Why it's Cheaper to Buy Short Sales than REOs

By
Services for Real Estate Pros

Some months ago, I had a long conversation with a real estate investor about short sale properties vs. REO properties.  He said he didn't think there was much in the way of savings derived from buying homes through short sales anymore.  Instead, he said it probably made more sense for him to buy foreclosed homes and wait patiently to buy them through lenders' REO Agents.

I thought that was it.  I thought he had made up his mind on the subject and was just trying to politely tell me that he would no longer be needing my services, but then he added, "So what do you think about this?  Do you think I should start buying my investment properties as REO's?"

With me being a Short Sales Specialist, I'm probably a bit biased on the advantages of buying short sale properties vs. REO's, but, in any event, here's what I basically told him.

There are both advantages and disadvantages to buying short sale properties.  The major disadvantage of buying a short sale property is that there may be undisclosed liens or problems with the title.  When you buy a preforeclosed property; you're buying it as is.  There is always a risk that the distressed seller may have acquired liens (e.g. unpaid hospital bills or unpaid contractors' bills for home repairs) while they owned the property.

Another downside to buying short sales is that they frequently take a long time to get approved and to close.  Most short sales take on average 3 to 6 months to close, and if you don't have the patience of a saint, you're probably going to lose interest in buying the property before too long.Waste Basket of Money

However, just like there are risks involved in buying short sale properties there are also benefits.  One of the biggest and most important benefits is the fact that short sale properties are usually cheaper to acquire than REOs.  If you wait for the property to be foreclosed on and placed on the lender's REO list, then you're going to usually pay more to own the property. 

The reason for this is the fact that by time the lender legally takes the property back he has already incurred an excessive string of additional fees, e.g. property taxes, HOA dues, hazard insurance premiums, mortgage insurance premiums, lost interest, attorney fees, property maintenance costs, real estate commission, etc. 

Naturally, the mortgage company plans to recoup these fees, and to help accomplish this goal, the lender subsequently raises the sale price of the REO property.  Depending on whether you're buying foreclosed property in a state that practices non-judicial foreclosures or judicial foreclosures, you could unknowingly end up paying an extra $10,000 on up to help reimburse the lender for these expenses.

Well, that's my take on the subject.  If you disagree, please post your comments.  I'm really curious to hear your thoughts on this subject.

 AUTHOR CREDITS:

"Short Sales:  Reason Why They Take So Long," from Tracy Miller's Blog:  Short Sales & More!  (Material Copyrighted 2008. Tracy Miller; All Rights Reserved.)   Tracy's blog published at Active Rain Real Estate Network (www.activerain.com/blogs/tracyshortsales).  It is permissible to reprint, repost, reblog this material. 

Comments (21)

Bo Hussung
Bell Title /Triserv LLC - Nashvle, TN

Tracy, I am not sure I follow, a quick abstract will take care of the undisclosed leins and a good title agent (like Cogent) can do it very quickly and for very little (less than $300.00) plus when it does close, we alreay have the abstract, so the title committment is easy and abstracts are good for usually up to 90 days. The other however is your logic makes sense except when the property is in a declining market. Right now, on a national basis inventories are bloated and probably going to get worse. As it it stands if no home were added to the current inventories, it would take 13.5  months to move them. Obviously, a bank or lender is not going to hang on to a property that long, but the more invntory, the lower the price, and the bigger the loses. Banks are desparate to raise capital for their ratios to remain in line with Federal requirements, otherwise the risk being tkaen over by the FDIC. So it is a conundrum for the banks and lenders. The losses are in the 40 to 60 cens on the dollar range and they do not want to be in the real estate business. It is not part of their footprint.

The good news for you is that it does create opportunities to help with financing and with this arsenal of info, you can negitiate the short sale faster. I would imagine the bank does not lose as much money and is not forced to go through the loss mitigation process if they get it off the books faster. Therfore the short sale is a better option.

Thanks

Bo

Dec 07, 2008 02:38 AM
Tracy Miller
Canton, MS
S. S. Specialist

Colleen:   I appreciate you taking the time to read my blog. I'm glad you found my post interesting. 

