buying short sale vs reo property?

by Gavin King

With a glut of REO properties on the market and so many short sales facing impending foreclosure, many buyers are wondering, and are even confused about, which offers a better investment opportunity. Many agents have listed pre-foreclosure homes with the prospect of helping the owners avoid foreclosure, only to have the lenders refuse to cooperate, despite many reasonable offers. This results in the foreclosure of the home, necessitating reserve bids from banks to buy back homes as collateral. The homes are then ran through the REO branch of the equation, which typically results in the foreclosing bank taking a fairly significant loss on the reserve price they bought it back for. Banks are commonly leaving willing and able buyers in the lurch while they decide if the offer is acceptable to them or not, but buyers typically will not wait that long causing a dissatisfied buyer, a disgusted agent and a foreclosure that could have easily been avoided. The common advice from agents now is to avoid short sales and just buy an REO property. The advantages of this is that the buyer doesn’t have to wait for negotiations between two lenders to see if their offer will be accepted or not. They simply have to wait for the primary lien holder who probably purchased the property through a reserve bid to accept or reject it. This frequently results in the greatest discounts as the amount of any secondary liens, or other liens, have already been satisfied at the foreclosure sale. If the loan situation for the home was a typical 80/20 loan with the primary lien holder financing 80% of the loan and the secondary lien holder financing 20%, and the secondary lien holder claim disappears at foreclosure, one can see how that occurs.The conventional wisdom used to dictate that whenever a buyer could find a primary and secondary lien holder type of a situation, as opposed to a single lien holder or both liens being held by the same company, he was in a prime purchasing position. The market has revealed many situations in which the lender in teh secondary lien holder position has declined to accept a short sale offer that would net them a few thousand and opted, instead, to force the property into foreclosure, in which they would most likely receive zero. Short sale buyers seem to be better of now, with a lender who in exclusively on the hook for the entire lien. The likelihood of having the offer accepted is much higher, now, in that instance, flying in the face of previous market occurrences. Not with standing, in a short sale any lien holder involved always retains the right to deny any short sale request. With the thorough understanding of how the process goes, anyone can see the real advantage lies in purchasing REO properties, and avoiding short sales.

About the author

Gavin King is a real estate developer and the designated broker for Realty in Idaho.