Short Sale and REO (also called "Real Estate Owned" or "Bank Owned") properties are everywhere in Orange County - in some newer communities these listings have accounted for as much as 50 per cent of the total market. Speculation and overdevelopment may be partly the cause, but Orange County is just one of many regions across the nation where a sharp drop in demand left behind a lot of unsellable real estate. As the market corrects itself, investors here will find a wide variety of Short Sale and REO properties in all price ranges.
While it's easy to find Orange County REO and Short Sale listings, a thorough understanding of the transaction process is key to finding the best deals. Short Sale and REO listings usually appear in the same place because of their relation to foreclosures, but they are very different. Short sales are typically initiated by a home owner trying to avoid foreclosure, while REO properties are managed by the bank or lender after a foreclosure. For this reason, investors/buyers deal exclusively through their real estate agent with the lender in REO transactions, and with both the lender and the home owner in a Short Sale.
Short Sales
A short sale is when the lender agrees to discount the loan balance due to an economic hardship on the part of the homeowner. The homeowner sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender in full satisfaction of the debt. In such instances, the lender has the right to either approve or disapprove the proposed sale.
A short sale typically is executed to prevent a home foreclosure. Often a bank will choose to allow a short sale if they believe that it will result in a smaller financial loss than foreclosing. For the home owner, the advantages include avoidance of having a foreclosure on their credit history. Additionally, a short sale is typically faster and less expensive than a foreclosure.
Briefly, a short sale is nothing more than negotiating a payoff with the lienholder(s) for less than what they are owed, or rather a settlement of their debt, generally secured by real estate.
Lenders have a varying tolerance for short sales and mitigated losses. The majority of lenders have a pre-determined criteria for such transactions. Other distressed lenders may allow any reasonable offer subject to a loss mitigator's approval. "Red tape" is very common in short sales, similar to REO and HUD properties, requiring potentially multiple levels of approvals and conditions. Junior liens, such as second mortgagees, HELOC lenders, and HOA (special assessment liens), may also need to approve of the short sale. Frequent objectors to short sales include tax lieners (income, estate or corporate franchise tax - as opposed to real property taxes, which have priority even unrecorded) and mechanic's lien holders. It is also possible that senior lienholders may prevent a short sale by refusing to allow a junior lienholder to receive any of the sale proceeds.
When the lender decides to forgive all or a portion of a borrower's debt and accept less, the forgiven amount is considered as income for the borrower and was liable to be taxed. However, after the signing of “The Mortgage Forgiveness Debt Relief Act of 2007” by President Bush, amendments have been made to remove such tax liability. This now allows the borrower and lender to work freely together to find a common solution that is beneficial to both parties. However, at this point, this protection is limited to primary residences only. So consultation with a tax advisor is necessary ensure that a borrower qualifies.
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Real estate owned (or “REO”) is a class of property owned by a lender, typically a bank, after an unsuccessful sale at a foreclosure auction. This is common because most of the properties up for sale at these auctions are worth less than the total amount owed to the bank. The minimum bid in most foreclosure auctions equals the outstanding loan amount, the accrued interest, and any costs associated with the foreclosure sale (including attorneys' fees, if any).
After an unsuccessful auction, the bank will go through the process of trying to sell the property on its own. It will remove some of the liens and other expenses on the home and try to resell it to the public, either through future auctions or direct marketing through a Realtor. Generally speaking, REO properties are in poor shape in terms of repairs and maintenance. However, because of their substantially reduced prices, they are excellent investments for real estate investors. As a result, investors will often go after these properties as banks are not in the business of owning homes and so, in some cases, the low price can more than compensate for the condition of the property.
But "buyer beware" is the watchword with a bank-owned property. Buyers of REOs just don't have the safety nets available in more normal transactions. The lenders, because they never actually lived in the property, are not required to disclose property defects or to repair them when there are problems. Investors, therefore, should make use of reliable inspectors to make sure they're not signing-up for problems.
Further, the REO departments are reluctant to negotiate prices. They will deal with realistic counter-offers, but they tend to reject lowball offers. They also expect buyers to have their own financing in place, and do not want offers with contingencies. | |
Please Contact Jenell or Ron, at O.C. Premierhomes for more information on Short Sales and REO's (Bank owned) properties.