Bo:  Thanks so much for sharing your experiences and feedback on short sales.  With you being a Title Expert, I really appreciate your input on this subject, and I'm glad to hear that you believe there are less risks involved in purchasing short sale properties, especially in terms of there being few, if any, title risks. 

I'm sorry I didn't provide more information on the subject of titles here.  For the sake of brevity and to ensure easier reading, I chose to limit my words, but what I probably could have also added here was the fact that with short sale properties, these buyers will have the responsibility of paying off any newly discovered liens produced from a title search (in order to purchase the property), and with REOs, these buyers won't encounter this problem because the foreclosure will wipe out any other lien holders helping to guarantee a clean title.  So, in other words, I believe short sale properties pose special title risks that REOs won't.

Also, I'm not sure if in your last several paragraphs you were saying that lenders are currently more motivated to approve short sales because of the depressed real estate market.  If this is the case, I'd like to just say that I haven't witnessed this in my experiences working with them.  I still find it just as much hard work to get short sales approved today as I did several years ago.  But, hopefully, this will all change.

Bo, thanks so much again for sharing your comments on this subject.  You've helped to make me a lot wiser on this topic.

Dec 07, 2008 11:41 AM
Sidney Kutchuk - Realty Works Temecula Kutchuk - Realty Works Temecula
Realty Works Temecula - Temecula, CA
Realty Works Temecula

Tracey, Great blog.  I think sometimes that when the 1st trust deed holder forecloses the 2nd goes bye bye and has no recourse, right?  Then the 1st can sell for less after foreclosure!!!!   Hey, I tagged you for the Christmas MeMe, if you have not received it yet....go to my blog and see!!!

Dec 08, 2008 01:47 PM
Craig Rutman
Helping people in transition - Cary, NC
Raleigh, Cary, Apex area Realtor

I was the foreclosure king in my office for the longest time. It seemed that every buyer that walked in looking for a foreclosure asked for me! I thought I had found my niche.....Then the Short Sale started to become popular....Both have benefits and drawbacks. With all the great info you've posted Tracy, I've learned more about short sales from you than I have anywhere else! Brains - Beauty - Short Sales! What a woman!

Dec 08, 2008 02:27 PM
Doug Jordan
Pacific Mortgage Group - Honolulu, HI

Good Post Tracy, I'm just curious to your ratio of closing on the short sells? Around 40%? Because of the wait, do most people usually find something else before the deal is done? And yep lenders aren't crazy about them either that I've seen.

Dec 09, 2008 12:06 AM
Charles Gardner-Realtor/Investor
ZIP Realty, Inc-Houston District - Humble, TX

Hello Tracy,

I'm impressed with the information and very glad I found your blog.  I have supported buying REO's but your information gives me a chance to rethink my opinion.  I'm looking forward to becoming more attuned to short sales and to reading your posts.

Thanks

 

Dec 12, 2008 10:00 AM
Adriana West
Home Expo Gallery, LLC (Keller Williams) - Roswell, GA

I enjoyed your post on Short Sales, and I greatly agree with your opinions.  In my experience as a Short Sale Specialist, I can only disagree with one point - the one about liens.  In my own blog, I talk about how I avoid that situation myself by getting the title cleared days before closing.  My post is about the last minute scramble one of my sellers (yes, the seller, not the buyer) had to run around to get a money order to clear a lien and getting the letter from the lienholder to clear it at closing.  The lien is the responsibility of the seller. 

Liens are also a problem for the much advertised tax sales too.  In that case the seller, the true owner of the debt, is long gone and the lien is owned by the property so that the buyer has to clear it.  And they are almost always found at the last minute at the closing table.

Another point you did not make is that a Short Sale property is often in better condition than an REO/Foreclosure.  When a homeowner is foreclosed, they often depart in anger and damage the place on the way out.  A Short Seller has the incentive to keep the property in good condition.

But your point on the financial advantage is the key one here.  The buyer usually gets the property for a lower price (and in better condition) than they would a few months later buying it after it has been foreclosed and all the foreclosure costs are wrapped into the price.

