REO
Real estate owned or REO is a class of property owned by a lender, typically a bank, after an unsuccessful sale at a foreclosure auction.[1] A bank will typically set the opening bid at a foreclosure auction for at least the outstanding loan amount. If there are no bidders that are interested, then the bank will legally repossess the property. This is usually the case as the amount owed on the home is probably higher than the value of this foreclosure property. As soon as the bank repossess the property it is listed on their books as REO and categorized as an asset (non-performing).
As soon as a property goes into a distressed status (the borrower/home owner misses mortgage payments) the bank will want to determine the amount of equity that the property has. A popular method to determine the equity is to obtain a Broker Price Opinion (BPO) or order an appraisal. Based on the amount of equity that is determined from the BPO, the bank will decide whether to try for a short sale or to allow it to go through the foreclosure process. If the bank is unable to sell the property through a short sale or at a foreclosure auction it will now become an REO property.
After a repossession from which the property becomes classified as REO, the bank will go through the process of trying to sell the property on its own or obtain the service of an REO Asset Manager. The bank will remove some of the liens and other expenses on the home and try to resell it to the public, either through future auctions or direct marketing through a real estate broker. The asset Manager will also try to contact REO realtors that specialize in certain zip codes to help sell this bank owned property. Bank REO properties are generally in poor repair and maintenance. Real estate investors will often purchase these properties, as banks are not in the business of owning homes and the low price may compensate for the condition of the property.
Many larger banks have REO/asset management departments that field bids and offers, oversee upkeep, and handle sales. Most REO properties on the open market should be listed in MLS by the broker who performed the BPO. A common problem in many areas involves the listing broker “pocket listing” the transaction and not putting it out on the open market. Those who do put the listing on the MLS will sometimes not field legitimate offers in the hopes of selling it themselves, quite often contrary to the banks’ wishes. As a result, a new industry has been creates wherein REO exchanges have been developed to overcome this problem. Companies exist to provide listing opportunities for banks to get their property out to the general public. Other similar companies provide services that connect Asset Managers to experienced realtors who can help sell the REO. Myriad REO websites have been created recently to connect Asset Managers with qualified REO realtors.
If you have any question about REO properties or are in need of an appraisal from an established high quality appraisal company then Contact Us here or Order an Appraisal here.
Short sale (real estate)
A short sale is a sale of real estate in which the sale proceeds fall short of the balance owed on the property’s loan.[1] It often occurs when a borrower cannot pay the mortgage loan on their property, but the lender decides that selling the property at a moderate loss is better than pressing the borrower. Both parties consent to the short sale process, because it allows them to avoid foreclosure, which involves hefty fees for the bank and poorer credit report outcomes for the borrowers. This agreement, however, does not necessarily release the borrower from the obligation to pay the remaining balance of the loan, known as the deficiency.[2]
Process
In a short sale, the bank or mortgage lender agrees to discount a loan balance because of an economic or financial hardship on the part of the borrower. The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender. Neither side is “doing the other a favor;” a short sale is simply the most economical solution to a problem. Banks will incur a smaller financial loss than would result from foreclosure or continued non-payment. Borrowers are able to mitigate damage to their credit history, and partially control the debt. A short sale is typically faster and less expensive than a foreclosure. It does not extinguish the remaining balance unless settlement is clearly indicated on the acceptance of offer.
Lenders often have loss mitigation departments that evaluate potential short sale transactions. The majority have pre-determined criteria for such transactions, but they may be open to offers, and their willingness varies. A bank will typically determine the amount of equity (or lack thereof), by determining the probable selling price from an appraisal, Broker Price Opinion (abbreviated BPO), or Broker Opinion of Value (abbreviated BOV).
Lenders may accept short sale offers or requests for short sales even if a Notice of Default has not been issued or recorded with the locality where the property is located. Given the unprecedented and overwhelming number of losses that mortgage lenders have suffered from mortgage failures that in part triggered the financial crisis of 2007–2010, they are now more willing to accept short sales than ever before. For “under-water” borrowers who owe more on their mortgage than their property is worth and are having trouble selling, this presents an opportunity for them to avoid foreclosure as a result.
