As Realtors are well aware, in the current marketplace, a majority of sales transactions are either bank owned properties (REO) or “Short Sales”. When representing purchasers, the question most frequently posed is whether it is better for a purchaser to acquire a Short Sale or REO property. The quintessential lawyerly answer to that question is “it depends”. There are very distinct similarities as well as specific differences that need to be considered in evaluating such transactions.
With either type transaction, there are specific uncertainties that must be considered. Primarily, time for settlement in either type transaction is likely to be subject to potentially considerable delays. With a Short Sale, obtaining bank approval for the sale may take months to obtain, and, in fact, sometimes the bank will not approve the Short Sale at all. One never can be certain as to how long that approval will take, so the purchaser needs to be ready for settlement, yet prepared to experience serious delays in obtaining approval.
With an REO, approvals are much more expeditious, but also not on a time table. It may take days or weeks to receive the approved contract from the bank seller. In addition, settlement is often delayed while awaiting final bank approval of the HUD-1.
In both REO and Short Sale transactions, delays often occur as a result of the frequently questionable status of the title to the property. Time is often required to clear up those issues prior to settlement. If the title issue requires the payment of any money to clear up the defect (such as an unreleased judgment against the seller), the REO seller will have the funds to clear up the matter, but the Short Sale may fail due to lack of funds on the part of the individual sellers. On bank owned property, the bank often has not obtained the Trustees Deed from the foreclosure, and delays may eventuate while awaiting delivery of that deed, which is a prerequisite to the bank’s ability to convey title.
With a Short Sale, the owners may or may not be in possession of the property, and thus may or may not be caring for the property condition. In fact, an owner that is about to lose their property to foreclosure may be the least likely to care for the property condition. In an REO transaction, the property is almost always vacant. Although there is no one in the property to maintain the condition, neither is there anyone occupying the property and causing harm to the condition.
If property condition issues are discovered at the final walk thru, the Short Sale owner rarely, if ever, has the funds available to make any requested or required repairs. They do not have enough money to pay off their mortgage(s) in full, so they certainly do not have the funds to make repairs to the property. With a bank owned property, there is little uncertainty about property condition, because the bank sale addendum generally eliminates any expectation that they will pay for any repairs. Such sales are typically “as is” at the time of closing, meaning the bank will not even be responsible for a change in condition from the time of contract through closing. Some bank sellers will agree to pay for some required repairs or to be responsible for change in condition, but a careful review of their sale addendum is necessary.
An additional issue that often arises relates to unpaid Homeowner’s Association dues. A bank seller will agree to clear up those issues, and will have the funds available to do so. A Short Seller will usually not be able to afford to clear up the unpaid HOA fees, leaving the purchaser in a position where their only means of clearing up the matter is for the purchaser to assume responsibility for paying off the HOA lien.
Over all, an REO property purchase generally has more certainty than a Short Sale, with respect to time of closing, certainty of property condition, and certainty of clear title. The bank sale may be “harsh”, but at least the purchasers know more precisely what they are buying. In neither situation should the purchaser finalize the move in date until settlement is complete. Otherwise, they may find themselves repeatedly rescheduling the move.