Your Exceptional Life

In my travels, I’ve noticed that there are terms out there, peculiar to this market, that are bandied about, but widely misunderstood.  Not to worry, today I sort them out for you.

First up, the term the started this mess REO.  It means, Real Estate Owned.  That simple.  Now how does that translate into the real world?  Real Estate Owned is actually a line item on a business’s balance sheet.  It is considered an asset.  Cisco has a line item for Real Estate Owned.  Pepsi has a line item for Real Estate Owned.  McDonald’s has a line item for Real Estate Owned.  The acronym has become a noun in today’s market, meaning the same thing as bank-owned.  When the balance sheet belongs to Citibank or Chase or Bank of America, the REO is bank-owned.  Cisco and Pepsi and McDonald’s do not market their REO properties as such, even though that’s what they are.  When those sorts of large corporations own real estate it is not “distressed”.  (Although a lot of property owned by a lot of large corporations today is upside-down)  When a property is respossessed by the lender and then placed back on the market, it needs to be disclosed that it is owned by a bank, or bank owned.  Pepsi and McDonald’s do not need to disclose in the marketing that they own the property, even though it shows up on that line item of their balance sheet.

When a bank sells one of their REO’s, (also called a bank owned property) they are exempt from a lot of the disclosures that a normal seller would be required to provide in the State of California.  The bank has probably never seen the property.  They don’t know if there is a leak in the roof.  They don’t know if the property previously had a termite infestation, or if water runs into the garage when it storms.  They don’t know if Uncle Fredo passed away in the third bedroom after a long illness.  I had one last week where the insurance company wanted to know the age of the roof.  That kind of information is not available in the sale of a bank owned property.  Two years ago I would have told you that those inspections were worth about $40,000 in the marketplace, depending on the value of the home and what area it was located.  Today, the market has adjusted and while I still believe them to be valuable, the market is no longer placing value on them.

It is essential that the buyer does their inspections on bank owned real estate.  It is also essential to have a competant inspector complete a home inspection on your property.  I’ve seen P-traps pulled out of the sinks, electrical yanked out by bitter former owners, disconnected appliances and everything in between.  Unless the buyer is a contractor, it is incumbant that they purchase a home inspection.  One of my buyer’s recently renegotiated with the bank after the inspections were completed for a $100,000 price reduction, and got it!  That’s the benefit of working with a Realtor experienced in bank owned property.

The next term is Short Sale.  Short Sales are not the same as a bank owned property, they are not REO’s either.  In a Short Sale the borrower is still in possession of the property.  That owner will provide the new buyer with full disclosure on the property.  The bank is being asked to take less than what is owned as satisfaction of the obligation.  In the last three years, banks have done a terrible job of handling these transactions.  Many real estate agents don’t understand how to handle them either.  In order to consider a Short Sale, the bank has a large package of information that they require, including all of the seller’s financials.  If the seller has access to funds, the bank will ask them to bring those in to escrow.  As an example, the seller is selling a piece of investment property and they are a businessperson with $250,000 in an investment portfolio.  They owe $750,000 on the property but in today’s marketplace they can only get $560,00 for it.  The bank is going to ask them to bring in the short fall.   Conversely, if it is a owner occupied property and the owner has lost their job and can no longer make the payments, the bank will review the seller’s financials, see that they are maxed out and make the Short Sale.

There are three different ways a Short Sale can come to market.  As a pipe dream, the package submitted or fully approved.  They don’t call it a pipe dream, but the listing agent has brought a property to the marketplace with no idea what the bank will accept as a settlement.  Sometimes the banks require an offer before they will look at the package.  These are the toughest ones to get to close.  A lot of the time these Short Sales are grossly underpriced just because the agent needs an offer to work with.  They don’t care if that offer closes or not, the bank won’t give them a pay off number without an offer.  I think this is a lousy practice on the part of the agent and the bank.  I just took over a property last week that had been priced at $500,000 on a Short Sale.  The offer had been accepted by the seller but the bank wanted $575,000 and the buyer wouldn’t come up the last $75,000.  In doing my research, the bank was right, the property was worth $575,000 and the agent grossly underpriced it, costing the owner the home and all the credit damage that goes with that.

I don’t believe there are deals in Short Sales.  The Short Sales I see show a lot of deferred maintenance.  Many times the sellers don’t bother to stage the home or even clean it up.  Some of the dumpiest homes I’ve seen have been Short Sales.  Things that were so bad that I would be embarrassed to put my sign on them if I weren’t advertising them as a fixer upper.  If the seller isn’t making payments during the Short Sale process, the possibility of it becoming foreclosed is always looming.  The default department does not stop the process because the seller is attempting to Short Sell the property.  I’ve seen many Short Sales crushed two weeks before close because the bank took the property back.  Short Sales are not for the weak of heart.

Hopefully this has helped demystify the difference between a bank owned property, an REO and a Short Sale.  Kind of makes you wish for the good old days eh?