Foreclosure, REO and Short Sale Myth Busters

Three real estate myths busted.

Home Page by Colleen's Contributor, Sarah Hodgdon

While you are having fun by the pool, beach or backyard grill on Independence Day, you may be daydreaming about creating financial independence. Many have done so owing real estate especially during recessionary times. Buying distressed properties can be beneficial. Two misunderstood types of distressed properties are foreclosures and short sales. Before you start building your real estate empire you should know about them.

Foreclosure is a term used incorrectly every day. Foreclosure is the process the mortgage holder goes through to take back piece of real estate (loan collateral) for lack of payment from the borrower. Each state has specific rules and regulation a mortgage holder must follow. After the foreclosure process has been completed and recognized by the court the property can be returned to the mortgage holder and then becomes known as an REO (real estate owned).

REO myth busters

Myth #1: Mortgage holders are so desperate to sell, they will consider offers for 50% of the listing price.

Fact: Over the years, banks have gotten much better at pricing properties to sell and even intentionally list properties below market to generate multiple offers. Using this practice, properties in all price ranges have sold for as much as double the listing price, even in today’s market.

Myth #2:  Mortgage holders won’t negotiate.

Fact: Banks will negotiate if the original offer is reasonable. They look at the entire offer and consider the negotiable items: purchase price, closing cost they are asked to pay on behalf of the buyer, closing date, financing (loan or cash) and stipulations of the sale. If the offer is worth negotiating, they will.

Myth#3: If a property was foreclosed, the new buyer is responsible for liens that may have been placed on the property.

Fact: The answer is yes and no. If someone buys a property at a courthouse auction, they will be responsible for any liens the property has at that time. Many properties are bid on by the mortgage holder and they end up with the property. Before the mortgage holder can transfer the property to another person all liens must be paid. If a buyer is concerned about hidden liens, their best bet is to buy an REO.

Myth #4: A buyer or buyer’s agent can negotiate directly with the mortgage holder.

Fact: If the mortgage holder is a private lender or individual it could be possible for a buyer or buyers agent to talk with them, but unlikely. Institutional mortgage holders (banks) list their REO’s with a listing agent to handle calls, showings, contracts, and closings. They will not talk with anyone except the listing agent.

Myth #5: The person who owned a property that was foreclosed have no more financial obligation to the mortgage holder.

Fact: The foreclosed party can be held responsible for the difference between the amount of money owed at the time of foreclosure and the amount the mortgage holder sells it for. Often times the foreclosed party receives a 1099 for the difference and are required to pay taxes on the amount as is income. Some states allow the mortgage hold to place a deficiency judgment against the foreclosed party for the difference.

Short sale properties are more and more prevalent and are confusing to the average buyer. Here are common myths and the facts.

Short Sale myth busters

Myth #1: Short sales can close quickly.

Fact: Short sale is a misnomer since they can take months and months to close, if they close at all. The term means the mortgage holder has agreed to take less money from the sale than owned to pay the remaining mortgage balance- meaning the payment is short.

Myth#2: Anyone who owes more on their house than it’s worth can sell their home as a short sale.

Fact: Mortgage holders require full financial disclosure from the person wishing to sell as a short sale. The seller(s) must provide tax returns, bank and financial account statements, pay stubs or other proof of income. If the mortgage holder determines the seller has enough money to pay the mortgage; they will NOT consider a short sale or receiving less than the current mortgage balance.

Myth #3: Once the mortgage holder agrees to the terms and conditions of the contract, the property will close without any other delays or issues.

Fact: It ain’t over until the closing is complete. Many things can happen between the time the mortgage holder acceptance the contract and the closing date: The seller could come up with the money to pay past due payments and penalties, a new lien could be placed on the property that the seller can’t pay and mortgage holder won’t pay, the seller becomes unresponsive to the mortgage holders requests or they abandon the property.

Knowing more about foreclosures, REO’s, and short sales helps when purchasing real estate – even if you aren’t building your real estate empire right now!

Got any other real estate facts you’d like me to check? Contact me by clicking my name above, or leave your question here.

Image courtesy of FreeDigitalPhotos.net

This post is contributed by a community member. The views expressed in this blog are those of the author and do not necessarily reflect those of Patch Media Corporation. Everyone is welcome to submit a post to Patch. If you'd like to post a blog, go here to get started.

Brendan Spaar August 02, 2012 at 06:26 PM
I tried getting in on a short sale in Forsyth County two years ago. The property was listed at $250,000. The "agent" listing the property told my agent and I that 250 was the starting price for the bank. He was still in the process of collecting offers to present to the bank and the current offer was $275,000. Granted this was a $300,000 neighborhood but I think this is a shady way of doing business. Buying a house shouldn't be a bidding war. Do short sales always close higher than the list price? It was surprising to me to see that happen in a buyer's market.


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