What you should know about REO vs Standard vs Short Sale

The homes for sale in Temecula, Murrieta and French Valley areas of Riverside county can be put into 3-4 main categories.

This image provides an example of the types of sales in French Valley Winchester California for the previous 30 day period.

1)      Foreclosure properties. When a bank has taken a property back they refer it as Real Estate Owned or REO. When a borrower has missed several payments, the note provides a mechanism whereby a trustee authorizes the sale of that home at public auction (called a Trustee’s Sale) – the proceeds of which are applied to the outstanding balance of the note. If a minimum “reserve” amount is not met at the auction and it does not sell, ownership of the property is transferred to the lender and it becomes an REO.  REO  properties represent about 31% of the sales last month. Since ownership is clear and the bank’s decision maker has already been assigned to liquidate the property, these transactions can typically close 30-45 days from the acceptance of an offer.

2)      Short Sale properties. When the home owner wants/needs to sell but there is not enough equity in the property to pay off the note(s) and the seller’s closing costs, the seller (through the listing agent) petitions the bank(s) to release the lien(s) on the property and the liability for the note for an amount that is less than the remaining balance on the note. The seller may or may not be in default on the note (if they’ve missed more than 3 payments). Because additional approvals need to be obtained from the seller’s lender, the seller will accept a purchase offer “Subject To” Short Sale approval(s)). Because the seller’s acceptance of an offer typically indicates the beginning of the approval process with the seller’s lender, these transactions can take 3-6 months to close. It’s also possible that the seller’s lender will not approve the Short Sale at all. Short Sale  properties represent about 35% of the sales that closed last month.

3)      Standard Sales. These can be broken into 2 groups. (Data on New Home sales is not always entered in the Multiple Listing Service database and represents a fairly small percentage of sales. So, it will not be addressed in this discussion.)

1. Standard, Owner Occupied, home owner sales. The owner has equity and is able to negotiate his own selling price. The owner is likely still living in the property. This was the “norm” up until 5 years ago. These transactions can typically close 30-45 days from the acceptance of an offer. These  properties represent about 8% of recent closings.
2. Corporate owned. An investor has purchased a property (either at a Trustee’s Sale or from a bank as an REO in need of repairs). They typically put in new carpet and paint, make any other necessary repairs and then sell it right away. They, like the traditional standard home owner sale and the REO, are looking to sell for as much as the market will support. The owner has equity and is able to negotiate his own selling price. These transactions can typically close 30-45 days from the acceptance of an offer. These  properties represent about 22% of the recent closings.

So What’s the Difference??

I actually got some unexpected results while doing the research for this article.

My assumption was that Short Sales would be “trading” for a little less in the market because of the difficulty associated with them on both the buyer’s side and the seller’s side. I was surprised to find out that they’re keeping pace with the REOs. As expected, Standard Sales (which have either been maintained due to pride of ownership or have had a corporate investment made in paint and carpet) are trending higher than REOs and Short Sales.

This chart represents sales in Temecula and Murrieta California that were 4 bedroom 3 bath and less than 3,000 Square Feet.

Originally posted on the AimREG.com blog