I'm often asked to define the three primary types of home sales and how they differ. REO vs Standard sale vs Short sale. Which type of sale is the best deal? How long does each one take to close? Should I be focusing on one and avoiding the others? I put this web page together to help answer many of these questions. Should you have others, please feel free to call me. I will be happy to discuss property sales with you and how you can take advantage of each type of sale!
The three most common types of property sales in the market today are: Standard sales, Bank Owned sales (REOs), and Short Sales . Following is a description of each type of sale, plus buying strategies to help you decide which type will be the best for you.
1) Standard sale or "equity" seller
This is the type of sale that most people are familiar with. The seller still has equity in the property, so this type of sale is not a "distress" sale. The advantage of a standard sale is the ease of purchase (no long wait time) and the cooperation of the seller, who is usually willing to work with the buyer for repair credits, termite repair, closing costs, etc. Also, standard sale properties are usually kept in the best condition. Many sellers take extra care to prepare the property for sale by doing repairs, painting, cleaning, etc
The down side of standard sales is that they may be the most expensive option of the three. Standard sellers typically pad their list price in order to try to get the highest price possible. There is often room for negotiation however, and this is especially true if the home has sat unsold for an extended period of time, if the sellers are in a hurry to relocate, or if they are otherwise motivated by financial pressures.
2) Bank Owned or REO sale
A bank owned or REO (Real Estate Owned) sale is a the sale of a home that has already been foreclosed and has returned to the lender. The original owner is no longer part of the transaction. This transaction is strictly between the lender (who is now the owner) and the buyer . REOs are considered to be a type of "distress" sale, in that the loss of the home by the original owner was involuntary. These types of sales are sometimes referred to as a foreclosure sale.
With REOs, the lender/owner is exempt from having to complete certain disclosures such as the TDS (Transfer Disclosure Statement). The properties are generally sold "as is", so it is up to the buyer to thoroughly inspect the property before committing to the purchase. The advantage of an REO is price. REOs are typically priced to sell, so a buyer often winds up with a very good deal. The down side is often, condition. Many REOs are left in poor condition, due to the neglect (or resentment) of the former owners.
3) Short Sale
This type of sale is often confused with a bank owned sale or a foreclosure, but it is neither. In a short sale, the homeowners still hold title to the property and they are trying to sell short (for less than what is owed on the home). The reason they are selling may be because they are "upside-down" on the property, or they may have suffered a significant financial hardship, rendering them unable to make the mortgage payments. Selling the home through a short sale may allow the owners to avoid a foreclosure, plus it may have less of a negative effect on their credit. Short sales are also considered to be "distress" sales, since they involve the loss of the home due to a financial hardship.
In a short sale there are at three parties involved, the seller , the buyer , and the lender(s), who must approve the sale and agree to take the shortage. If there is more than one lender, they also have to approve the transaction. This further complicates (and lengthens) the short sale process. The advantage of a short sale may be the price, as short sales are usually listed below market value. The flip side is that it typically takes considerably more time to close than a bank owned or standard sale. Short sales (despite the name) typically take the longest time to close. Much of the time involves negotiating with the lender(s) and getting approval for the sale. Also, there may be several additional costs involved, as any deficiencies must be paid off before title can be transferred. These additional costs have to paid in cash (outside of the buyer's loan) and the costs can be substantial. Remember also, that lender approval is never guaranteed!
You may occasionally see a home listed as an "approved" short sale. This indicates that the primary lender has approved the sale price for a former buyer (one who may have "walked"). Generally, the lender will still approve this price for a subsequent buyer, but this is not guaranteed. Therefore, "approved" is a bit of a misnomer. If the lender feels the market may have improved, they may order another BPO (Broker Price Opinion, a type of appraisal) on the property. If the BPO indicates a higher price, the lender will typically counter for the higher price, even if hey approved the former price before.
