What is a foreclosure, REO or short sale property?
Real estate investment property expert Tom Schroth with Kudzu Realty works with investors in East Cobb, Roswell and all around Atlanta. Don’t settle for a Realtor who has never owned an investment property or worked with a foreclosure and does not understand the real estate investor’s unique needs. Tom is going on three decades of full time real estate and there is no substitute for experience when buying investment real estate in East Cobb and Roswell.
It’s important to understand some on the nomenclature in Atlanta real estate market surrounding distressed properties such as foreclosures, REO (Real Estate Owned) and short sales. The word foreclosure is often misused as a generic definition for any distressed property but it is important to recognize the a true foreclosure is a property that the bank took back from the mortgage holder and sells at the courthouse steps. Keep in mind that many non-foreclosure properties in Atlanta, East Cobb, Roswell,Sandy Springs, Dunwoody and Marietta are great investments as well.
Distressed Property: Definitions
Foreclosure: This is the buzzword on the street, but what exactly is a foreclosure? Strictly speaking, it’s the process of forcing the sale of a property held as collateral by a bank or lender. This happens when a borrower defaults on a loan that is secured by real estate.
The bank does not automatically take the property back; rather, the property must be sold via the county court through an auction. Anyone can bid. However, the purchaser must pay cash, likely will not be able to inspect the property in advance, and will be responsible for evicting former owner. There may be unsatisfied tax liens as well, and the quality of the title (or ownership) received may be less than perfect. Note that the bank will be bidding against you on its properties, typically for the amount they are owed.
Foreclosures are complex and risky purchases, and usually are not a good fit for consumers or even seasoned commercial real estate investors. Most Atlanta investment properties that are foreclosures end up being bought back by the bank.
Bank-Owned Real Estate (aka REO): These are properties that the bank has bought back at the foreclosure auction and are now being marketed for sale. Most are marketed through real estate companies using traditional methods. This enables buyers to conduct their due diligence before they make an offer and use traditional loans and terms to acquire the property.
This is the best choice for most buyers and investors to find the right combination of a good price with the lowest risk.
Short Sale: This is when a lender is accepting a discounted payoff to release a mortgage. The seller may or may not be in default, but must demonstrate hardship via the inability to pay the mortgage and a lack of assets to make up the difference in the sales price of the property and its current market value.
If there is more than one mortgage, the secondary lien holders must agree to the short sale. While a buyer and seller may agree to a sales price, if it is anything less than the full payoff, the banks will have to approve it. The short sale process can be long, complex and unpredictable, taking many months, and the bank may end up wanting a higher price than the one offered.
This is generally not a good way for a non-investor to purchase distressed property, at least not without expert assistance from a Realtor who is experienced in short sales.