On foreclosures, short sales and REOs
Originally appeared in Hills Publications, May 16, 2008 and ANG Newspapers, May 25, 2008
Will you get a bargain or the short end of the stick if you buy a bank owned property? Some of my clients have been asking me this question. Before I share my thoughts, a few definitions:
REO is an acronym for “real estate owned” by a bank, i.e., the foreclosure process has been completed and the lender is now the seller. A “short sale” is one in which the property’s equity is less than the total amount of the loan(s), interest and penalties owed to the bank. In this case, the borrower (seller) still owns the home and the lender has agreed to settle for less than what is owed instead of foreclosing. For short sales, the seller may accept a contract, but it must be approved by the lender.
MLS statistics
The East Bay Regional Data Multiple Listing Service (MLS) database covers a wide territory that includes Alameda to Alamo, Berkeley to Bethel Island, Danville to Discovery Bay and Hayward to Hercules.
To get an idea of exactly how many short sales and REOs are actively on the market, I searched the MLS and came up with an astounding 6598. This is out of 14,941 total, active listings. Thus, 44% of all listings for sale right now are properties where the owner has or had been unable to keep up mortgage payments.
I wondered what percentage was in the Oakland to El Cerrito corridor vs. other areas. Eight hundred and twenty-nine of the almost 6600 foreclosure or pre-foreclosure homes are in this stretch. That equals 40% of all active listings for those cities.
Of these, 799 are in Oakland. Digging deeper, only 13 are in the most popular Oakland neighborhoods. Shockingly, 1867, or 75%, of all properties currently for sale in Antioch, Brentwood, Oakley and Pittsburg are in the distressed category.
Getting a deal?
How good a deal you might get as a buyer depends on many factors. First and foremost is the location of the home and how many others in that area are also bank owned or short sales. As indicated above, places like eastern Contra Costa County have a glut of these types of listings, which is severely depressing selling prices.
This affords an opportunity to purchase at a fraction of the original price. As long as you plan to live in the house or rent it out until the market turns around, you could end up with a good buy. On the other hand, a number of REOs and short sales in the most sought after Oakland neighborhoods are selling with multiple offers. I recommend to my clients that they avoid this scenario.
Be careful about condition
Something else to think about — people who get into financial trouble with their mortgage often have not been diligent about maintaining the home. Buyers of short sale or REO listings should be careful about condition. These kinds of properties can have expensive issues, such as foundation, roof, drainage or sewer line problems, not to mention the need for interior and exterior upgrading.
Obviously, a list of unknown, costly items could turn into a disaster for the unaware buyer. The logistics of these transactions may make it difficult to get a precise idea of exactly what you are buying.
Check comps and rents
Never assume a home is well priced just because it is now much lower than when it came on the market. Have your agent review with you closed sales of comparable properties in the past three months. Older comps may no longer be useful.
If you plan to rent it out, make sure to research rents in that locale and how long it will likely take to get it rented after close of escrow. Also add in the cost of spiffing it up prior to renting.
Final Thoughts
A last caution – dealing with most lenders in short sales or REOs is not a pleasant experience. If you make an offer, be prepared to wait weeks or months for a response from the bank. I have heard many stories of buyers, thinking they purchased a house at a good price, finding out, after three months or longer, that the lender actually accepted another offer.
Distressed properties, whether short sales or REOs, are not slam-dunk profit makers. Be cautious and closely examine all the variables, not just the price, before committing to this type of purchase.
Related Articles:
Condition: What Your Agent Should Tell You