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Is a Distressed Property a Bargain for You?

In a tight economy, bargain hunters turn their attention to distressed properties, and if you look online, there are plenty to be found. However, as you begin your search it is important to understand different real estate terms to know exactly what you are seeing.

Short Sale

A short sale is a situation in which the property is for sale for less than the amount owing on the mortgage. It is typically executed to avoid foreclosure. In a short sale the lender agrees to discount the loan balance due to economic or financial hardship. Sellers and lenders usually will try a short sale first, when foreclosure appears inevitable because there can be fewer tax and credit implications for the owner and because costs associated with foreclosure may be worse for the lender than the loss created by a short sale. Short sales can be very complicated, and the outcome is not guaranteed. The owner and the lender(s) must agree on an offer. There is no commitment on the lender’s part to sell the house. Once a short sale is completed, the lender must write off the difference between their loan amount and the proceeds from the escrow – something they try to avoid. It is not uncommon for the short sale to be rejected by the lender and the property ends up going into foreclosure anyway.

A short sale is not recommended when you have a fixed period of time to move. The approval process by the bank can tie up the buyer’s time for several months, and if the contract is not approved the buyer must start the process over again. Many times buyers do not want to deal with this type of uncertainty.

When considering a short sale, whether buying or selling, discuss with your Realtor® the importance of working with a seasoned short sale negotiator, loss mitigation specialist and real estate lawyers who specialize in this type of distressed property.

Pre-Foreclosure

Pre-Foreclosure is the term used for a property prior to the Notice of Default (NOD) being filed. This period of time can range from a month to a year depending on the county or state laws and begins when a homeowner defaults on their loan. During this time a number of options can happen – the homeowner may raise the funds to pay off their debt and stay in the home, the lender may issue a Notice of Sale and begin the process of putting up the property for sale at a later date, or the homeowner tries to sell the home to avoid a foreclosure sale.

A pre-foreclosure does not necessarily mean the home is selling below market value. It is very important for buyers to work with their Realtor® to ensure proper research is done on a case by case basis to determine a property’s value.

Foreclosure

Foreclosure is the process through which ownership of a property reverts to a lender. In a foreclosure all of the rights of the homeowner covered by a mortgage are terminated. The foreclosure process begins when the homeowner fails to make the payments on the mortgage. The lender issues a Notice of Default (NOD) threatening to sell the property and as a result the homeowner is no longer a party in the sale.

Realtors® do not sell foreclosures. Foreclosures are auctioned at a Trustee Sales at the Court House in the county where the property is located. Buyers may participate in a Trustee Sale typically by placing a deposit down on the purchase price at the time of the auction and pay the remaining balance within 1 to 30 days. Rules vary and must be checked with the county in which the sale is taking place.

Buying foreclosures at an auction is risky and only seasoned investors should consider this option. Foreclosures being sold at auction are not investigated by Realtors® and Title Professionals as in normal property sales transactions. Serious problems to consider when purchasing a foreclosure include: title problems, Superior loan pay offs, IRS liens, tenants and owners still occupying the property, and possible structural problems. The price may seem good at the time of the auction but additional costs and risks may come when you take title to the property.

Looking to Purchase a Foreclosed
or Bank-Owned Home ?

Let a professional Realtor® walk you through the difficult process of purchasing a distressed property. Just fill out as much of the information below that you want and we'll get right back to you, with no obligation to you. We guarantee your privacy.

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REO

REO stands for Real Estate Owned properties. An REO differs from a foreclosure in that the bank has already tried to sell the property at a foreclosure auction and did not get bids. As a result, the bank became the owner of the property. The bank does not want to keep the REO any longer than possible, lender-owned properties can present a great opportunity to buyers.

An REO offers more advantages to the buyer than a foreclosure. For one, the buyer can purchase the property on their schedule since there is not an auction date. Also the property can be inspected before the purchase is complete and rejected if there are serious problems. The lender will remove any liens on the title, and clear any other issues that might slow down the sale of the property.

However the buyer must investigate why the property was not bid on at the auction. A good Realtor® will ask the important questions and guide the buyer through the sale.

When planning to buy distressed properties, buyers should always be pre-approved for their new mortgage. Most lenders will not accept an offer on a REO without a Loan Status Report (letter or form from the lender indicating the buyer has been pre-approved) and proof of funds available for down payment..

There are many homes on the market that are not distressed properties. In many instances owners have a lot of equity, they are motivated to sell and have priced their homes to move quickly. A distressed property doesn’t always mean a great deal – work with your Realtor® to find the best option for you!

Information provided by
Judy Baerg, Realtor® 623-451-5527
Meredith Flinn, Realtor® 623-451-8795