I don’t understand, I thought this was a foreclosure!

If you follow the real estate market at all, you certainly know that the selling landscape has changed tremendously over the last 7 years.  When you are ready to make an offer on a home that you like, you want to know who you will be dealing with on the other side of the transaction.  With the changes over these last 7 years, there are Foreclosures, REO’s, Short Sales, pre-foreclosures, and more types of Sellers to know about.  Here’s a quick primer on what you will see:

Private Sale – these make up the largest share of our market, a homeowner that is selling their home, for whatever reason: downsizing, moving up, re-locating, retiring to another area, etc.  An Investor that is selling a home (possibly a “fix and flip”) would also fit in this category. Here you will know right up front who the Seller is. Their motivation to sell?  That you might not know…

Short Sale – Not too long ago, many real estate brokers didn’t even know what a Short Sale was, but I’m sure it’s talked about in their offices every week now. In the simplest terms, a Short Sale means that the homeowner wants or needs to sell, and they know that the market value of their house (what a buyer will pay) is less than what is owed on the home.  What they owe will include a mortgage, and could also include:

  • Outstanding real estate taxes
  • Outstanding Water and/or Sewer bills
  • Liens put on the home (liens could be for work done by a contractor, medical or hospital bills, etc.).

So, if the home is listed for sale and the best offer doesn’t cover all the encumbrances, the sale would be Short on funds to pay all parties. Negotiations would need to take place to convince the mortgage holder to accept less than what is owed to them.  Additional negotiations would need to occur with any other lien holders.  These negotiations can take months to work out, if they can be worked out at all. Short Sales can be the most problematic and frustrating sale for all involved.  Even though the buyer and seller may agree on a sales price, there are other parties that need to agree to the sale.

Pre-approved Short Sale – These are the new kids on the block, so to speak.  Some Lenders and GSE’s (Fannie Mae & Freddie Mac) have decided to sell entire pools of loans to Investors, Hedge Funds, etc.  The purchaser of the pool will try to work with the Owner to re-negotiate the terms of the mortgage.  If unsuccessful, the Hedge Fund will encourage the Owner to sell the home, and will indicate the minimum dollar amount that they will accept to release the mortgage. They may also assist in negotiations with any junior lien holders. If a sale doesn’t take place, the next step would be foreclosure.

Pre-Foreclosure –  Owner is greater than 90 days late on payments and lender has started foreclosure process.  Purchasing a home in pre-foreclosure can be very stressful, particularly when you realize that the homeowner doesn’t really want to sell or move.  You are coming in trying to offer the Owner a way out, but a homeowner in denial won’t see it that way.  Don’t expect a large Bank to hold off the foreclosure process for you to work out a sale.   The difference here as opposed to a Short Sale is that the legal process to foreclose has begun. There may also be liens on the home, so you will be required to perform your own due diligence investigation.

Foreclosure – . When the owner of a home is 90 days late with mortgage payments, the lender will begin foreclosure proceedings.  How the lender proceeds with the foreclosure is governed by law, but there are 2 paths for them to follow (legally there is a third option that was just enacted into law in CT, but that is still too new to discuss here).

If there is a mortgage but no other liens, then the foreclosure process is handled directly in the Court, between the Lender and the Homeowner, with a Judge presiding over the process.

If, in addition to the mortgage, there are also liens on the property, then the process will involve a Foreclosure by Auction. At the foreclosure auction, the “junior” lien holders will have the ability to purchase the property, and potentially recover some of their losses.  The Foreclosure auction is handled by a real estate attorney, and there are no real estate agents involved. The sale is typically held on a Saturday, at the house.  You may recognize these sales by the white and black sign posted in front of the property.  Anyone may bid to purchase the home at the auction, including the junior lien-holders.  You might get a great deal on a home this way, but some “buyer beware” items to note:

  • If you purchase at auction, there may still be unreleased liens, and they will become your problem.
  • Large down payment required: 10% of the total of mortgage value and legal fees
  • Access to the home:  may or may not be vacant, you might now have tenants
  • Sight unseen- if still occupied, you won’t be able to inspect the interior of the home
  • Need to close in 30-45 days, no mortgage contingencies
  • Environmental issues – need to do your own due diligence

In the present real estate market (2014), the great percentage of homes going to auction in eastern CT have a market value that is less than the bank’s opening bid (amount owed on the mortgage plus legal fees).  If no one bids more than the Lender at the auction, the court approves the sale, the Lender takes ownership of the property, and all the junior liens are extinguished.  At this point the property is referred to as an REO, which stands for Real Estate Owned.  

Sales of REO properties most often include a real estate agent, but the Lender may also decide to market the REO through a large national auction house ( Auction.com, Hudson & Marshall, etc.) These auctions differ from the Foreclosure by Auctiondescribed above because the lender now owns the home, the property will be vacant, and the liens have been removed.

If you want to purchase an REO, since the Lender now owns the property, any negotiations to purchase will NOT require negotiations with lien holders (the liens are gone), so a sale can happen quickly and on an expected time-frame.  Generally, most REO Sellers will allow you to perform inspections, obtain mortgage financing, and may make repairs to the property to meet your loan requirements. This will vary from Bank to Bank, some will strictly sell As Is with no repairs, others will fix up the property before it goes on the market.