(Please remember that the answers are generalities - There may be exceptions with individual sellers).
|Question||Standard sale / equity seller||Bank owned / REO seller||Short sale seller|
|Average response time for your offer?||Fast - Sellers will respond quickly to your offer.||Fast - Lenders are anxious to sell REOs and will respond promptly.||Usually slow. Your offer may get accepted by the seller and the listing agent right away, but it will then be submitted to the lenders and getting a response from them will be slow to extremely slow|
|Length of time to close?||Fast - Usually a 30-day escrow period if buyer is purchasing with a loan.||Fast to very fast - REO sellers will often ask for a faster close time than for a standard sale.||Slow - Most of the wait time with a short sale involves getting lender approval (and this is all before escrow is opened).|
|Contingent offer OK?||Yes, but not always accepted.||No||No|
|Cash offer preferred?||Yes -The lack of a loan contingency is an incentive for the seller.||Yes - Lenders prefer the faster close with a cash buyer.||Yes and No - Cash is not a huge incentive on short sales. The main concern of the lender is the purchase price and how much the lender is being shorted.|
|3.5% down, FHA loan OK?||Yes, though cash buyer or buyer with higher down payment will be preferred.||Yes||Yes|
|Pricing?||Usually the initial list price is padded, since sellers want to see how much they can get. They are more willing to negotiate as the home sits unsold.||Aggressive - Lenders usually price REOs to sell.||Mixed bag - Agents sometimes use "teaser" pricing to draw an initial offer. Regardless of agent's price, final price must be approved by the lender(s) so list price is less meaningful than with bank owned or standard sales.|
|Which is the best deal?||There are exceptions, but standard sales are usually the most expensive to purchase.||REOs are priced well and are usually the best deal.||These can be a great deal but watch out for hidden costs . such as payoffs to 2nd lender, delinquent HOA dues or taxes, negotiator fees, etc.|
|Which is the easiest to work with?||Standard sales are usually the easiest and most cooperative.||REOs are generally easy to purchase, but are demanding on time frames, plus are sold "as is". They can also be competitive and you may find yourself in a multiple offer situation.||Short sales are difficult because of the extended time frame, lender negotiations, and additional out-of-pocket costs.|
|Length of contingency period?||Standard 17 day period typically used.||17 days or less. Lenders sometimes specify a shorter period, for expediency.||Standard due diligence period, once escrow has been opened.|
|Competition from other buyers?||Depends on price and availability. In areas with high numbers of short sales, a standard sale of the same model will be very desirable, increasing the competition.||High - REOs are in demand.||Mixed - Competition can be strong if list prices are low, but a glut of short sales on the market, plus many frustrated buyers, ensure that there will be an ample supply of homes available for purchase.|
|Are disclosures provided?||Yes - Required.||Not all - Some are not required for an REO sale, such as the TDS (Transfer Disclosure)||Yes - Generally the seller will still complete disclosures.|
|Condition of home?||Good - Standard sellers usually take extra care to prepare the home for sale.||Usually sold "as is". Some have been damaged or have been left in poor condition by the former owner. Others may have been cleaned up by the lender.||Mixed - Many short sale sellers will continue to take reasonable care of the home during the sale, though some abandon the home. Almost all are sold "as is".|
|Can you get a credit for repairs?||Yes, though the actual amount of the credit is negotiable.||No - For the most part, the sale is specified "as is".||No - The seller is in a "distress" sale and will usually not contribute to repairs.|
|Seller help with buyer closing costs?||In many cases, Yes. Many standard sellers will agree to pay some of a buyer's closing costs as part of the deal.||Maybe. Some lenders are OK paying closing costs as part of the deal. Others won't.||Usually No.|
|Easy to show?||Yes, though showing times must be coordinated with the sellers.||Yes, very easy - Most REOs are vacant||Depends - Most short sale properties are still occupied by the sellers and they are generally cooperative. Some Short sale properties are vacant, so easy to show.|
|This type of sale is best for a buyer who:||
|Watch out for.....||Seller not fulfilling repair commitments or doing second rate repairs, removing items that were thought to be included (window coverings, certain appliances), moving damage.||Extensive addendums with lots of small print that may include: shortened contingency periods, automatic contingency removal, and/or ability to cancel escrow if they get a better offer!||Lots of extra costs, like pay-offs to 2nd TDs, delinquent property taxes and HOA dues (these costs must be paid outside of the loan) . The buyer may be asked to help to pay part of the short sale negotiator fee if the listing agent is using one.|
Standard sale / equity seller
Standard sellers almost always "pad" their list price. Many do so to test the market in order to see what they may be able to get for their property. With sellers, time is often the critical factor. Generally speaking, the longer the property sits unsold on the market, the more motivated they become and the more they will be willing to lower the price. With that, a low offer on a home that is new on the market is not likely to succeed. Standard sellers will simply wait for a better offer. They do get discouraged over time however, and a lower offer on a property that has sat for several months may have more of a chance of success.
