Bank Owned vs. Short Sale

Bank Owned vs. Short Sale

What’s the difference?

Bank owned means the property is already owned by the bank. It is also called “REO” (Real Estate Owned). It has been foreclosed upon and therefore has no liens recorded against it. Presumably, the bank wants to sell this property as soon as possible. Theoretically, they do not want to keep the real estate in their portfolio any longer then they have to. However, the impersonal nature of a file on an asset manager’s desk often means no priority or attention is given to a buyer’s offer.

Also, this does not mean a foreclosed property is being offered at “fire sale” prices. Some banks are trying to get at or near “market value” for their REOs. They often contract with real estate agents to sell some of this inventory, or it is offered to their high net worth customers, friends and investment groups. It is rarely listed en masse, and recent speculation is that banks have been holding back on releasing much of this inventory for fear of further flooding the markets and increasing the downward trend in prices.

A short sale is sold at a sales price that is less then the amount owned against the property. Because the payoff is “short” of (less than) the mortgage balance, the bank has agreed to take a loss.

I believe the term “loss” is debatable in that some of these properties were bought with a hefty down payment, with interest payments having been made for years. In fact, it is possible that if the seller’s actual investment were factored in – rather than just considering the balance of the loan – that the bank often has made a significant profit on its loan, while the seller is invariably the one getting the “short” end of the stick.

There is also documented evidence that some underwriters are not motivated to negotiate short sales because they can be reimbursed through FIDC (taxpayer) guarantees on  foreclosure losses.

Buying a short sale can take much longer then buying a bank owned property because the bank — and any other lien holders — must approve the short sale. This requires the seller to get approved for the short sale much like they had to originally get approved for the purchase loan and prove they could afford to make the payments; now they must show the bank they have no way of continuing to make their mortgage payment.

If you are a seller and contemplating a short sale, consider that New Mexico is a “deficiency judgment” state and the bank can come back to you, even years later, with a deficiency judgment. Only a Waiver of Deficiency Judgment by the bank will nullify that possibility.

What should a buyer do?

It is my experience in the Santa Fe area market that there are as many — if not more — “good deals” to be made with MLS-listed “motivated sellers” as there are looking at – and often wasting time with – REOs and short sales.

No buyer wants to pay more than the best price he can get; nor should he! No one wants to be the one who buys at the top of the market – although no one knows the top, or the bottom, until it has passed.

The best way to buy a house is to first know what you want. Then, ascertain your financial comfort level and the costs associated with a loan, i.e., get pre-approved and know your loan options and costs associated with ownership of a particular property (taxes, HOA dues, utility costs, etc.). Next is to understand relative local and current market values and the quality and condition of the property and, finally, to negotiate for the best possible price.

As experienced Buyers Agents, we at GreenRoads will help you locate a home you love, understand the Santa Fe real estate market, and represent your best interests. We look forward to working with you through the whole process, including REOs and short sales should you decide to pursue a property with that status.

By Aysha Griffin, Certified Short Sale and Foreclosure Specialist ©2010