This is a historically significant time to be purchasing property. With interest rates at their lowest on record and home prices now at 2001 levels in Sonoma County, buyers are being told that THIS is the time to buy property. It is true that today's buyers are in a very unique situation. These two factors working hand in hand allow for your dollar to go a great deal farther than it ever has.
Whether speaking casually with friends or when meeting a prospective buyer at an open house, one of the most frequently asked questions I hear is "What is the difference between short sales and REOs?" This is an important question in this housing market. In the first quarter of 2010, short sales and REOs accounted for 59% of all single family residences sold for under $500,000 in Sonoma County, CA.
In a short sale, the homeowner owes the bank more than the property is worth. If a home was purchased four years ago for $500,000 with a $400,000 loan. Today, the value of that home has decreased to $300,000 but the owner still owes the bank $400,000. If the homeowner presently needs to sell their home,, the only option they have in this case is a short sale. The reason it is termed "short" is the $100,000 still owed to the bank above today's fair market value will not be recouped by the bank. Any offers to purchase must be approved by the bank because they are settling the homeowner's debt based on a shortage of the amount due.
One thing to keep in mind is that due to the red tape and many levels of bank approval required for a short sale to go through, the process may drag on for months. A normal escrow usually lasts 30 days from start to finish. A short sale can take months to close and there is a chance that it may not close at all. Of course, there are exceptions to this rule and recently, some banks have been made great strides in drastically decreasing their lengthy short sale approval processes.
If the bank fails to accept any offers after a period of time, the home goes through the foreclosure process and is then becomes the property of the bank. Once this happens, it is referred to as an REO (Real Estate Owned).
An REO is a bit easier and less of a time-consuming transaction. Because banks do not want to own property for very long, REOs are normally priced below market value. In the past, bank owned property had the reputation of being neglected and run-down. Some of them still are, but in recent months, banks have come to realize that though they are selling a property at a loss, they have an opportunity to bring it back into the fold as new business. I've seen a number of REOs, recently, which have been newly painted and carpeted with added stainless steel appliances in the kitchen. These efforts, in combination with loan pre-approval from the owning bank required when submitting an offer, have brought about multiple-offer bidding wars for these below-market priced homes.
For many years to come, these two scenarios will be a reality of this real estate market. I hope I have helped to clarify some things for you. The guidance of an informed real estate agent is imperative in this challenging market. Be sure to keep yourself in the know.