It seems almost every day I am asked about the difference between short sales and foreclosures, and to explain them. I thought I would do that here, and also throw in some tips for anyone considering trying to buy a San Diego foreclosure property or short sale. In this post I’ll start with foreclosures.
Most real estate professionals refer to a “foreclosure” when a property has already been foreclosed upon. The bank, lender or investor now owns it. These properties are technically called “REO” properties, which means Real Estate Owned. The prior owners are gone and no longer can reinstate their loan.
Frequently the prior owners of foreclosed homes were not in a good mood when they left. The property is usually in poor shape. Missing fixtures and appliances and deferred maintenance is not uncommon. FHA Buyers should keep in mind that FHA will not provide a loan on a home with permit and code violations, health and safety issues, or lacking structural integrity.
Buyer Beware – Often the bank owners/sellers of REO properties have not even visited the property. They rely on the listing agent to take pictures and describe it. Be aware that the listing agent does not hire a physical inspector. The previous owner did not leave a property history or a list of problems and issues with the home. And again, the previous owners were probably not in the best of moods when they left, so defects are common. The bank seller may not have knowledge of defects and is exempt from most disclosures. It is up to the buyer to discover and inspect. Even a home inspection may not uncover all defects.
Pricing – Currently, in San Diego, the banks have turned a buyer’s market into a seller’s market by pricing properties so low (often 10-20% below market) that it creates an “auction-like” atmosphere where multiple buyers bid up the price. Last month the REO listing agent of a 916 sq. ft. home in North Park stated that he received 100 offers on the property. It was priced at $174,900 and closed (all cash) for $340,000.
Getting an offer accepted – Banks do not like to counter offer back and forth. They usually request that buyers submit their “highest and best” offer the first time, or sometimes come back once for highest and best. The bank asset manager or “investor” will look at the net price. So if you ask for closing costs they will subtract this out of your offer price. They will give higher consideration to offers that are cash or have stronger financing. They do not like to pay for home warranties and sometimes will not pay for termite reports or work.
Timing – When offers are submitted for foreclosure properties, the response usually comes from the bank within a week. When an offer is accepted, things move very fast. The banks want to close escrow on foreclosure homes as quickly as possible, and will usually be looking for COE of 30 days or less. The timeline is much longer for short sale properties… but I’ll save that for my next post.
Great discussion of the potential pitfalls in buying a forclosed house! I’m eager to read about short sales, since I’m confused about that too.
Thanks for a basic, but very helpful comment. It will help me a lot.
AV
Thanks for your post. I’ll try to post more about short sales in the near future. Essentially a short-sale is a pre-foreclosure sale that is undertaken by the home owner in advance of foreclosure. These arise when the home owner will net less money from the sale than is owed on the home mortgage. The home owner seeks forgiveness of debt from the lender in the amount that the home owner will be “short” at the completion of the sale… hence the term “short sale.” Just about half of the homes for sale in San Diego at the present time are short sales. But not all of the short sales are approved by the lenders. The home owner needs to show special hardship or financial insolvency before banks will give approval to forgive the debt. Many of the people who attempt short sales are unable to show this sort of hardship. If there is no hardship and the home owner has stopped making the mortgage payment then the bank will usually opt to foreclose on the property instead.