Paul Loulis
Realtor® / MBA / C.D.P.E.

Following is an explanation of "Short Sales", The Foreclosure Process, and REO’s:

 

While a short sale may be a last resort for many homeowners facing foreclosure, it represents a great opportunity for potential home buyers and real estate investors to purchase property at a significant discount.

 

A short sale is a legally-binding agreement to allow a home to be sold for less than the amount that is owed.  A "short sale" occurs when the net proceeds from the sale of a home are not enough to cover the sellers’ mortgage obligations and closing costs, such as property taxes, transfer taxes, and the real estate practitioner’s commission. The seller is unwilling or unable to cover the difference.

Some — although by no means all — short sellers may also be in default on their mortgage loans and be headed for foreclosure. However, home owners who bought at the top of the market or who took out large amounts of equity with a refinance and who now need to sell because of divorce or job transfer may also find themselves upside down, owing more than the home is currently worth when closing costs are factored in.

 

The lender must approve the offer from the potential buyer.  Of course, lenders are not looking to bail out "flippers" or other borrowers who simply overextended themselves. In most cases, a borrower must have suffered a serious financial hardship that directly caused him or her to default on the mortgage: the loss of a job, a serious illness, or the death of a loved one.  A written declaration and supporting documentation demonstrating financial hardship will definitely be required by the lender. This may include pay stubs, tax returns, and liquid asset statements, among other documentation.

 

After a few months, once the home goes into foreclosure, the lender selects a real estate agent to sell it for them.  At that time, the lender sets the sale price based on an appraised value.  Prior to foreclosure, the homeowner attempts to sell the property and will then go to the bank with the offer and try to get the bank to accept the offer as PAYMENT IN FULL, releasing the homeowner for the remainder of the debt obligation. 

 

President Bush signed H.R. 3648, The Mortgage Forgiveness Act of 2007, into law, sparing homeowners the tax burden associated with cancelled mortgage debt.  Prior to this action, forgiven mortgage debt due to foreclosure, short sale, or deed in lieu of foreclosure, was considered taxable income. The new law, however, temporarily waives these taxes for debts forgiven (as high as 35%) from the beginning of 2007 to the end of 2012.  The bill also extends the tax deduction for mortgage insurance premiums through 2014.

The California Foreclosure Process

Phase 1: Notice of Default

The foreclosure process commences when a Notice of Default is recorded. During this 90 day period, all parties are notified that a Notice of Default has been filed, including the owner/borrow and lenders in a junior position. During this period the owner/borrower is effectively given opportunity to cure the default.


Phase 2: Notice of
Trustee's Sale

If the owner/borrower fails to cure the default, the Notice of Trustee’s Sale is published in a local newspaper for three consecutive weeks to announce the date, time, location and minimum opening bid to acquire a foreclosed property at auction. This phase lasts a minimum of 30 days, during which period the Notice of Trustee’s Sale must be recorded in the county of foreclosure at least 14 days prior to the actual auction date.  


Phase 3: Trustee's Sale

On the day that was established for sale of the property, and after all publication period requirements are met, the property is sold to the highest bidder for cash for the full amount of the debt plus foreclosure fee and expenses. If no one bids at the Trustee's Sale, the property automatically transfers to the foreclosing party. In both cases, a Trustee's Deed upon Sale is recorded. The foreclosing party is typically a bank and the property is designated “bank owned” or REO.

 

Why Buy an REO?

An REO is real estate owned by a bank or lending institution.  An REO is different from foreclosure property in that the bank has already tried to sell it at a foreclosure auction and received no acceptable bids.  (At the foreclosure sale properties must be purchased on all cash basis and the minimum bid is usually the amount owned on the note plus delinquent interest and costs.)  Because the property was not bid on, the bank then became the owner of the property.  The bank is not in the business of owning real estate.  They need to sell this asset to free up funds so they can do what they do…lend money.  With the recent sub-prime loan crisis and the huge increase in foreclosed and REO properties, lenders have gotten more motivated to get these properties sold and off their books.  They must sell these properties and sell them NOW.  This makes it a great time to be an REO Buyer whether you’re buying a home to live in or an investment property.  Either way, by purchasing REO properties at below market prices there is a lot of money to be made.

 

Advantages of Buying an REO Property

When you are thinking of buying an REO you have many advantages that a buyer does not have when purchasing a home in foreclosure or at the foreclosure sale.

 

1.         Below market pricing….Why pay market price for a home or investment property when our team of professionals can assist you in acquiring a REO property at below current market prices.  Imagine having built-in equity as soon as you close escrow.

2.         No emotion….You are dealing with a bank that is making a business decision on an asset.  Not an owner selling their home.

3.         No surprises….You can view the property and get professional inspections.  You’ll know what you are getting into before you purchase.

4.         Conventional financing is available – Generally no problem getting a loan, in some cases the owning bank may offer preferred rates, pay buyer closing costs or other incentives.

5.         Timing…You are able to buy on your schedule.  There is no auction.  You can submit your offer and have a response from the lender within a few days.

 

Are All REO’s Good Deals?

Definitely not!  Just like purchasing any home it all depends on what your objectives are.  In most cases it comes down to price, condition and location.  Are you going to live there or will it be an investment property?  How does the property cash flow?  How are the schools?

 

Just because the bank owns it does not make it a good deal.  As a buyer you have a duty to be knowledgeable of the neighborhood and market prices in the area.  Take advantage of your right to have the property inspected so you know what you’re buying and the condition of the roof, heating, plumbing and electrical.  It is also a good idea to get a current termite inspection if one has not been provided.

 

Our team of REO specialists can help guide you through the process of finding and purchasing REO properties. 

 

CALL ME!!  The market has changed significantly.  It is now a buyer's market.  This is a great time to shop for homes, with more affordable pricing and historically low interest rates. There are many additional opportunities with “short sales”, “foreclosures” and “bank owned” properties.  I have had extensive training in all three.  It is important to work with an agent who has in-depth knowledge of these "distressed sales".  I can negotiate a smooth transaction for you. 

 

 





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