Additional parties
Multiple levels of approvals and conditions are very common with short sales. Junior lien-holders – such as second mortgages, HELOC lenders, and HOA (special assessment liens) – may need to approve the short sale. Frequent objectors to short sales include tax lien holders (income, estate or corporate franchise tax – as opposed to real property taxes, which have priority even when unrecorded) and mechanic’s lien holders. It is possible for junior lien holders to prevent the short sale. If the lender required mortgage insurance on the loan, the insurer will likely also be party to negotiations as they may be asked to pay out a claim to offset the lender’s loss in the short sale. The wide array of parties, parameters and processes involved in a short sale makes it a relatively complex and highly specialized type of real estate transaction. Not surprisingly, short sale deals have a high failure rate and often do not close in time to prevent foreclosure when they are not handled by a knowledgeable and experienced professional. Short sale negotiators, Realtors who are short sale certified (a National Association of Realtors designation), loss mitigation specialists, and real estate lawyers who specialize in short sales are often brought in to handle these deals. Quite often, the average consumer is not aware that the lien holder pays the Realtor commissions, often exacerbating the difficulties.
Consent
Short sales are different from foreclosures in that a foreclosure is forced by a lender, whereas both lender and borrower consent to a short sale. However, this consent may change at any time, and negotiations may be ongoing between the lender and borrower even while the short sale is on the market. The borrower may decide to remain and refinance their house, or become obstinate and force foreclosure. The bank may renege as well if they decide to stick with the current borrower, or if they disapprove of the sale price. Any short sale contract includes a contingency where the bank must approve the sale.
In the state of California, short sales can be tricky in that it is important for the party handling the deal to advise the seller to seek the advice of an attorney and a CPA. There could be tax consequences if the loan(s) on the property are not purchase money (all the funds needed to purchase the property). On the other hand, if the loan(s) on the property are purchase money, then the loans are considered “non-recourse” and the debt is generally forgiven and satisfied at the end of the short sale.
Changing consent can present a perilous situation for potential buyers. It can waste considerable time and money for a prospective buyer who anticipated a sale. Typically, deposits with the bank will be refunded but money for paid inspections or other services cannot be.
There are several defenses against this. If the seller has moved out of a property, that is a clue that they have no intention of staying or negotiating further with the bank. “Bank Approved Short Sales” are advertised by real estate advertisements, indicating that a real estate broker has verified the selling bank’s position. This still does not guarantee acceptance, and it often does not take junior lien holders into account, but it is better than situations where the bank holding the mortgage has only been lightly involved in the borrower’s decision.
Credit implications
Short sales are a type of settlement, and they adversely affect a person’s credit report. The negative impact may be less than a foreclosure, but in some cases the effect is the same. Like all entries except for bankruptcy, short sales do not show on a credit report according to the Distressed Property Institute. The credit will restore within 18 months or so. Depending upon other credit information, it is possible to obtain another mortgage 1–3 years after a short sale, or less if the borrower is current at the time of the sale.
While lenders sometimes forgive the remaining loan balance, other lien-holders likely will not. Further, it is possible for a lender to omit updating mortgage balances zero balance after a short sale. However, willfully misrepresenting information on a credit report can constitute libel in some jurisdictions, and lenders may be sued in civil court for engaging in this behavior.
Approval timeline
Short sale success rates vary from state to state and from bank to bank. Bank of America short sales, as of 2009, had the longest approval times and the highest failure rate. Smaller “local” banks tend to have their own rules, but will typically approve the short sale in days, not months.
Business
Short sales are common in standard business transactions in recognition that creditors are not doing debtors a favor but, rather, engaging in a business transaction when extending credit. When it makes no business sense nor is economically feasible to retain an asset, businesses default on their debt. It is common for commercial debt to trade on the secondary market for a small fraction of their face value in realization of the likelihood of these future defaults. This is known as distressed debt.
Fraud
CNBC reported that some lenders have been accused of engaging in fraud during the short sale process.[3]. The fraud involves lenders in second position demanding kickbacks in the form of cash payments from the home buyer or real estate agent, and that are not disclosed anywhere on closing documents or HUD-1 statement. This is in violation of RESPA rules, which require disclosure of such payments.
Deficiency judgment
By nature, all short sales will have a deficiency balance. Laws governing the right of the lender to pursue a borrower for the deficiency balance vary state to state. States considered recourse states allow the lender to pursue. Non-recourse states generally prevent this, though some allow pursuit of deficiency though set forth limits on the amount that can be pursued.
If a lender can legally pursue the deficiency and does not specifically waive its right to pursue the deficiency, the borrower is at risk for a deficiency judgment.
Nevada law potentially grants lenders a six year window of time to sue for the deficiency based on breach of contract in contract law, not foreclosure law. Other states may differ.
