As the Snohomish County real estate market continues to correct itself, more and more homes will be sold as short sales, foreclosures and as bank owned properties. So what are the differences of these types of properties.
What is a Short Sale?
Lets look an example: Homeowner A has a $300,000 mortgage and is forced to sell the property as a way to avoid foreclosure. Faced with selling, A contacts his REALTOR® and schedules a listing appointment. Mr./Mrs. REALTOR® conducts a Comparative Market Analysis (CMA) and determines a list price. A agrees to list the property for $265,000. This is a short sale; when the property is selling for less than the homeowner’s mortgaged amount.
Short sale properties can be more challenging than traditional transactions because all aspects of the Purchase & Sale have to be approved by the lien holder. Adding an additional party to the transaction also slows down the communication process and sometimes the lien holders take twice as long to respond, even on the minor questions.
When viewing properties online look for the verbiage “short sales” and “subject to underline lien holder approval”.
What is a Distressed Property?
At first light it may seem that a short sale and a distressed property are the same thing. This is actually not the case. A distressed property is when homeowner B is behind on monthly mortgage or has a high risk of defaulting on payments and is forced to sell the property; not necessarily selling for less than the mortgaged amount but it can be both distressed and short sale. In this case a seller is looking for a low market time and pricing is critical to get the home sold with the seller netting zero or having to bring money to the table at time of closing.
What is the Foreclosure Process?
Foreclosure is a process and not necessarily a property. To better understand the foreclosure there are specific dates in a timeline when actions take place. The very first part is: when is a property in default? Technically, it is on the 1st day the mortgage payment is late but banks usually have grace periods built into payment terms. This is when the foreclosure process begins and, technically, the homeowner has 190 days before the property is sold at auction (day zero). As the process continues there are some other main time frames: 120 days is the Notice of Default, 90 days is the Notice of Trustee’s Sale and 11 days before Auction is the last date to reinstate.
*Note: Auction date is set at Zero and the timeline works backwards, download full-size image.
An important part of the timeline for buyers of a foreclosed home is the possession date. When a purchaser buys a property at auction the buyer does not receive possession right away even though they have legal title on the property. The date of possession is 20 days after purchasing the property at the court house because the previous owner now becomes a tenant and requires a 20 day notice to vacate (if the previous owner is still in the home).
REO stands for Real Estate Owned. It applies to a property owned by a lending institution who acquired the property through the foreclosure process. REOs don’t have to be taken back by a bank and can be found at other institutions like the VA, HUD, Fannie Mae, Feddie Mac, FHA, IRS, FDIC, USDA and even the Small Business Association and Army Corp. of Engineers. Like short sales, REOs can take a long time to purchase because of the response time when dealing with the bank and cause more headache that initial impression of “getting a deal”.
What does this mean for the real estate market?
As more and more properties become available that are either short sales, distressed or REOs it is going to affect the price/value of the homes currently on the market. Banks want to get these properties off their books so they can qualify for government bailout funds (which the public will not see any benefit from) and as a result the prices are falling below market value. When these properties close and enter the databases, REALTORS® and appraisers are forced to use when determining the value of a property thus continuing to soften the market.