DE-MYSTIFYING THE DISTRESSED REAL ESTATE MARKET
The three phases of the distressed sale market are:-
(1) Short Sale, (2) Foreclosure, (3) Bank Owned/REO/Real Estate owned.
(1) Short Sale
This is a sale where the seller owes more to the lender than the sale price of the property. If the seller can no longer afford to pay the mortgage the choice is default on the loan and go into foreclosure or ask the lender if they will accept a reduced payback to satisfy the mortgage debt. The lender is often not sympathetic (especially if the mortgage is still being paid) and advises formal listing of the property and the submission of an accepted offer by the Seller. In this process the Seller accepts an offer, subject to approval by the lender(s). A Short Sale Package must be submitted to the lender(s) for approval which includes the accepted “subject to” offer, hardship letter, complete Seller financial statements, two months of bank statements, two years of tax returns and two of the Sellers latest pay statements. Part of this approval process, after evaluation of the information/offer package submission is an appraisal inspection to establish market value of the property.
This review and approval can take 90 days after document submission and approval is uncertain. If after 90 days the bank approves the sale, the terms of acceptance are defined within an Approval of Sale letter - time limits set within this letter generally cannot be changed.
The next step if the property cannot be sold as a Short sale and if the mortgage payments have ceased, is Foreclosure.
(2) Foreclosure
This occurs after the homeowner has stopped making payments to the bank. Generally a Notice of Default is filed and the homeowner has 90 days to bring the loan up to date. After the 90 days have elapsed the property is offered for auction on the courthouse steps. This follows a Notice of Default (NOD) and then a Notice of Sale Date. To be successful at the auction a buyer must have cash in hand to complete the sale and an offer price meeting the lenders minimum acceptable value. Many times buyers purchasing property with outstanding debts and also site unseen, with no recourse for the Buyer once purchased. (In short the process is risky for the Buyer and cash is required).
If the home is not successfully auctioned the Lender assumes ownership of the property and it becomes/is called Bank Owned or REO (Real Estate Owned).
(3) Bank Owned/REO
The property has been through the short sale & foreclosure processes and has reverted to Lender ownership. Once the lender decides to sell the property it is sold through a Real Estate Broker using standard Real Estate practices. The Buyer has opportunity to inspect, the ability to finance and to purchase with a clear title. However there are few Disclosure Documents, no Inspection Reports and no repair work undertaken.
