The following column detailing the short sale process and REO transaction appeared in the January 4, 2011 edition of Essex.Patch.com. To go directly to the source, please copy and paste this URL into your browser: http://essex.patch.com/articles/process-plays-role-in-success-of-short-sale-bank-owned-home-sales
As we discussed in the last week's column, short sales and bank-owned homes, although similar in overall listing volume, differ significantly in their respective outcomes.
In 2009, according to the data from MRIS, Inc, only 14 percent of bank-owned homes that hit the Multiple Listing Service (MLS) failed to get to settlement, where as, 67 percent of short sales, met the same fate and likely contributed to even more bank-owned inventory in 2010 and beyond.
Why such a big discrepancy in the failure rates? Why are bank-owned homes settling quickly and easily while most short sales are doomed from the start?
Short sale process differs significantly from that of a bank-owned property on the market and, when combined with the inability of market participants to properly adjust to these differences, likely accounts for the increased pain for both short sale buyers and sellers.
Bank-Owned Property Sales Process
Typically, when a homeowner defaults on a loan and is successfully taken through the foreclosure proceedings by the lender's trustee, the property's first defining moment occurs at the foreclosure auction that takes place on courthouse steps. There, anyone can bid on the property and lender's sole goal is to recover as much of the outstanding loan amount as possible. In today's market, however, it is not an easy feat given the fact that most homeowners that default now are upside down on their mortgages.
Most properties do not sell at the auction and the lenders are forced to take them back. The home now becomes a part of lender's real-estate owned (REO) portfolio and, once the foreclosure is ratified by a judge, is physically owned by the lender.
Bigger, national lenders are not equipped to handle their swelling REO portfolios and usually hire third-party vendors known as asset managers whose specialty is the disposition of bank-owned inventory.
Once the home is transferred to an asset manager, he assigns a local real estate broker to handle the property. The broker is usually responsible for evicting anyone who might still be residing in the property; for hiring contractors to do clean up and needed repairs; and pricing and marketing the new asset.
Before a bank-owned home is listed on MLS, it goes through a vigorous evaluation process. The assigned real estate broker will prepare a broker-price opinion (BPO) based on property's condition, recent sales, and current competition. The asset manager may request a separate valuation from other local brokers or licensed appraisers to validate listing broker's assessment of current fair market value.
Although the lenders would like to recover as much of their losses as possible, the fair market value is usually the driver behind the initial list price of an REO property when it hits the MLS.
Once on MLS and syndicated to hundreds of Internet sites, it is available to buyers and their real estate agents. A prospective purchaser and her agent can now make an appointment to see the property just like they would any other available home.
The offer process is also fairly similar to a non-distressed transaction. The buyer's side submits a standard contract to the listing agent with any necessary bank addenda who in turn submits the offer, usually via an online portal, to the asset manager.
The asset manager reviews the offer and evaluates it based on the net to seller, type of financing, settlement date, and the amount of earnest money deposit, amongst other factors. Buyers of REO properties should keep in mind that although the bottom line to seller is a very important factor in lender's decision to accept or decline an offer, it is not the only one. There are other variables in play.
Once the offer is accepted and the contract is ratified, the parties move toward settlement in almost the same manner as in a regular transaction: buyer secures financing, goes through the home inspections, if any, all while title-work is prepared by an attorney.
There are two main reasons for a potential derailment of an REO transaction.
First, if the foreclosure paperwork was not prepared properly by the trustee when taking the property through foreclosure process, clean title might not be able to pass from seller to buyer. Given the high number of foreclosure filings, more and more properties are mishandled by foreclosure attorneys working on behalf of lenders.
Often times, title defects force the lenders to cancel the contract with the buyer and take the property back to auction. Needless to say, it is essential for any buyer of a bank-owned property to work with a title company that's knowledgeable and experienced in handling REO transactions.
And then there is the home inspection.
Bank-owned homes are always sold as is, possibly with inspections. Neither the lender nor its representatives have ever occupied the property and thus can not attest to the property's condition. The lender is also exempt from providing the buyer with either a property disclosure or disclaimer - a task mandated by Maryland law for other sellers.
Many buyers of REO properties, however, go into the transaction with the notion that once the home inspection is done, they will be able to ask the seller to do repairs or compensate the buyer based on the findings. That happens very rarely and, based on my conversations with local REO listing agents, accounts for most of the failed deals.
Buyers should be prepared to take the property in its current condition or, if the inspection reveals serious structural or mechanical issues, to walk away from the deal.
Even with the two main hurdles, potential title defects and negative results of the home inspection, buying a bank-owned home is a fairly straight forward process that mimics that of purchasing a regular home from a conventional seller. Thus, it is safe to expect a high success rate when involved in this type of transaction.
Unfortunately, it is not the case when it comes to the short sale process which we will dissect in the next week's article. Stay tuned.
Do you have any real estate or distressed property related questions? Do want them answered by a Maryland short sale expert? Email them to Vlad@BaltimoreRealEstateExpert.com. Selected questions and answers will appear monthly.