Buyers are seeing many more homes for sale today with terms like REO, foreclosure, short sale, and others. All these terms have something to do with a bank, but here’s an explanation for each:
Bank OwnedThe bank has aquired title (ownership) to the property. The bank is the seller.
REO or “Real Estate Owned” Can be read simply as “bank owned” Corporate Owned Many times this is just another way to say “bank owned” Foreclosure This is the process by which a lien holder aquires the property through court procedures. Each state operates a little differently, but this process can typically take several months once started and typically does not start until the owner is 60-90 days behind. Pre-ForeclosureThis is commonly referred to as the time during the foreclosure process but before the sheriff’s sale. In this time period you are still negotiating with the seller but the bank may have to be consulted in cases where a short sale is needed. Short Sale When a seller is in a distressed situation and the offer that is submitted does not cover the expenses to sell the home and pay off the lender, the seller may ask the bank to take a “short payoff” on the loan, meaning to accept less than what was owed. Banks will sometimes do this because they do not want to own homes, they want to make loans. Each circumstance is different and the bank is not required to accept any short payoff.
There are many ways to buy foreclosures: from the no cash, no credit methods taught on late night TV, to billion dollar bulk purchases. There are significant discounts available on foreclosures, but buying a foreclosure is not a get rich quick proposition. For those willing to work, and in some cases take some risk, foreclosures represent a unique opportunity for acquiring real estate at discount prices.
Choose a Stage of Foreclosure
The first step towards buying a foreclosure, is to determine which stage of foreclosure to focus on. Each of the 3 stages has it’s own advantages and disadvantages, and each requires a slightly different approach. Here is a brief overview of each:
Prior to the completion of the foreclosure process and the owner losing the home, you can purchase the property from the owner. Today, many owners in foreclosure owe more on the property than it is now worth. In these cases, known as short sales, you will also need the approval of the bank. In some cases, preforeclosures will be listed with a Realtor® and be available for sale through the MLS. If the property is not listed, you can approach the owner directly, or preferably using a Realtor®. Preforeclosures are much like any purchase of real property and you typically have the opportunity to get inspections, title insurance, and financing prior to completing the purchase. It is also possible to purchase the property Subject To the existing loans; which is similar to assuming those loans, but does not necessarily require cash or good credit—this is the method often taught by late night promoters, and has risks that should be carefully considered.
If the owner is unable to sell the property, refinance, or otherwise resolve the problem, the property is taken to auction. These auctions are referred to as Trustee Sales, or Sheriff Sales, depending on the state. The process for the auction varies by state, but typically properties are sold as-is, where-is, subject to existing loan and liens, and require payment in full and in cash, at the time of sale. Properties are also typically sold while the owner or renter is still living there, which means there is no opportunity to inspect the property, and you may have to do an eviction after purchase. By far the riskiest method of purchasing foreclosures, buying at auction can also offer the deepest discounts due to these risks and the limited number of buyers willing to take them.
Bank Owned or REO
If an investor fails to bid at auction, the property is essentially sold to the bank and becomes bank owned. Within the banking industry, these properties are referred to as R.E.O., which is an abbreviation for Real Estate Owned. Most REO properties will be listed with a Realtor® whom the banks refer to as an REO Broker. These real estate agents often handle the eviction and clean up of the property, in addition to listing it for sale. Buying an REO is very similar to buying any home that is listed with a real estate agent, and you have the opportunity to do inspections, get title insurance, and get financing. Most banks, however, do require that the property is purchased “as-is”, and may also impose other non-standard terms, so it is especially important to work with an experienced Realtor® that can explain these terms.