Investing in Bank Owned vs. Short Sale Properties

The current economic climate has dramatically changed the real estate landscape.

real-estate-signs

With this market shift comes new challenges for buyers, sellers, brokers and lenders. There also seems to be a lot of confusion when it comes to the differences between a Bank Owned asset (REO) and a Short-sale, who the parties are, paperwork, how to structure a winning deal and expectations of buyers, sellers, brokers and lenders.

What follows is an overview that may help reduce this confusion.

Bank Owned Properties:

Ownership: Typically a local bank or a national servicer. With the assistance of brokers, all negotiations are basically made between a Buyer and an employee of the bank/servicer (as opposed to an owner/seller).

Paperwork/Rules for Offer Submission: Standard purchase and sale agreements are used as well as the banks’ own addendums and disclosures. Offers must be complete and filled out in accordance with the banks’ rules. Many brokers representing buyers resent or resist following these rules and submit offers that are not in compliance. These offers are either delayed until corrected or rejected by the bank regardless of the price being offered. Any delay on a desirable property severely limits your chances of getting your offer accepted.

Formulation of an Offer: Before a Bank forecloses they have one or more brokers provide an opinion of value. Then at the time of foreclosure/listing they have the listing broker determine if that value is still valid. Most of the time the Bank is pricing near market and is expecting to transact the property close to the asking price. If you feel the asking price is well over market it is best to perform your own market analysis (something your broker can do) and provide that information to the listing broker along with the offer. Stories, letters, opinions etc that are not supported by facts are of no value and cannot be used by the listing agent to help your offer. Many times the listing agent is working within a system where all they do is go online and fill in a few boxes – price, loan type, down payment, close date, indicate if the earnest money is in cashier form or not and if there is a preapproval. The lender never has the opportunity to see additional paperwork nor do they care. But if the market analysis is done well, the listing broker might be able to use that to justify a lower price thereby making your offer acceptable.

Repairs: The Bank prefers not to make repairs so an “as-is” sale is best. If a few repairs need to be made to facilitate FHA or Conventional financing the Bank might be willing to accommodate that so it is certainly ok to ask for. It’s best for supporting bids for the repairs to accompany the offer so the Bank knows the buyer is not just making numbers up. Often times the house will be a fixer or in a condition such that traditional lenders will not lend on the property. In those cases, an all cash offer or possibly a construction loan are necessary to get the deal done. Submitting an offer using an FHA loan in a case where all cash is necessary only creates frustration for all parties involved and will turn out to be a waste of everyone’s time. So be realistic.

Earnest Money: It will need to be in the form of a cashier’s check (not a note). Proof of funds for the down payment and loan approval for the balance will also need to accompany the offer.

Closing Date: As for closing, keep the date as tight as possible. Fewer days on the market mean lower holding costs for the Bank which works to your favor. Many institutions are beginning to have penalties for closings that run beyond some date so make sure your lender can perform in that time frame. If there is any doubt you either need a different lender or need to have the lender agree to cover those late fees if they don’t perform timely.

Response and Timing: Once a buyer’s broker has submitted all the appropriate paperwork in accordance with the bank’s rules you may receive an answer within hours or it may take up to a week. In all cases, the listing broker does not have any control over the response time no matter what timeframe you put in the offer for acceptance. The best approach is to ask the listing broker for an approximate length of time needed for response and use that in your offer. If the offer is for far less then the asking price do not be surprised if the response is an outright rejection. Banks are trying to maximize their returns and are not looking to give properties away. They are also usually unwilling to go through multiple counter offers and if they feel the potential buyer is trying to “steal” the deal they will not try to negotiate. If the offer is a solid offer (close to asking, few contingencies) it may get accepted without a counter.

Short-Sales:

Ownership: Legally the property is owned by a person or entity (LLC) and the house could be occupied by an owner or tenant or it could be vacant. However, the owner is in a negative equity situation (the sales price less closing costs is less than the debt on the property) and needs lender approval to affect the sale.

Paperwork / Rules for Offer Submission: A standard purchase and sale agreement is used along with an addendum acknowledging the fact that this is a short-sale transaction.

Formulation of an Offer: As opposed to a Bank owned REO the listing price for the property may be well above market, well below market or at market. The seller might be pricing it low to encourage multiple offers, might have it high to try to recoup as much money as possible or it might be priced correctly. In most cases the lender has not approved a sale at the list price so a Buyer doesn’t know if his offer even at list price will be accepted. To help support an offer the prospective buyer is encouraged to perform their own market analysis and make an offer close to that. Submission of the market analysis to the listing broker at the time of offer may also be beneficial.

Repairs: While it might be nice to have repairs made, the seller certainly doesn’t have the resources to make them and the lender is very unlikely to do so since they don’t own the property. So an “as-is” sale is the best and most likely to be successful. This makes trying to buy a short-sale property that needs repairs using conventional or FHA financing challenging at best and an exercise in futility at worst. This also contributes to the low success rate of completing a short-sale transaction.

Earnest Money: This should be in the form of a note that is converted to cash (check to Escrow) after acceptance or even after removal of the inspection contingency. A Buyer can be flexible with this unlike a Bank REO situation. The Buyer should also supply proof of funds for down payment and pre-approval from the lender for any new loan to make your offer stronger.

Closing Date: Closing can occur within 30 days but the 30 day clock will not start until the lender gives their approval – see below.

Response and Timing: Initially this type of offer is handled like it would in a non-short-sale situation. The listing broker will present it to the seller but once they approve it, it will be forwarded on to the lender for their approval. At that point the listing broker has no control over the process and is in a wait and see mode like the Buyer. This approval process may take one week or it may take up to three months. One thing to keep in mind is that while all parties are waiting for an approval of the offer another department of the lender/bank is working on the foreclosure and may actually foreclose on the property with offers in for approval. If that happens, the deal is dead and the listing terminated as the former seller is no longer the owner of the property and does not have authority to sell. If that happens and the Buyer is still interested in purchasing the property work with your broker to follow-up on the property as it will come back to market with a different listing broker and usually a different listing price.

Short-Sale Negotiators: In addition to brokers, a short-sale negotiator may be involved who attempts to negotiate with lenders on behalf of the buyer and seller. By having experience working with lenders the hope is that they will be more successful than the inexperienced seller going it alone. It has proven to be somewhat effective but there is also a fee involved. It is a contingent fee that typically runs in the $2,000-$5,000 range and it is expected that the buyer pays this fee if they are successful. If the seller is using a negotiator it should be disclosed in the listing description so if you don’t see it, ask the question to avoid a surprise down the road.

Key point for Short-Sale Transactions: Have Patience; good things may come to those who wait.

This overview is just that, an overview. It is not intended to make you an expert in the field of working with Bank Owned REO and Short-sale properties.

Original article by Marvin Kau.

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