Borrowers considering a short sale should be aware of this risk and ask every party involved in the process (Realtor, lender, third party, …) what can and will be done to protect against a deficiency judgment. Consult an attorney in the state where the property resides to determine specific risks.
Once a short sale has been completed, a Chapter 7 bankruptcy is a possible remedy the borrower can use to remove the risk of the deficiency or discharge the judgment itself.
The Mortgage Forgiveness Debt Relief Act was introduced in Congress on September 25, 2007, and became law on December 20, 2007. This act offered relief to homeowners who would formerly owe taxes on forgiven mortgage debt after facing foreclosure. The act extends such relief for three years, applying to debts discharged in calendar year 2007 through 2009. (With the Emergency Economic Stabilization Act of 2008, this tax relief was extended another three years, covering debts discharged through calendar year 2012.)
Normally in US law when a lender decides to forgive all or a portion of a borrower’s debt and accept less, the forgiven amount is considered as income for the borrower and is liable to be taxed.
However, after the signing of the Mortgage Forgiveness Act, amendments have been made to remove such tax liability and allow the borrower and lender to work freely together to find a common solution that is beneficial to both parties. This protection is limited to primary residences — rental properties are ineligible for relief — so consultation with a tax advisor is necessary to ensure that a borrower qualifies.[1] The amount of forgiven mortgage debt allowed to be excluded from income tax is limited to $2 million per year.
More recent legislation provides for a specialized type of refinancing option, available for mortgages made after 2006, for owner-occupied homes. Under this program a debtor provides information similar to that necessary for a short-sale but rather than selling the house to a third-party an FHA guaranteed loan at a fixed-rate is available if the original lender is willing to write-off all but 85-percent of outstanding of the debtor’s obligations (including principal, interest, late-fees, prepayment penalties, and all other fees). FHA-backed refinance packages are available beginning October, 2008, and carry a fee equal to 1.5% of the value of the house. Debtors who exercise this option must sacrifice 50-100 percent of equity that builds in a house, and may not participate in home equity loan programs. This program is only available to owner-occupied residences. This program requires consent from a lender: consent is not automatic and may be freely withheld, though withholding consent can result in a foreclosure with adverse financial results.
A Deed in lieu of foreclosure is a deed instrument in which a mortgagor (i.e. the borrower) conveys all interest in a real property to the mortgagee (i.e. the lender) to satisfy a loan that is in default and avoid foreclosure proceedings.
The deed in lieu of foreclosure offers several advantages to both the borrower and the lender. The principal advantage to the borrower is that it immediately releases him/her from most or all of the personal indebtedness associated with the defaulted loan. The borrower also avoids the public notoriety of a foreclosure proceeding and may receive more generous terms than he/she would in a formal foreclosure. Another benefit to the borrower is that it hurts his/her credit less than a foreclosure does. Advantages to a lender include a reduction in the time and cost of a repossession, lower risk of borrower revenge (metal theft and vandalism of the property before sheriff eviction), and additional advantages if the borrower subsequently files for bankruptcy.
In order to be considered a deed in lieu of foreclosure, the indebtedness must be secured by the real estate being transferred. Both sides must enter into the transaction voluntarily and in good faith. The settlement agreement must have total consideration that is at least equal to the fair market value of the property being conveyed. Sometimes, the lender will not proceed with a deed in lieu of foreclosure if the outstanding indebtedness of the borrower exceeds the current fair value of the property. Other times, lenders will agree since they will end up with the property anyway and the foreclosure process is costly to the lender.
Because of the requirement that the instrument be voluntary, lenders will often not act upon a deed in lieu of foreclosure unless they receive a written offer of such a conveyance from the borrower that specifically states that the offer to enter into negotiations is being made voluntarily. This will enact the parol evidence rule and protect the lender from a possible subsequent claim that the lender acted in bad faith or pressured the borrower into the settlement. Both sides may then proceed with settlement negotiations.
Neither the borrower nor the lender is obliged to proceed with the deed in lieu of foreclosure until a final agreement is reached.
In New York, the Home Equity Theft Prevention Act has created some confusion regarding this frequently-used method of settlement. It is unclear whether HETPA applies to deeds in lieu of foreclosure since there is no clear exclusion as there is for a referee’s deed, for example. The 2-year right of recission is not a risk that banks or title insurers are comfortable with, especially given the complexities of compliance, so many banks and title insurers in New York are not willing to work with deeds in lieu.
If you have any question about REO properties or are in need of an appraisal from an established high quality appraisal company then Contact Us here or Order an Appraisal here.