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Why It's Cheaper To Buy Short Sales Than REOs

Thought I would share this colleagues blog:

Some months ago, I had a long conversation with a real estate investor about short sale properties vs. REO properties. He said he didn't think there was much in the way of savings derived from buying homes through short sales anymore. Instead, he said it probably made more sense for him to buy foreclosed homes and wait patiently to buy them through lenders' REO Agents.

I thought that was it. I thought he had made up his mind on the subject and was just trying to politely tell me that he would no longer be needing my services, but then he added, "So what do you think about this? Do you think I should start buying my investment properties as REO's?"

With me being a Short Sales Specialist, I'm probably a bit biased on the advantages of buying short sale properties vs. REO's, but, in any event, here's what I basically told him.

There are both advantages and disadvantages to buying short sale properties. The major disadvantage of buying a short sale property is that there may be undisclosed liens or problems with the title. When you buy a preforeclosed property; you're buying it as is. There is always a risk that the distressed seller may have acquired liens (e.g. unpaid hospital bills or unpaid contractors' bills for home repairs) while they owned the property.

Another downside to buying short sales is that they frequently take a long time to get approved and to close. Most short sales take on average 3 to 6 months to close, and if you don't have the patience of a saint, you're probably going to lose interest in buying the property before too long.Waste Basket of Money

However, just like there are risks involved in buying short sale properties there are also benefits. One of the biggest and most important benefits is the fact that short sale properties are usually cheaper to acquire than REOs. If you wait for the property to be foreclosed on and placed on the lender's REO list, then you're going to usually pay more to own the property.

The reason for this is the fact that by time the lender legally takes the property back he has already incurred an excessive string of additional fees, e.g. property taxes, HOA dues, hazard insurance premiums, mortgage insurance premiums, lost interest, attorney fees, property maintenance costs, real estate commission, etc.

Naturally, the mortgage company plans to recoup these fees, and to help accomplish this goal, the lender subsequently raises the sale price of the REO property. Depending on whether you're buying foreclosed property in a state that practices non-judicial foreclosures or judicial foreclosures, you could unknowingly end up paying an extra $10,000 on up to help reimburse the lender for these expenses.

Well, that's my take on the subject. If you disagree, please post your comments. I'm really curious to hear your thoughts on this subject.


Tracy Miller "Why It's Cheaper to Buy Short Sales than REOs," from Tracy Miller's Blog: Short Sales & More! (Material Copyrighted 2008. Tracy Miller; All Rights Reserved.) Tracy's blog published at Active Rain Real Estate Network ( It is permissible to reprint, repost, reblog this material. Please reprint material with the author's information included. It is preferred that reprints of this material are published with this exact same "Author Credits" footer depicted or included at the bottom of any reproductions.

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Comment by Gail Silvers on January 31, 2009 at 11:03am
Carlos, I am a Broker in NW, FL and I list REO's and short sales. What I am seeing is a huge shift from the Realtors towards working with the REO's instead of the short sales due to the quicker response from the banks, quicker closing and a for sure commission. I get twice as many showings on my REO's and they are selling quickly (within 30 days of list date) My Investor clients seem to be gravitating towards the REO's too. I work in a large condo market and the Banks are offering "special financing " on the REO condo's which is difficult to match when buying as a short sale. The time spent nurturing my short sale listings/offers is pushing me more towards working with the REO market ....The Asset Managers are easy to get intouch with and want your guidance. They are making deals below short sales in our area, just to get the properties off their books. The positive side of short sale listings is we as Realtors are helping people avoid foreclosure and that is priceless to me! It's a great way for us to give back to our community.
Comment by Bill & Fran Jenkins/Team Jenkins on January 31, 2009 at 10:14am
Carlos, Interesting take on the subject. As far as price here in our market the smart agents are pricing the short sales competively with the lowest on the market which in most cases are either REO or other short sales. So being in contract with a short sale while waiting 3-6 months in a declining market is actually going to put the buyer in a higher price than the current REOs or short sales.

One of the biggest advantages (if you are with a client) is the majority of the short sales are in much better condition than the REOs. The homeowner is still motivated if they are short sale to not have a foreclosure on their credit report. Therefore they tend to keep the property in better condition (if coached by a good agent of the importance of condition).

Bottom line price and motivation are what sell houses. All short sell clients are highly motivated (if not don't take them) and getting a short sale priced correctly is common sense and like taking candy from a baby. Condition is what might make the difference between two model match homes. If you dump a bag of pennies on a table the shinniest stand out........but they are still only worth a penny.
Comment by Daniel Ripper on January 30, 2009 at 10:23pm
Carlos, I think there can be many advantages to buying a short sale, but the key work is patience! somthing I don't have much of and the reason I chose the REO route. One thing I have to disagree on is the raising of costs to offset the extra expenses incurred thru the foreclosure process. While this may be the business model of some smaller banks, most need to liquidate their property ASAP, and being that we're still in a declining market (in most of the U.S.) I feel that would harm more than benefit the seller. Most sellers get a few evaluations from local agents, an appraiser and then determine the value. I find most of the time they listen...wise choice.

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