Purchasing a Short Sale or REO (foreclosed) Property
Mark Anderson, Owner’s Network Real Estate- Broker, Realtor®, Green designation
Published June 23, 2009

The purchasing process is similar between a foreclosed property and a Short Sale. The only real difference is who actually owns the property until it is sold. In both instances, the lender is the primary player in the sale. In a REO or foreclosed property, the bank or lending institution holds title. While in foreclosure or in Short Sale, the home owner holds a trust deed title, although their bargaining position is very weak since they are not fulfilling their contractual obligations.

Why there is there so much delay in buying a Short Sale or REO property?

In the long run, the bank has little to gain by negotiating a Short Sale home quickly. Either way the home will be sold and both ways the bank will loose money on the sale. Through a short sale, the lender could possibly see a sale of the home and receipt of proceeds faster than processing a foreclosure and then selling the house. See a simplified explanation as to why delaying the sale can benefit a lender.

This process can take much time causing a great delay in buying a home that is advertised as a Short Sale property. Since the home owner still has title to the property, the bank cannot simply sell it on their own. In fact the bank doesn’t sell the home, the home owner does. They just need proper authorization to do so and at what price.

The bank has to come to some determination of the current market value of the home which can be substantially below the loan amount. This can take time as they obtain a value from an appraiser and a market analysis from their chosen real estate marketing agency. Then the bank has to get approval from the proper official(s) to accept a shortage on the loan payoff, hence ‘Short Sale’ and take a loss on the mortgage. A negotiator is chosen to come to some agreement between the bank, the real estate agency and the homeowner as to what the bank will agree to do about the delinquency of the loan and the amount they will release the loan short for.

Once officially released for public sale, then they will hold the sale open for a period of time and receive as many possible purchase contracts as possible. The contracts are then reviewed often by a committee which meets once or twice a month. The acceptable contract is then reviewed within the previously set parameters to be approved and signed by the official representative of the bank. Then escrow is opened with usually a 30 day Close of Escrow date set.

To purchase an REO the process is quite similar to the Short Sale but doesn’t involve a negotiator since the only issues are internal bank policy and procedure. The bank still has the corporate asset determination and sales process that must be navigated to finally sell a REO property. In the long run, the bank has little to gain by selling their REO properties quickly. See a simplified explanation as to why delaying the sale can benefit a lender.

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