors refuse consent, the transaction fails.

It is not unusual for creditors to insist on specific terms, a higher sales price or a change in provisions from the original contract. Therefore, the seller and buyer must be prepared for delays resulting from any changes to the original contract as well as other events outside of the sellers and buyers control.

In Short Sale transactions, the deadlines for completion of buyer contingencies may need to be suspended pending creditor consent. However, if consent is slow and the buyer wishes to proceed anyway, the buyer must understand that they have no recourse for recovery of these expenditures should creditor consent be denied.

Since most creditors want to secure the highest and best offer for the property, they may insist that it remain on the market. As a result, a creditor may withhold final consent until they have had an opportunity to compare one offer with future offers. As a result, the entire Short Sale process may involve a significant risk of delay or failure.

Short Sale transactions can be complicated and time consuming. Your real estate broker is NOT an expert and cannot give legal or financial advice. Buyers are strongly encouraged to secure additional competent professional advice before entering into a Short Sale transaction.

Selling Short Sale Property

The term “Short Sale” is used to refer to those real estate transactions in which the listed sales price is insufficient to pay off all of the secured debt on the property. Secured debt includes mortgages, trust deeds, state/federal/property taxes, liens or other assessments. In most short sales, the seller must secure an agreement from one or more third-party creditors to accept from the closing proceeds something less than the amount of the debt due them. In other words, the debt is “shorted” or reduced. The final decision on price and terms of the transaction, as well as the identity of the ultimate buyer, will be in the control of third parties whose consent is required in order for the seller to convey clear title to a buyer.

A Short Sale is only one alternative when facing foreclosure. Before agreeing to a Short Sale, sellers need to explore all options. For example, there may be private parties, such as family members who may be willing to provide interim financial assistance. A current lender or government program refinance option may also be available. Additionally, there may be legal options such as a deed in lieu of foreclosure or bankruptcy. While a real estate broker will be helpful in directing the seller to sources of information, they should not be relied upon for legal, lending or credit advice.

To determine if a Short Sale is a viable option, a seller must meet lender Short Sale qualifications. These qualifications include but are not limited to hardship such as the loss of a job or other income, relocation, illness of borrower or co-borrower, death of co-borrower or declining property values; a monthly income shortfall (if at the end of the month there is not enough income to pay all obligations) no additional savings available to pay down the loan. To verify financial hardship, creditors will require documentation including, but not limited to 2 months bank statements, 2 years tax returns, paycheck stubs, other income receipts.

The seller must also take into account any tax consequences such as deficiency exposure and credit rating declines. Each situation is different and must be evaluated on an individual basis with an expert such as a lawyer, accountant, mortgage broker, lender, or credit or consumer counseling expert.

Since a Short Sale requires approval from one or more creditors who are not parties to the transaction, the seller’s agreement to sell must be made subject to (“contingent upon”) third-party consent. This generally means that if any of the creditors refuse consent, the transaction fails.

It is not unusual for creditors to insist on specific terms, a higher sales price or a change in provisions from the original contract. Therefore, the seller and buyer must be prepared for delays resulting from any changes to the original contract as well as other events outside of the sellers and buyers control.

In Short Sale transactions, the deadlines for completion of buyer contingencies may need to be suspended pending creditor consent. However, if consent is slow and the buyer wishes to proceed anyway, buyers must understand that they have no recourse for recovery of these expenditures should creditor consent be denied.

Since most creditors want to secure the highest and best offer for the property, they may insist that it remain on the market. As a result, a creditor may withhold final consent until they have had an opportunity to compare one offer with future offers. As a result, the entire Short Sale process may involve a significant risk of delay or failure.

Short Sale transactions can be complicated and time consuming. Your real estate broker is NOT an expert and cannot give legal or financial advice. Sellers are strongly encouraged to secure additional competent professional advice before entering into a Short Sale transaction.