Distressed Properties: Short Sales, Foreclosures, REOs
Foreclosures are a complicated matter and if these properties are of interest to you, we highly recommend that you seek the guidance of a seasoned realtor who is very familiar with how these transactions proceed.
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There are 3 stages to the foreclosure process. At each stage, the real estate is thought of as a distinct type of property that a new purchaser can acquire:
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"Pre-foreclosures", also known as "Short Sales", are still owned by the borrowers who are in default on one or more mortgage loan payments. A short sale is a sale of real estate in which the proceeds from selling the property will fall short of the balance of debts secured by liens against the property and the property owner cannot afford to repay the liens' full amounts, whereby the lien holders agree to release their lien on the real estate and accept less than the amount owed on the debt. Any unpaid balance owed to the creditors is known as a deficiency.
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"Auction" properties have been posted for public sale and may be bought at the time of the foreclosure auction by arranging to pay the arrears -- plus other costs -- at the same time the lender legally takes ownership of the collateral.
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"REO" is the term for "real estate owned" properties by the bank, savings and loan or other lending entity after the foreclosure sale (or "auction") is concluded with no other purchaser buying the real estate.
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To summarize, a preforeclosure occurs when the lender initiates foreclosure proceedings as the result of a default. If the borrower cannot cure the default by paying the arrears, and does not sell the property, it is sold at a public foreclosure auction. If no one buys the property at the auction, it becomes REO and the lender is now the seller.
There is also a fourth stage for some properties. In the case of loans "insured" by a federal agency such as HUD or Fannie Mae, or "guaranteed" by the Department of Veterans Affairs (VA), the properties are eventually acquired by the government. When such properties are foreclosed by the mortgagees, the agencies reimburse the lenders for the loan amount and certain costs of foreclosure. The government then takes ownership of the real estate and makes arrangements to sell the properties to the public through contractors and Realtors.
You can see how at each stage, the owner is a highly motivated seller. Watching the progression of properties through one type to the next will allow you to understand when is the optimum time for you to seize the opportunity to benefit by helping others to solve the problems that have arisen from the borrowers' difficult circumstances.
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KELLY MITCHELL
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