Adriana

Dec 13, 2008 02:17 AM
Tracy Miller
Canton, MS
S. S. Specialist

Jane:  Thanks for reading my blog.  You're right.  If the first and second lien holders aren't able to reach an agreement/compromise on the amount of losses they'll accept, then the first can simply foreclose on the property and wipe the 2nd one out entirely, and the 2nd will get nothing. 

Also, I received your tag.  I will follow up on it before the end of the day.  Thanks so much for thinking of me.

Craig:  I appreciate you taking the time to read my blog and sharing your thoughts on the subject.  I'm really flattered to hear that you believe you've picked up some helpful information by reading my blog, especially since you're a much sought after Short Sales Expert in the state of North Carolina.

Doug:   I'm glad you found my post helpful.   You asked me roughly how many short sales do I see close?  If I'm working with a real estate agent and negotiating on behalf of his/her buyer who will use the property as their primary residence, it's around 35%.  When I'm working with experienced real estate investors, the ratio of short sales that I see close, especially in the past couple of months, has been much higher, around 70%.

Charles:  I'm so glad you had time to read my blog and that you found the information helpful.  Please stop by again.

Adriana:  Thank you for taking time to read my blog.  I appreciate receiving feedback on my posts from real estate professionals like you who are also very involved in the short sales field.  You raised a concern about my comments on liens and so did a previous reader, Bo Hussung, who is a National Title Expert.  I responded to his concern, which I believe is similar to yours, so I unfortunately won't write about it again here, but please feel free to go up a couple of comment lines to review my response to Bo.

Also, I find it interesting to hear that you believe short sale properties are normally in much better condition than REOs.  Unfortunately, in my experiences at managing/negotiating hundreds of short sales, I haven't normally found this to be the case.  Many distressed sellers are starting to realize more and more that lenders are a lot more motivated to approve short sales when the property is damaged.  Subsequently, I've been involved in many short sales where the property was damaged by the homeowners themselves --- where they left weeks of garbage and feces inside the house; left behind dead dogs, jabbed holes in the walls with ice picks, left graffiti on the walls, etc. 

And in other instances, the homeowners claimed the property was damaged after they abandoned the house, which is probably true and occurring more often these days as a result of the rising copper prices.  Many drug addicts break inside the vacant short sale properties and strip them of valuable copper tubing, pipes, from behind the walls in the kitchens and bathrooms so they can later redeem the metal for cash at a local scrap metal yard.

Dec 14, 2008 09:36 AM
Ellie McIntire
Ellicott City Clarksville Howard County Maryland Real Estate - Ellicott City, MD
Luxury service in Central Maryland

Tracy, your posts are very informative and helpful. I keep checking back to get as much info as possible. Keep it up.

Dec 16, 2008 12:32 PM
Anonymous
Condition of Short Sale vs REO homes

Hi Tracy:

I've never experienced one case of intentional damage in any of my short sales, I wonder why my cases are so different from yours.  I have seen many cases of what you describe in Foreclosures, and in a few rentals I'm dealing with, but never with a Short Sale.  It is true that many of the properties are damaged in some way due to the lack of funds to keep up the maintenance - problems with the HVAC, a damaged section of siding, etc.  And that does make the lender more likely to accept the short sale.  I council my sellers to take good care of the place as best they can financially because that increases their likelihood of making the short sale work, but not to invest in making significant repairs because it would have two negative consequences: make the lender want to push for a higher price, and make the lender wonder why the Seller put money into the house instead of their back mortgage payments.

I have not had a case of after-departure damage either, but have heard of many - for the very reason you mention, the price of metals.  That is why I push my sellers to stay in the property until the last moment.

Adriana

Dec 17, 2008 01:17 PM
#12
Tracy Miller
Canton, MS
S. S. Specialist

Ellie:  As always, I appreciate you stopping by and giving me feedback on my work.

Adriana:  Thank you so much for returning.  I appreciate you sharing your thoughts and insights on short sale properties vs. REOs.  I'm glad to hear that you're not coming across the assortment of damaged short sale properties that the list of investors I've worked with have stumbled on.  It sounds like you're having a lot of success in protecting preforeclosed properties through strong talks with your sellers.  Keep up the good work.

