Foreclosures And Short Pays: Are They Really Bargains?

Buyers today are finding many more properties available on the market than there have been in a long time due to the present economic and financing conditions. What are the classifications of the homes offered for sale, and is one situation preferable over the others?

Properties are for sale under five different circumstances:

1. Seller with enough equity in the property to pay off his loan(s) and all closing costs from the proceeds of the sale. ("Traditional Sale")

2. Seller with no equity in the property (or not enough equity to cover all closing costs) who hopes to receive an offer which his lender will accept even though it will be less than the outstanding loan balance. ("Short Pay" or "Short Sale")

3. Seller who is late or has defaulted on his loan payments and whose lender may have initiated foreclosure proceedings on the property. If the net proceeds from the sale of the property are less than the outstanding loan amount, this will also be a Short Pay or Short Sale if the lender accepts an offer to avoid foreclosure.

4. Bank (or lender) owned property ("Real Estate Owned," "REO," or "Foreclosure") after foreclosing on a delinquent Seller. Also can be an investor who has bought a foreclosure property at a foreclosure sale (or from a lender after the foreclosure) and is reselling it. ("Foreclosure" or "Investor-Owned")

There are three drawbacks to buying a foreclosure: 1) The previous owner lost the property for financial reasons and probably did not maintain it as well as someone in a traditional situation. 2) Lenders are not required to provide a "Sellers' Transfer Disclosure Statement" to the buyer, or any other disclosures regarding the condition or material facts affecting the property. Foreclosure buyers must be especially diligent in their due diligence to avoid a can of worms. 3) The response time to a buyer's offer can be longer than a traditional purchase situation depending on how well organized the REO department is. The response time, however, is usually much faster than the response time for a short pay offer.

Sellers of short pay properties must give their buyers the Sellers' Transfer Disclosure Statement and disclose all known material facts about the property. Nevertheless, because of their financial circumstances, they usually do not maintain the property as well as someone with a traditional sales situation.

Because a short pay seller must have his lender's approval before he can close escrow, it can be a very long process. Each lender's protocol is a little different and may have multiple levels. Weeks or months can pass before a buyer receives a reply to his offer. It can be even more complicated if there are two lenders on property- one for the first trust deed and another for a second trust deed or a line of credit.

Because of the time lag in receiving a response from the lender, more than one offer can be submitted during the process creating a multipleoffer situation which did not originally exist. This is a huge disadvantage for a buyer. In a traditional sale, the seller is normally required to reply within a certain number of days, or risk losing the buyer. This puts pressure on the seller to make up his mind quickly.

Another caveat is whether or not there is PMI (mortgage insurance for a loan when the purchase had a low down payment.). If the lender will receive both the property AND the mortgage insurance payment on the property, it doesn't make financial sense for it to accept a short pay. Nevertheless, because of the bureaucracy, it may keep the buyers and their agents hanging in limbo anyway.

The purchase price for traditional sale may end up being lower than that for a similar property in foreclosure or a short pay! Furthermore, the property will have been well kept, and will usually show well since most sellers today do need to sell and are not testing the market. Traditional sellers with equity in their properties who are represented by Realtors® will respond quicker to buyers' offers, will provide the Sellers' Transfer Disclosure (and others) and will be more flexible to giving concessions to the buyer in order to put the deal together. If there are items to be repaired, a traditional seller is likely to do them or credit the buyer for them. With an REO or Short Pay, the buyer most always accepts the property "as is" with no chance of the seller taking care of defects or repairs.

There are always exceptions, but REOs and Short Pays are not necessarily better deals than traditional sales. They may sound sexier, but in reality, a traditional sale may make more sense in the final analysis. With prices down, mortgage rates hitting new lows, and the conforming and FHA caps more than $729,000 until the end of 2008, it is definitely time for buyers to shimmy down the fence pole and call an experienced Realtor® to help him/her move up, become a first time buyer or find a great investment property!

Susan Stone, GRI, Realtor® & Broker Associate with White House Properties, has been an Agoura Hills resident since 1982 and has worked in real estate since 1988. (Her comments are her own opinions and are not necessarily those of White House Properties). She has written articles for a number of publications, served on a Real Estate Advisory Committee for the Daily News and has taught homebuyer classes for Bank of America. She is a graduate of Pomona College, Claremont, CA and earned a Professional Designation is Marketing and Merchandising from UCLA. Susan is fluent in English, Spanish, French and Portuguese and partners with other agents/brokers for a number of others. She can be reached at: (818) 8650944, ss4re@aol.com or at www.susanstone.com.