Valerie Bomberger

Understanding Foreclosures 

& Short Sales

I get questions all the time by buyers about Foreclosures & Short Sales. I have included some of the questions below and the answers I give. I hope this page is of help.

What are Foreclosures & Short Sales?
A foreclosed property is one where the owner has been unable to meet monthly mortgage payments and the property is now owned by the bank. A foreclosed home is also referred to as an REO, or a Real Estate Owned property. A foreclosure is simply a home that has gone through the legal process of repossession by the bank. The property then is disposed of through the asset management division of the bank or through a third-party asset manager.

 Although some REOs may be vacant or need repairs, they frequently look just like other homes on the market. Typically, they are sold in as-is condition, but they are often in move-in condition which may make them appealing to many buyers. Be aware, however, that the buying process of an REO is not exactly the same as other home purchases. Working with an agent skilled in the REO transaction will be a huge help answering questions and streamlining an REO purchase experience. Banks are always motivated to get these properties off their books, and they usually hire a real estate agent to list it for sale. That means you can expect to find REOs listed alongside homes being sold traditionally in the same neighborhood. A short sale is when a homeowners property is worth less than what their mortgage is. They   sell “short” by getting the mortgage lender to accept less than what they owe to clear the mortgage debt.

What is the difference between a Foreclosure and Short Sale
A REO is a foreclosed property that is now owned by a bank. A short sale is a transaction that happens when an owner owes more on the mortgage than the home is currently worth and the bank agrees to a sale for less than the mortgage balance in order to avoid a foreclosure. These properties belong to the current homeowners, not to the bank. The number of short sales has increased in recent years so you are likely to run into properties like this during your home search. Like REOs, short sales can be complicated, so you will want to work with an agent experienced and trained in negotiating these transactions.

Short sales look like other listings, but they likely have a lower asking price than other comparable properties. The term “short sale” is a contradiction because the sales process can take longer than a traditional purchase. However, because more and more short sales are appearing on the market, lenders are streamlining their procedures making it less time consuming. Data shows the amount of time necessary to close a short sale has decreased in recent years.

What makes a Foreclosed Property a good deal?
  • You can often expect to pay below-market price for the property.
  • You can secure financing for your purchase with a traditional mortgage the same as you would a “normal” home purchase.
  • You can do inspections, purchase title insurance and make your mortgage arrangements before completing the purchase.
What is the bad news when buying a Foreclosed Property
  • You will find that many banks will only sell these properties “as-is”, meaning you will be responsible for paying for necessary repairs.
  • Banks rarely negotiate the price they’ve set on foreclosed properties. They’ve researched the market and have set a price that they find reasonable and are very unlikely to go lower. However, since most REO properties are priced below other homes for sale in the same neighborhood, this isn’t necessarily a bad thing for you as the buyer.
  • The purchase process frequently takes longer than a traditional home purchase.
Tip on Foreclosure and Short Sales Process
When you shop for an REO, consider the same things you would in any other home – location, condition, features and price. Foreclosures are often in poor repair, so be prepared to put sweat equity into the home or to hire a contractor. Banks seldom do any more than make repairs required by federal lending standards. REOs are sold “as is,” which means buyer beware. Before you put a contract on an REO, take some pictures of areas that need repair and try to interview some contractors to get an idea of what it would cost to fix them. Talk to your lender. Federal insurers such as FHA and VA have home improvement loan programs that may help.
How to buy a foreclosure (REO) or Short sale
There are two ways to buy a foreclosure – through auction and on the open market. Until the home has completed the foreclosure process the homeowner has every opportunity to save the home, but once it’s over, the home is available for auction. Auctions are announced in local newspapers so you know when a particular home will be put on the block.You’ll have only a little time to drive by, and you will not be allowed inside as the home is not open to the market. Contact your real estate professional for advice. He or she will help you research foreclosed properties of interest, or you can go through the county records yourself to learn more. At auction, the home goes to the highest bidder and the proceeds go toward the remaining mortgage debt. If you want to buy at auction, be prepared to bid against other investors on the courthouse steps and to pay cash for the home if your bid is accepted. Don’t let excitement rule you; stay within your planned maximum bid. If the home doesn’t sell at auction, the bank takes the home back as an REO, or real-estate-owned property. From there the property is typically turned over to an asset manager and put on the open market. Once the REO is listed with a real estate broker, you can buy it just as you would any other listed property, with a mortgage loan if you prefer. But, be prepared for out-of-the-ordinary delays. Asset managers may be handling hundreds of properties in your area. They may be unresponsive to low-ball offers, or refuse to negotiate at all. Their job is to get the most return possible for the bank.
Things that can go wrong with a Short Sale 
  • Second mortgages: It is possible that a second lender might not agree to the same terms that have been set by the seller and the primary lender.
  • Mortgage Insurance: The mortgage insurance company is another entity that must agree to the short sale
  • Other liens on the property: A lien is a claim by a third party on a property for money owed. Liens must be addressed before the home can be sold whether or not the transaction is a short sale.
  • Government-backed loans: If the seller’s loan was an FHA or other government-backed loan, it can cause delays and challenges because the government must approve the sale arrangements.
  • HOA’s: HomeOwners Associations may have transfer fees, document costs and unpaid dues. All of these must be addressed and a lender may or may not agree to pay these expenses.
You need patience and persistence in closing a short sale. A couple smart tips for short sales include hiring an agent experienced in this area and getting prequalified for your mortgage. Have a home inspection done, but be aware that you will likely be responsible for all repair costs, so weigh that against the reduced price of the property. You also need to know who is paying the agent’s commission and if you have to make up any differences there.


 Let Valerie Bomberger, ABR , AHWD with REMAX Harbor Country help you in the home buying process and answer questions on Foreclosures & Short Sales.

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