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Tuesday, July 20, 2010

Short Sale, Auction, Foreclosure or Straight Sale?



Looking for the best Real Estate Deals: Short Sale, Auction, Foreclosure or Straight Sale

• A Short Sale where you buy directly from the home owner before the bank takes over. The bank thus agreeing to accept less than what is owed for the property and thus avoid the foreclosure process. Home owners are most often responsible for the deficiency judgment created by this situation. The typical short sale process takes 4 to 6 months to complete from time of first offer.
• At an auction where you may be in competition with other buyers.
• From a Real Estate company or the bank itself. This is known as an REO aka Real Estate owned.
• An Arms Length Transaction. Where you buy directly from a home owner who is not in financial distress and close with all of the normal contingencies.

Short Sale:
In a short sale you get to do all your various due diligence including any home inspections and a title search to make sure there are no liens.

In real estate, a short sale is a sale of home or property in which the proceeds from the sale fall short of the balance owed on a loan secured by the property sold. In a short sale, the bank or mortgage lender agrees to take a reduced amount on a loan balance, due to an economic or financial hardship on the part of the mortgagor. This negotiation is all done through communication with a bank's loss mitigation department. The home owner gets a contract on the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender. The net amount, after commissions and excise tax, is usually less than the outstanding debt. In such instances, the lender would have the right to approve or disapprove of a proposed sale.

Extenuating circumstances influence whether or not lenders will discount a loan balance. These circumstances are usually related to the current real estate market and the borrower's financial situation. If the home seller of a property has the financial ability to bring cash to the table at closing for a mortgage debt short fall, this scenario would not be considered a short sale.
A short sale is typically executed to prevent a home from going to the foreclosure auction, but the decision to proceed with a short sale is predicated on the most economic way for the bank to recover the amount owed on the property. Often a bank will allow a short sale if they believe it will result in a smaller financial loss than foreclosing, as there are carrying costs associated with a foreclosure. A lender will typically determine the amount of equity, or lack thereof, by determining the probable selling price from a real estate Broker Price Opinion (BPO) (also known as a Broker Opinion of Value - BOV) or through a home valuation by an appraiser.

Auction:

Buying at an auction typically carries the most risk but also can come with the greatest reward.
Auctions are handled differently from state to state. Some are held right at the property and others at the local court house. Seattle area auctions are typically held through the courts.
Many times with an auction you are not allowed to inspect the property prior to the scheduled auction date. These types of sales tend to bring out more “investor” types as these properties can be bought on many occasions for a price that could warrant a “flip” where the buyer turns around and re-sells the property.

A buyer going to an auction will need to come up with a fairly large deposit and will be expected to show the lender that they have the ability to complete the purchase. The other consideration in the auction scenario is that you may have to spend time and money removing the previous owner. A task that most buyers don’t have the stomach for.

Bank Owned:

The REO scenario is usually the least risky as the bank has acquired the property and has wiped out the liens through purchase.

Once a home is Real Estate owned many banks will list these homes with a Real Estate Broker. The buyer gets clear title, is most often allowed to inspect the home, and is allowed to have a mortgage contingency. This is typically the best route for the non savvy Real Estate investor. These properties are typically sold "As Is" however, meaning that missing carpet or scatched floors and other cosmetic items cannot be addressed with the inspection responce like a typical arms length transaction.

A few other very important considerations in the foreclosure process in the “pre-foreclosure period” and the “redemption period”. The pre-foreclosure period is the time between a previous owner’s notification of default and the point when the property can be sold by the lender. This time period is also when the existing owner can make good on the note and keep their home, or sell it themselves. So the shorter the pre-foreclosure period, the more advantageous it is for the new buyer.

The redemption period is the time when the previous owner is allowed to buy back the home after the lender has sold it. Again, the shorter this time period, the better it is for the buyer.

And don’t forget the very often overlooked forth option in today’s market….

The standard “Arm’s Length Transaction”

Home sellers who are not dealing with a personal short sale or foreclosure still have to deal with a very competitive market made so by those very situations. Many home owners who bought more than 5 years ago and who placed 20% down and did not resort to interest only or adjustable rates are in great positions to sell. In these cases you can go in and buy a very nice home at today’s lower prices and not have to deal with all of the hassles of a short sale, or auction, or banks selling a home in “As Is” condition.

In these cases, you can make an offer, have your inspection and financing contingency, closes at escrow in 30 days and have an all around typically smooth transaction!

Brokers from The Cascade Team are trained in all these various home purchasing and selling processes. Please feel free to contact one here for more information.

The Cascade Team Brokers:

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