Decipher the difference between the many home buying options, from foreclosures to traditional sales.
The first thing to know when shopping for a home is that Traditional Real Estate Listings can almost all be found on your states/town/county MLS system. Some states are broken down by areas and have several MLS systems. For instance, the homes in the Morris County area can be found on the GSMLS and your agent pays for this service. Some agents join multiple MLS services in order to better serve their clients if they are considering different areas altogether or to market the sale of a property on several MLS systems as well.
As a buyer/seller, this is where close to 100% of the properties on the market will be listed. The listings here represent everything from traditional sales, discount brokerage, bank or corporate owned properties, bank auction properties, short sale properties, etc. Below I will try and break down the differences between all of these, in a nutshell. It can definitely get a bit confusing.
Traditional or Natural sales: This represents the vast majority of listings where the seller is the homeowner who is hiring a full service agent to market and sell their property.
Discount Brokerage Services (Redfin, USRealty.com, RealMart, etc.): As an agent, these agencies market their homes on the MLS but can be difficult to deal with and in many cases almost impossible to reach by phone or obtain any information from. It is important as a buyer to understand that these home sellers are already cutting corners to save money with their listing and may be difficult to deal with when trying to resolve inspection issues. Cutting corners from the get-go can never be a good idea.
Bank Owned Properties
REO-Real Estate Owned by banks, Homepath.com, HUDHomeStore.Com, Homesteps.com, Auction.com, Hubzu.com and others
All of these companies market their properties by listing them on the MLS. From first look, these homes represent an opportunity for great value but can be very challenging for the buyer. These are properties where the bank has taken possession of the home by completing a foreclosure action against the prior owner. The bank is the actual seller. These properties almost always need some work and in some cases are a complete disaster. You will see some marketed “AS IS.” The real problem for buyers is the seller will almost NEVER make any repairs or allow repairs to be made prior to closing which kills many of the deals during home inspection. In most cases buyers can’t use FHA, VA, USDA or other government backed mortgages either, as the properties won’t meet government lending standards. In other scenarios the buyer needs to be pre-approved for a renovation loan to make repairs, repair or replace failed septic systems and much more. Buyers need to be aware that they will invest up to $1,500 or more in inspection, attorney and appraisal costs before they will even know if the property is bankable.
Short Sales (Subject to third party approval):
A short sale is simply a home that is still in the owners possession but the sales price will not be enough to pay off all of the liens against the home. Since the sale requires one or more lien holders to accept a short payoff (less than full balance) in order to provide clear title, Third Party means the lienholder, has to approve the sale.
A home seller may need to sell their home as a short sale for a variety of reasons:
· They may be facing a foreclosure for not making payments.
· They me be forced to relocate.
· They may just be having difficulty making the payments on their mortgage but are not yet in default…or a variety of other reasons.
There are two main challenges for the buyer when considering a short sale property. The first being that the seller is not going to make one dollar in selling the home so they more than likely will not be willing to make any repairs uncovered during a home inspection or appraisal. In some rare cases, they may allow the buyer to make their own repairs on a home they don’t own yet in order to satisfy appraisal concerns, but this is very risky, and only works a small percentage of the time. The second challenge is time. It can take an average of four months to get an answer from the short sale lender and in many cases they will not accept the offered price even if it is a full list price offer. In some cases it has taken up to a year to get a response from the lender. Buyers seldom have the patience to deal with this. These properties are often referred to as pre-foreclosures. As in most cases, the sellers have not made mortgage payments for some time, but not always. Many short sale properties are being sold by sellers that are current on their mortgage but just simply want to move quickly. See below for more information on pre-foreclosures.
Corporate Owned:
A corporate owned property is typically a home owned by a corporation that purchased it as part of an employee relocation or some other measure. It is important for your agent to check the public records at NJACTB.org to understand who actually owns the property. In many cases a listing will indicate the owner as “Corporate” when in fact it is a bank owned or REO. Generally, true corporate owned properties are treated like a normal natural sale, but it is important to know who actually owns the home to know if potential repair issues can be properly taken care of. If it is bank owned, then it is not corporate owned and most likely no repairs will be made.
Pre-Foreclosure, Foreclosure, Sheriff’s Sale, REO
These terms are very often misused by homebuyers looking for properties they can purchase below full market value. In order to better understand these terms you need to understand the default process.
A person owns a home with a mortgage, second mortgage, Home Equity Line of Credit or other lien. For whatever reason, they fall behind on their payments. When they are 91 days delinquent, the lienholder has the authority to start a foreclosure suit to cure default. They file a legal action form called a Lis Pendens (Pending Legal Action), in the county courthouse which makes it a matter of public record. Once this default notice is public record, many companies (RealtyTrac, Auction.com and others) start posting these properties online as pending foreclosure and potentially for sale. It is important to note these companies are in the business of getting people to buy into their “find foreclosures here” marketing service and could not care less about actually selling homes. These sites sell their lead contacts to Realtors just like Zillow, Trulia or Realtor.com.
The filing of the Lis Pendens is just the very beginning of the foreclosure process (pre-foreclosure) and in New Jersey it can take as long as five years for the entire foreclosure process to be completed. Once the lien holder has explored all of their options and satisfied all legal requirements, they notify the County Sheriff’s Office to schedule a Foreclosure Action Sale which, since the actual legal proceeding takes place under the authority of the County Sheriff, is called a Sheriff’s Sale. If no one outbids the lienholder at the Sheriff’s sale, the lienholder takes possession of the property which means they now own it, so it is Real Estate Owned or REO.
Look at it like this…many people go into a store and start their shopping at the clearance rack to see if they can meet their need at a discount but then, not finding what they wanted, start looking at normal priced clothes. It is the same process. BUT, some people will only buy items on clearance. These properties are usually great for investors, but not someone looking for a home in the next few months for their family.
My advice to buyers to looking for a home to purchase within the next few months, go traditional. Your inspection requests will be negotiated properly and you will not get a migraine during the process.
If you’re thinking of buying a home, you should also align yourself with a great lender who can help you through the entire process and help determine your purchasing power too. It takes a village to raise a family, it also takes a small village to help you navigate what works best for you when purchasing a new home. If you have more questions about which option is best for you, I’m always here to help and happy to connect you with great lenders too.
Note: Some of the info in this blog was provided by Martin Straka, Mortgage Loan Officer at MNet Mortgage Corp. a division of Mortgage Network, Inc. Thanks Marty!