One of the biggest misunderstandings we come across on an almost daily basis while working with Big Bear real estate is buyers not knowing the differences between a regular resale, short sale, and foreclosure (REO).
A regular resale is (exactly as it sounds) a regular sale in which the sellers own the property and are listing it at a price they are willing to accept. An REO (which stands for “Real Estate Owned”) has gone completely through the foreclosure process and is now owned by the bank (or Fannie Mae or Freddie Mac) as part of their portfolio. As with a regular resale, the price has been set at a point which the seller (the bank, in this case) is willing to accept. A short sale is almost a hybrid of the two. In a short sale, the homeowners still legally own the home, but are usually in default on their payments or are in danger of becoming in default. The house is now worth less than the loan amount (which is why it is called a “short” sale) and the sellers try to convince the bank to accept an amount “short” of what they actually owe.
Until four or five years ago, most people had never even heard of a short sale and very few still understand exactly how they work. I think part of this is the banks’ fault, because they try to keep the procedure shrouded in some mystery to avoid having to do too many of them. Until very recently, they wouldn’t even tell the sellers what price they would actually accept until they had an offer on the table (and then it still took two or three months to find out). This is what has lead to the wide disparity usually seen between the list price and actual market value. Because the sellers (and their agents) usually don’t know what price the bank will actually accept, they will list it at a very low “teaser price” with the caveat “actual sales price subject to lender approval.”
To give an example, if the sellers bought the property in 2006 at the peak of the market for $500K, that house is probably worth around $300K in today’s market. The short sale agent will often list that house at $200K in hopes of getting multiple offers and submitting the “highest and best” offer to the bank for approval. Chances are very low that the bank will actually accept an offer of $200K on this property because, for them, it is all subject to a formula which calculates what the house is worth in the current market, what their holding costs would be if they took it all the way through the foreclosure process, and what their sales costs would be when they eventually sold it as an REO.
I went to a short sale seminar about two years ago which was put on by a former Loss Mitigator at IndyMac Bank. According to him, if the formula told him they could make one penny more as a short sale. it would be approved; but if it said they would make one penny more as an REO, the short sale would be denied. This is why a typical short sale takes a total of about four to six months from when the offer is first submitted. When that first offer comes in, the bank needs to assign an Asset Manager to the file. When that eventually happens, the Asset Manager will order a BPO (Broker Price Opinion) and/or an appraisal to be done to determine the true market value. This usually takes several weeks for them to get the report(s) back and start inputting the values (including current market appreciation or depreciation) into the formula. Depending on the bank, there can also be several levels of Asset Managers you have to go though (we did one two years ago with a former Countrywide loan that had three levels of Asset Managers that needed to approve the file and it took an average of five weeks each). There are also other factors that need to be considered in a short sale (for example, the owners need to prove some sort of hardship, i.e. health problems, lost job to even qualify).
Most buyers get tired of waiting at some point during the process and find another home (either regular resale or REO) that they can close in 30-45 days. This is why you will sometimes see a property listed as an “approved short sale.” The differences between a standard short sale and an approved short sale are night and day. With an approved short sale, the sellers actually know what price the bank will accept (usually because it has gone through the above process, but the buyer moved on to something else and the bank has already approved a price). In the example above with the property listed at $200K, it would not be unusual for three or more offers to come in and the seller to submit the highest (let’s say $250K) to the bank for approval. After two or three months, the bank comes back and says “we won’t accept the $250K, but we will accept $285K.” It is now an approved short sale at $285K. Many buyers will ask “how do I know if a short sale listing is approved?” The answer is easy. It will say it all over the listing. As I mentioned, it is a huge difference to have an approved short sale versus just some teaser price the seller threw out there in order to get offers and the listing agent will make sure that the new listing says “approved.”