Every day, we hear about foreclosures and short sales and great deals- and wonder if they're a good route to first-time home ownership. So we asked Mark Biggins, lead agent in Redfin's Oakland/Berkeley office and an expert in this specialized process, for some guidance. There is so much to absorb we've broken Mark's answers into two posts- first, the epic basics of the process. Later today, some calming advice.
CSF:It's a good idea to start off with a definition. What are short sales and what are foreclosure sales?
MB: A short sale is a listing that is being marketed at a price below the outstanding balance of an existing loan or loans on the property. In this circumstance the lienholder (usually the whoever owns the mortgage) would be taking a loss when the sale goes through- and must give their approval prior to the sale proceeding. To complicate things, there's often more than one lienholder to deal with.
CSF: So what's a foreclosure sale? Is this another term for REO?
MB: An REO sale is a home that has been repossessed by the bank and is now being offered for sale. They are variously referred to as REOs, bank-owned homes or foreclosures. These sales are in many ways much more straightforward than short sales because you are not waiting for bank approval. They do however come with their own set of challenges- it's crucial to have an agent who understands the process and is experienced with bank-owned homes. Mostly, it's about condition.
The bank's goal is to minimize loss. If they have a good short sale offer that is close to market value it is in their best interests to approve and save the cost of foreclosing- an expensive process with months of legal proceedings, taxes, and property management issues.
The whole process can take months. A buyer can wait six months for their dream home to be approved only to have it declined at the end. With patience, they can get a very good value and often purchase a home well below its typical market value. The buyer pool for short sales is much more limited because of the problems associated with them and many buyers rule them out all together (and with less competition, the price drops) but a sale advertised as an “Approved Short Sale” is a good sign the sale close like a normal transaction.
REOs are generally in worse condition- the bank-owned houses can be in extreme states of disrepair and come without disclosures or property inspections upfront. This can lead to frustrating surprises during the inspections, although banks may agree to price reductions or credits in lieu of repairs. If a buyer sends them a $20,000 pest report, a $10,000 roof report and asks for a $15,000 credit, the bank recognizes that if a buyer cancels, they still have to sell the property with this new information. Banks prefer to keep the current buyer in contract as long as their requests are reasonable in order to get the deal done.
The pitfalls with REOs are associated with their specialized contract. Once an offer is agreed upon, the bank will send their own addendum to the CAR contract that strips the contract of many of its buyer protections and contingencies, plus the bank includes clauses that allow them to exit the contract at any time.
Overall, REOs can be scary because of the unknowns on property condition, but with an experienced agent to guide them through, a buyer can have a good experience with an REO- and a really good deal.