Saturday, 10 December 2011

Foreclosures vs Short Sales

In dealing with Florida distressed sales the most common question (other than “isn’t that risky”) relates to the different types of sales and circumstances under which properties are sold. Actually, a basic understanding of the fundamentals goes a long way to resolving the question about risk:
Of MLS listed properties distressed sales fall into two basic categories:
Bank Sales or “REO”s (Real Estate Owned) in which the homeowner has been evicted and the bank owns the property. The homes have usually been vacant for some time and may have been neglected by a defaulting homeowner for a substantial period before that. They almost always need at least cosmetic and minor mechanical repairs.
REOs are well publicized as the best deals, selling an average of 38% below comparable properties according to RealtyTrac. In demand locations however the statistics do not tell the whole story: In addition to being lower priced, REOs are a fast and sure closing for the successful bidder, often within 30 days. Because of this attractively priced bank sales often generate multiple offers and regularly sell over asking.
The biggest challenge in buying a good REO is often getting the deal. Once you have crossed that hurdle, the successful bidder is notified of acceptance and is given a period (usually 10 days) to do whatever inspections they deem advisable. During this period the buyer can generally elect to terminate the contract without penalty.
“Short sales” are the other form of distressed sale that are prevalent. In these cases the seller still owns the home but owes more money to the bank(s) than the property is worth. As a result the proceeds will be “short”. The bank(s) have to agree to discharge the loans at less than full value and pay any liens necessary to give clear title
Once an offer on a short sale is accepted by the seller it is forwarded to the banks and interested parties of which there may be several. The various affected parties then start negotiating to apportion the losses, a process that can take months. Once the bank accepts the offer however the buyer is given the same 10 day period as in a bank sale to inspect the property and terminate the contract in its discretion.
Because short sales take a long time and are uncertain many investors avoid them making them some of the best deals. Better yet while the negotiations are ongoing the property comes off MLS and the buyer has control of the contract. The escrow is as little as $ 1,000 and is fully refundable. A prudent buyer can open any number of contracts in a given area and simply pick and choose depending on who comes to the table with the best deal first.
Short sales are usually still occupied by the seller or in some cases come with tenants in place. Because they are being actively lived in they are usually in better repair than comparable bank sale properties. If you can afford to wait and play the numbers short sales can produce some of the best deals.

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