Distressed Property Types

Opportunities will present themselves from time to time in this area as the fall out from the economic crisis continues to weigh on homeowners. You first need to know that distressed properties come in two "flavors": (1) properties owned by banks and investors (known as REO's or real estate owned) and (2) short sale properties (properties that have yet to become foreclosures). Knowing the difference can assist you in your decision and expectations for the negotiation process as each carry their own unique traits.

Real Estate Owned (REO)
An REO has already gone through the foreclosure process and any negotiations will be exclusively with an Asset Manager of the institution charged with its sale and disposition. The key point to know with an REO is that the Asset Manager is charged with minimizing the loss the institution will incur. As such, while the Asset Manager is certainly motivated by selling the property, the Asset Manager is also charged with getting as much as he or she can for the property.

As such, you should not expect that you will be able to pay 50 cents on the dollar for the appraised value of the property. Also, expect that the property will be sold "as is" and this may mean that financing may be limited in scope as the property may be ineligible for some types of financing, like FHA.

Short Sale
Short sale properties are offered by the current owner who now owes more than the property is worth. The owner is seeking assistance from the lender to sell the property for less than the balance of the existing mortgage(s). As a buyer, you will be negotiating with the seller but will also have to obtain the approval from the bank/lender to accept your offer.

While various Federal programs have been implemented to assist in the sale of short sale properties, there is no guarantee that you will get a "steal" here either. The owner has to be approved for the sale based on the submission of a hardship package and additional parties may have to be involved if there is Private Mortgage Insurance or a second lien(s) or mortgage on the property. However, the sale may include appliances and other items that could be helpful when seeking financing.

Overall, depending on your situation, either path could offer benefits to you as a buyer but they may also bring difficulties (many unexpecte) which could derail your timelines. If your timeline is tight - say 90 days or less to find a home - buying a distressed property may not be for you as the additional parties involved could delay your negotiations.

Including distressed properties in your selection process could be useful, just make sure you are working with an agent and a lender that can best advise you of the benefits and potential pitfalls associated with either choice.