Monday, June 16, 2008

REO's or Short Sales?

Do you know that most people including real estate agents have no idea what's the difference between REO properties and short Sales? You are probably asking yourself why this matters. The reason this matters is if you are a buyer and are looking for a really good deal you will undoubtedly come across both of these types of listings. You will also probably think they are the same thing. This will be a big mistake since they are not the same thing.

REO properties are properties that are currently owned by a corporation which may or may not be a bank. Short sales are properties that are still owned by the current seller who owes more money to their current mortgage holder than the property is worth. For example, say a seller bought their home in 2005 and paid $525,000 for it and took out an interest only loan for 100% of the value. They now owe more than $525,000 on their mortgage yet the current market value of the home is only $375,000 and they need to sell immediately. This property becomes a "Short sale" since the money they will get from the sale will not be enough to pay off the current mortgage holder who must then approve this sale at such a reduced price. This process can take months to accomplish and then sometimes at the last moment the deal can still fall apart. Buyers must be aware of the substantial risks they are taking by entering into a short sale contract with a seller who ultimately can not make the final decision on whether to accept a reduced price on their property.

On the other hand, an REO property is typically a property that a bank or corporation owns after they have foreclosed on the prior owner who has typically failed to make their mortgage payments. The buyer who chooses to purchase one of these properties are typically buying them in "as is" condition and are negotiating through a real estate agent who makes the offer directly to the bank or corporation which is typically a very motivated seller who can make a final decision quickly.

Good and sometimes great deals can be had in either above situation but it is prudent for a buyer to be very aware of the differences and challenges that each situation can present.

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