This is part two of the series REOs vs. Short Sales and today I want to discuss what benefits and disadvantages REOs and short sales offer the home buyer.

It’s all about Price… Or is it?

I mentioned in the earlier post that most home buyers mistakenly believe a short sale is a better deal and more deeply discounted than an REO simply because the word “short” appears in the term. This is a mistake. The truth is that home prices are determined by comps – comparable properties around the home and then adjusted for price. Ideally, the way you should determine if a home on the market is a bargain is by getting your Realtor® to get you a comparative market analysis. This will show you the sold prices of homes in the neighborhood that are similar to the one you are considering buying. It will also show you the asking prices on all other homes that are currently active listings.

Most REOs are priced on the low end. In fact, I have seen many that are grossly underpriced to encourage multiple offers and as such command a higher than asking price. So be sure to ask your Realtor® for a CMA.

As compared with an REO where the home buyer knows the bank’s rock bottom price, with a short sale one can never be sure. This is because the listing agent who is advertising the property and has put it up for sale has done so at the request of the home seller. Since short sales require the bank’s approval (to forgive the mortgage principal) the appraisal or Broker Price Opinion has not been done yet. It is only after the bank receives an offer do they sound out a real estate agent of their choosing to give them an idea of what the house would sell for. The price you see on the tag is not what ultimately the selling price, which leads nicely into the next topic.

Escrow and Other Timelines

To really find out what the bank wants for the home takes time. The biggest difference between an REO and a short sale really is that a short sale can take much, much longer. The reason behind this is obvious – with an REO the lender has already requested an appraisal and knows what the property should sell for in its current condition and has priced it as such. With a short sale, that entire process of getting an appraisal is yet to be done. Also, with a short sale, there has to be a reason for the lender to approve it. Since the lender would be forgiving the principal on the mortgage with little repurcussion for the homeowner, the home owner is required to provide bank statements, tax returns and so forth to prove genuine financial hardship. The simple fact that the house has lost value is not enough. This takes time as well.

Perhaps the best thing homebuyers can do is decide how long they are willing to wait and start the home search as soon as that period is up. There is even a short sale addendum that limits the time home buyers wait for a response. Although response times seem to have become shorter, it is still in the home buyers’ best interests to decide a timeline for themselves and stick to it to find a good discounted house.

Escrow timelines for short sales begin the day approval is sent over by the bank. This is usually when the home buyer has to start the loan process with his bank. REO escrow timelines start with the acceptance of the offer by the bank. Be forewarned, though: banks are notorious for taking all the time in the world to get back to you regarding your offer, but they take the timelines they give you – the home buyer – very seriously. They are known to include heavy fines in their offers for delayed closing of escrow, so be sure you can close before you remove contingencies!

Inspections & Disclosures

As every real estate investor knows, homes that smell cost less. The idea really is to find out what causes the smell. Of course, I’m using figurative speech here, but the truth is that with both short sales and REOs one might never know what exactly is wrong with them. Inspections thus become imperative. The reason is that the bank has never set foot in the house it has listed as an REO. With a short sale, you have a slight chance that the home sellers will be honest about what needs repair, but they are trying to get out from under the house and I wouldn’t count on any huge disclosures. The problem is that with both thes situations, the sellers have been under financial duress and so have not maintained the property. There are probably many issues of deferred maintenance which you as the home buyer should at least know about, so hire a good home inspector and leave nothing to chance.

So there you have it. Ultimately, I think it really comes down to a choice for the home buyers to decide how they can acquire a home which needs little work, in a good location that will appreciate as fast or faster than other homes in the area for the least money today. But remember that Realtors® are your biggest allies in this regard. Happy home shopping!

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