Short Sales, Foreclosures & REOs

Understanding Short Sales, Foreclosures & REOs

Everyone is talking about them – short sales, foreclosures and REO (Real Estate Owned) property seem to be the rage to get a “great deal.” However, they have lasting effects on the homeowner and the neighborhoods in which they occur by applying downward pressure on property values. Homeowners who are in distress need to consult with and engage the services of qualified finance, tax and legal professionals. This is a serious legal issue that can have a profound effect on credit, taxes and many other personal matters.

Foreclosure

When a homeowner stops making mortgage payments to the lender, the loan is in default. The lender will then initiate the appropriate steps to sell the property to satisfy the debt. Put simply, foreclosure is a legal process by which a defaulted homeowner is stripped of their rights in the mortgaged property.

Short Sale

Homeowners who are facing foreclosure may ask their lender to accept a discounted payoff on their loan or a “short sale.” Ultimately, this means that the borrower is selling the property for less than what they owe on it. Doing  this allows the borrower to avoid a foreclosure action, while maintaining a better overall credit record than with a foreclosure. It also allows time for the homeowner to relocate on a more convenient timetable instead of facing eviction and possibly a deficiency judgment down the road.

Most lenders have specific criteria in considering a short sale for the repayment of debt. Some lenders will consider a short sale only if the borrower can produce evidence of hardship. A property that is distressed or requires extensive repairs may also qualify. If the homeowner negotiates an agreed amount sale price and qualifies for a short sale, then typically the foreclosure will not proceed or will be delayed if there is substantial progress in the sale of the property.

REO (Real Estate Owned) Property

In the unfortunate circumstance that a homeowner does not qualify for a short sale, the property goes into foreclosure and is eventually scheduled to be sold through a trustee’s sale or auction. When the property goes back to the lender it is called an REO (Real Estate Owned) property.

It is important for both the buyer and seller to understand that the current market conditions can alter normal procedures. Many of the service providers, such as beneficiaries, escrow, title and lenders, that process these transactions have an inordinate amount of files to deal with that often cause delays and other related challenges. Patience is often necessary.

Steps to Foreclosure

  1. First “notice” is filed (i.e., Notice of Default or Notice of Sale).
  2. Sale date is set.
  3. Sale or auction is held – if minimum bid is not met, the property will revert back to the lender and becomes an REO (Real Estate Owned) property.

Steps After Foreclosure

  1. Lender assigns property to asset manager.
  2. Asset manager lists the property through a pre-approved agent.
  3. Buyer makes an offer, typically AS IS.
  4. Lenders have their own procedures which may vary from one another – most lenders accept the highest and best offer with priority on the first decent offer presented.
  5. Once the bank accepts the offer, it goes into escrow.
  6. Closing date is scheduled and transaction is processed – depending on the market conditions, buyers may encounter delays and challenges.
  7. Buyer takes ownership.

Steps to Short Sale

  1. When payments cannot be made to the lender, immediately seek advice from your REALTOR® and other professionals.
  2. Borrower or professional contacts the lender about delinquency – first “notice” is filed (i.e., Notice of Default or Notice of Sale).
  3. Property is listed at fair market value
  4. Buyer presents offer to homeowner, then it is presented to the lender. (With a substantial offer, the foreclosure date might be postponed.)
  5. Once accepted, bank opens escrow.
  6. Closing date is scheduled and transaction is processed.
  7. Depending on the market conditions, buyers may encounter delays and challenges.
  8. Buyer takes ownership.

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