Offer close to list price if the home is new on the market
Offer lower than list if the home has sat on the market, especially for an extended period
Ask for repair credits or additional concessions to help "sweeten" the deal.
Bank Owned / REO sales
Lenders are very anxious to unload REO homes form their portfolio and as such, they are generally priced to sell. Because of this, buyers should be aware that many REOs receive multiple offers. Buyers may find themselves in competition with other buyers, so they should be prepared to bid aggressively or look for additional home choices. REO sellers will prefer a cash offer over an offer with a loan because a cash buyer can close quickly plus has no loan contingency. REO sellers will not generally accept an offer that is contingent on the sale of your home.
Make an offer that is lower than list but still reasonable (don't "low ball").
Be prepared for several counter offers.
Act quickly, as REOs are competitive.
Remember that short sales are always uncertain - There is always the possibility that the lender will reject the short sale and will simply foreclose on the property. With that, it pays to have additional options. Many buyers prefer to place offers on several short sales at once with the hope that one will get approved sooner than the others. While this strategy may be frowned upon by the real estate industry, it is nonetheless common practice by many buyers.
Find out if the list price is a "teaser" price by checking "comps".
Make your offer according to the above. Also, get your offer in quickly, so that your offer will be the one that the agent submits to the lender.
During the lender submission process, continue to view other home possibilities and make additional offers.
Be prepared to wait, even if your offer has been accepted and has been submitted to the lender(s).
Here are some of the other types of home sales.
The property has gone through the foreclosure process and is now being sold at a public auction, usually through a web site. Very often, the list price is merely the auction opening bid , so the price can be very miss-leading. It very typical for the price to bid up quite a bit higher than list price, so use caution.
Occasionally, some real estate agents also hold their own "auction" on a standard sale property, in an effort to attract a lot of buyers. They will often state that buyers are to fill out an offer form, and highest bids will then be contacted to fill out a purchase agreement. These types of auctions are really just agent schemes to create buyer frenzy and to get buyers to bid much higher than they normally would, Be carefully of being lured into one of these promotional auctions.
This is the sale of a property in which the owner(s) have died and the home is being sold be the former owner's successors. It is similar to a standard sale, with the exception that a special probate purchase agreement must be used. There is also a court date set during escrow to confirm the purchase and to possibly provide an opportunity for the sellers to entertainer higher bids on the property. The court process could require 60 days or longer to complete during escrow, but overall, it is similar to a standard sale. One note - Find out of the sale is subject to court over bid. If it is, other buyers may appear at the court hearing and put in higher bids.
Corporate Owned sale
This is a sale that is similar to a Bank Owned sale. In a Corporate Owned home sale, the original owner has accepted a buyout from their employer. The owner is usually a relocation company who has been hired to sell the property. Corporate Owned sales often have sales addendums similar to Bank Owned sales. These addendums may request an expedited contingency period, an "as is" sale etc., so pay close attention to all terms.
HUD home sale
The is essentially a bank owned home that is being sold by HUD (Department of Housing and Urban Development). A HUD home is a 1-to-4 unit residential property acquired by HUD as a result of a foreclosure action on an FHA-insured mortgage. HUD is the property owner and it is offered as a bank owned sale or REO) property to recover the loss on the foreclosure claim. See Bank Owned Homes above for information that also applies to a HUD home sale.]
Court house foreclosure sale
This property has gone through the foreclosure process and is now being sold at a public auction, usually through a web site. Few properties are ever sold at auction, with the majority returned to the lenders to be sold later as an REO. The reason for this is that they are often priced over market price, due to the amount owed on the loan. Second, purchasing at auction requires all cash, or a cashier's check, for the full amount of the purchase. Because of this, many of the homes sold at auction are purchased by investors with the intent to re-sell or "flip" the property