Today’s article is a Real Estate 101, focusing on the differences between short sales, foreclosures and bank-owned/real estate-owned properties. So often, it is perceived that the definitions are synonymous and they are not. Each term has its own very different meaning in the real estate world.
I will attempt to make this easy to remember so that when you are searching for your new home and come across one that is listed or advertised as a “short sale” you will understand what that means. Same goes for foreclosure and bank owned.
Bank Owned/ REO (Real Estate Owned)
This is usually when the house was acquired by the lender through the process of foreclosure and an attempt at an auction that did not result in a sale to a third party. The bank is now the official owner of the property.
“The property is most likely acquired by the bank as the high bidder at its own foreclosure auction, but it could have been obtained by a deed in lieu of foreclosure (equivalent to a buyer turning keys over to the bank),” says real estate attorney and Sudbury Board of Assessors member Joshua Fox. “From buyer’s perspective this is fairly similar to the typical private buy-sell in that the property is usually listed with a real estate agent and there will be an offer to purchase, an opportunity for a professional home inspection and a purchase and sale agreement with reasonable contingencies. The REO seller is also frequently willing to make limited repairs raised by the buyer as a result of a professional home inspection.
“From a legal perspective, it is extremely important to have a title examination performed on the property by a seasoned real estate attorney who must review with strict scrutiny the documentation related to the foreclosure. Interestingly, some REO sellers place short term restrictions on a resale or ’flip’ of the property after the closing.”
At the end of the day, the goal of the bank is to sell the property as they are overloaded with inventory.
Foreclosure
Think “FORCED.” This is when the bank essentially forces the sale of the house. When owners cannot or have chosen not to pay their mortgage, they are in violation and are now defaulting on their agreement with the bank to pay the mortgage.
“In most cases, the foreclosure purchase is much riskier than an REO or short sale transaction for a buyer,” says Fox. “As opposed to an REO or short sale transaction where a buyer signs a purchase and sale agreement, and has typical financing and title contingencies, there are virtually no contingencies when you buy at foreclosure; you bid against competitors at an auction and buy as-is, where-is and with all faults.
“As the buyer, you may or may not have an opportunity to look inside the home. You will not likely have a chance to have a professional home inspection. In order to qualify as a bidder at the auction, you must attend with cash or certified funds in accordance with the published notice of sale.
“If you are ‘lucky’ enough to be the high bidder, you give the deposit on the spot, sign the bank’s self-serving form memorandum of sale on the spot, and you buy subject to outstanding real estate taxes, and any and all liens which take priority over the mortgage being foreclosed.
“When I represent foreclosing banks, I reserve the right to sue the high bidder for damages in excess of the deposit if he/she defaults on the purchase, which means that the buyer has even more at risk if he/she defaults on the purchase. If you get cold feet, the bank is not likely going to give your deposit back without a fight. Therefore, before you bid at auction, you must perform all the due diligence necessary to make an informed decision about the property.
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