Dec 22, 2008 11:23 AM
Christine Donovan
Donovan Blatt Realty - Costa Mesa, CA
Broker/Attorney 714-319-9751 DRE01267479 - Costa M

The other thing is that there's often less competition for short sales than REOs because fewer people want to wait on a short sale.

Dec 22, 2008 03:12 PM
Barbara-Jo Roberts Berberi, MA, PSA, TRC - Greater Clearwater Florida Residential Real Estate Professional
Charles Rutenberg Realty - Clearwater, FL
Palm Harbor, Dunedin, Clearwater, Safety Harbor

Tracy - That was a great list! I am with you on the sale of short sales! We have one closing next Monday - it has been going since August, but it is indeed a wonderful savings!

Dec 22, 2008 11:13 PM
Loan Survivor Real Estate Financing Expert
Purchases, First Time Buyers, Pre-Approvals, Refinance - Birmingham, MI

Good post and I second one of the other repliers that a short sale is also usually in better shape than a REO:)

Dec 26, 2008 03:39 AM
Jim Dvorovy
Cutler Real Estate - Canton, OH
REALTOR - Canton Ohio Real Estate

Tracy - What do you do in incidences where the seller abandons the property instead of continuing to live there? It is a very emotional time for the sellers, and they often look out for that much needed security for their family to have a place to live. Not wanting to get kicked out at the last minute and not have a secure place to live, they often abandon it instead.

Since the listing agent is not an asset manager, there are no funds available to winterize the property, change locks, mow the yard, clean the gutters, pay the utilities, etc. I am wondering how you or your team handles this?

Dec 28, 2008 08:15 AM
Kent Anderson
Coldwell Banker Resort Realty, Sandpoint, Idaho - Sandpoint, ID
from Schweitzer to the Lake
Tracy - I prefer short sales also. My experience is that the properties are in better condition with a short sale. REOs may actually look as good or better than a short sale property, but, due to the vacancy of the home, potentially dangerous internal problems can arise. I appreciate your attention to these issues...I presume short sales and REO'S will become a larger part of my portfolio in '09.
Dec 28, 2008 04:27 PM
Franklin & Brentwood, TN Homes Mike Nastri
Keller Williams Realty - Franklin, TN
It matters to us as much as it matters to you.

Tracy,  You made many great points, so I decided to follow your blog.  So much good information here.  I will refer back and look forward to your next blog.

Dec 29, 2008 05:00 AM
Gail MacMillan
Titusville, FL

Good Morning Tracy- This is an excellent post and I am going to reblog it.  2009 will have to be a year of changing my attitudes about short sales.  You are ahead of many in this field.  Best wishes for continued success in 2009.

Gail MacMillan Titusville FL Real Estate

Dec 30, 2008 12:33 AM
Anonymous
Duffy Tarantino

I can not speach for your area of the country but here in Las Vegas (3rd highest in Foreclosures). I have had three instances where my buyer tried to purchase as a SS and then gave up only to get the home for much less as an REO.

Once the second is gone the first can sell it for less plus now they need to sell it before they only wanted to sell it.

 

Love the rest of your site.

Jan 30, 2009 02:30 AM
#21
Anonymous
Alex Bogdanoff

I've done dozens of short sales as Buyer & Seller rep here in the DFW area. As an investor/Realtor one of the biggest benefits of a short sale vice REO purchase in this area is that a short sale seems to warrant less competition from other investors. It seems there are many internet sites that provide REO listings & more buyers look at these properties than would know of the short sale. A short sale seems to provide more exclusivity with the bank vice the often standard request to "Submit Highest & Best Offer" when there are mutiple offers with the REO property.

A second benefit for me to avoid REOs is that the major agencies that list the REOs, especially in the Ft Worth area, are very sleazy & provide terrible customer service to the Buyers & their agents. Agents in this area will know who I mean. Its to a point that I now avoid showing their listings because I NEVER land a deal with them after putting in many hours of paperwork. I HATE working with them!!

Briefing your investors on this aspect may keep them on the short sale bandwagon. I like your website. Good luck.

Jan 31, 2009 03:02 PM
#22