How to buy pre-foreclosure properties?

Ken, a good friend of mine also a past client, has heard about the bargain deals in real estate. Being a first time investor, he has a lot of questions about the short sales and REO (bank owned properties). Here is a list of the questions that he asked me which I thought would be useful for anyone who is also thinking about taking advantage of the current real estate market as an investor.

Q: What is the difference between Short Sales and REO?

A: Short sale means that the current mortgage is higher than the listing price on the house. For example, if the owner owes $580,000 but the house is only listed for sale at $425,000, it is a short sale. Because the list price is less than the mortgage, either the seller must bring cash to the escrow to close, in this case perhaps $190,000 (the difference of $160,000 plus closing costs); or the lender will take a loss at closing.
The REO (real estate owned by the bank) means that the bank has foreclosed on this home and it is part of the bank’s inventory.
The major difference between short sale and REO is the ownership, in that short sale the owner still owns the property, whereas the REO the bank owns the property.

Q: Are there any chance that buyer may pick up a property that has lots un-paid bills?

A: No. By the close of escrow (that is, at the end of the long process of buying a house), the seller should provide buyer with a clear title (no lien, no back taxes, no un-paid utilities, no garbage fees, etc) and a title insurance which will insure against any UNRECORDED liens. The buyer don’t have to worry about any charges from the previous owner.


Q: Are there any additional costs that buyer should pay?

A: The buyer is responsible for paying any inspections that buyer had ordered, plus if the buyer is getting a new mortgage, the buyer will be paying the costs associated with that. Since most short sales are “AS-IS” sale, any repairs and remodeling will be your responsibilities too.

Q: Can there be more than one bank involved in a short sale?

A: Yes, there is possibility that there are a first mortgage and a line of credit against the property. But many times those two mortgages are from the same bank. Therefore there are two mortgages but there is only one bank involved.

Q: what is the procedure of the short sale?

A: The seller will sign the purchase contract, but the bank will ultimately decide whether or not the property is sold. The bank will review the offer and based on its own appraisal, and it will talk to the investor of this loan to decide if the offer is acceptable. If the offer is rejected by the bank, the property will be put back on the market and the buyer will get their deposit money back. But the buyer doesn’t get a refund for the inspections or other expenses that buyer must pay.

One of the complains with regarding to the short sales is that there is no easy way to know whether the bank will approve the sale and this leaves the buyer waiting and waiting. Fortunately, the federal government recently issued guidelines to speed up the process and provide more clarity for the buyer, seller and the lenders. The new Home Affordable Foreclosure Alternative Program, known as HAFA, provides a well-mapped route for executing a short sale. Although they don’t take effect until April, however, mortgage servicing companies have the option to implement them early.   I will discuss more about HAFA and its impact for the home sellers in my future blogs.