Ernest Villafranca

A couple of people have asked what's better to buy: houses that are foreclosures (REO, Real Estate Owned, Bank Owned) or short sales?

Well, first off, what is meant by better? Cheaper, easier, surer? Let's address all three.

Foreclosures are generally priced very low, because banks want them sold fast. Houses are usually vacant and in poor conditions. Almost always there is only one lender, the second lender having been wiped out. But as the market is showing, bank owned properties are selling for more than asking price with multiple offers. A house listed at $119,000 sold for $155,000, with 15 offers.

On the other hand, short sales are usually owner occupied; in poor to fair conditions; banks act like they don't want them sold; and there are usually two lenders. Listing agents and sellers want to get an offer that will satisfy the first and second lender but this is usually not possible. A house that was a short sale for $275,000 went into foreclosure, and came back on the market as an REO for $175,000. There was no second to worry about, and the bank priced it low to generate offers, which it did, and got more than asking price.

Generally speaking, a foreclosure sale will be cheaper than a short sale. However, it could take somewhere between 6 to 9 months from the date of foreclosure until the bank puts it on the market. Most buyers can't wait that long for something that may or may not be. Also note that a low price draws more buyers, thus a higher sale price. At this time, short sales are very competitive.

Next, are bank owned properties easier to buy? Or rather, less difficult to buy? Right now, multiple offers are making it very hard to get an offer accepted. Also, banks come out with their own purchase contract; their very own submission procedures; and they want to dictate and control the process. Banks most always stipulate that the sale is As-Is; and they threaten per diem late fees. And worst, they claim the right to cancel the contract at any time for any reason. So, they too are difficult transactions.

Short sales are very difficult because banks take a long time to go over the owner's information and the offer. It's not uncommon for banks to approve in four to six weeks, even if there some agreement between the first lender and second lender. A first may give a second only $3000 to release, and the second may accept. Or the second, may want 10 to 20% of their money. If there is only one bank it's less difficult. The lengthy process becomes irritating, annoying, and frustrating to the point that most buyers quit and move on.

Are foreclosures more of a sure thing? Yes. The bank has done a Broker Price Opinion (BPO), set a price, done a few repairs, and put it on the market.

A short sale is less, less certain. If there is only one bank, the odds of getting the offer approved are 50-50; two lenders 25-75, a 75% chance against the buyer. With three lenders, it's nearly impossible. This is why many buyers avoid or try to avoid short sales. That with the fact, that a lender may entertain other offers coming in later. Buyers don't want to wait two to three months only to be told sorry this offer isn't going to work for the bank.

So taking everything into consideration, i.e. price, difficulty, and certainty, bank owned sales (REO) are ‘better' than short sales.

My advice to buyers is go with a regular sale first, an equity sale, and a foreclosure second. If there's a house that buyers really, really, really got to have, and it's a short sale, then so be it. Go for it. This is the third option. There was a fellow who wanted to expand his business space; when a house adjacent to his business came up as a short sale, he bought it because it made sense. (Of course, price should be attractive.)

There is mold everywhere. Mold has always been here and always will be. Mold, mildew, yeasts are microscopic fungi. Like dust and pollen, mold float freely through the air, settling where there is moisture and warmth. Mold blackens the grout lines in showers, the sheetrock in walls and ceilings. Mold releases microscopic spores that cause allergic reactions, runny noses, sneezing, coughing, watery eyes, as well as irritating odors.

Mold in a house that is for sale can be a deal breaker. First, it's a hygiene issue, and second, it's a liability issue. Someone gets sick, they claim they were not properly informed, and then they want to sue somebody. Here are a few stories.

Story 1

A street sewer line burst and the sewage flooded into the basement. After everything was dry, it was found that there were dangerous types and levels of mold. The lab reported molds such as Aspergillus, Stachybotrys, Candida, Helminthosporium (Bipolar), etc. Scary! It was explained to the buyers that the seller was paying for the remediation, but they said this kind of stuff couldn't be completely cleaned, and since they were allergic to mold, they had to back out.

Another buyer bought the house, because he didn't give a hoot about mold, and the basement was going to be disinfected anyway. Different people see things differently.

Story 2

Another house flooded due to a broken water line in the kitchen. The entire floor level flooded up to three inches. Sellers did a lab report for mold, mildew, and spores. Mold levels were the same or less than outside so the buyers bought the house.

Story 3

Another house had mold in a closet and in the bathroom. The bank appraiser called it in his report and the bank made it a condition to lend. The bank asked for a licensed pest/termite inspector or mold inspector to clear it or say it was cleared. Buyer said, oh that stuff in the bathroom. I'll clean it myself. It's just like the stuff in my bathroom. Buyer got Tilex, bleach, and got busy scrubbing the closet and bathroom. Pest/termite inspector wrote a letter stating mold had been removed, and the bank made the loan.

Story 4

There was mold in the bathroom. Buyer was told to clean mold himself or pay someone to do it. Bank appraiser came and noted the mold in the bathroom. Buyer scrubbed it with cleaning products and then painted the bathroom. Appraiser came back said it was fine. Pest/termite inspector wrote a clearance letter but this particular bank did not like the pest/termite inspector's clearance letter. So a mold inspector was brought in; he saw that surface was clean and wrote a letter with a diagram stating bathroom was good. Buyer cost, $99. Loan got approved.

By the way, in this particular case, two other mold inspectors were called. One said it would cost $450 to take at least two air samples inside the bathroom and one outside. Another mold inspector said $550 to sample the entire house or just the bathroom. They both said it would take the lab three to four business days for the analysis and the report. Neither of them would do a visual inspection only, even though the mold had been identified only visually.

To give you an idea of what a mold report looks like click on Certificate of Mold Analysis from Pro-Labs, and for more general mold info go to US Environmental Protection Agency.

If you're buying or selling a house that has mold, get the bleach out and be ready to scrub. Also open the windows to air out the place. A lot of bank owned properties are in poor conditions and shut tight for a long time...creating a perfect place for mold growth. If it's a major infestation, call the pros or go look at another house.

In addition to the health issues, mold has become a liability issue. The California Association of Realtors (CAR) has a disclosure entitled Radon Gas and Mold Notice Disclosure, advising buyers about the health problems caused by mold, and every brokerage has a mold disclosure of their own. Realtors disclose to make sure the buyer is aware and to avoid potential lawsuits.

Last, there are about 200,000 harmless types of mold. We are swimming in an ocean of mold (dust, bacteria and viruses). For the average healthy individual, limited natural exposure to mold and its spores is a part of everyday life and is usually not a health threat. For individuals who are sensitive to mold, however, consult a mold professional and a physician.

There's a lot of bank-owned, Real Estate Owned (REO) property on the market right now. (Short sales follow second.) However, getting an offer accepted is challenging, and then getting the loan is something else. I've got buyers and I'm having a hard time buying!

Many REOs require buyers to get pre-approved with their lender. Buyers say it's steering and illegal. And it might be. So buyers cross out listings with this requirement.

Some REOs say no FHA. Others only all cash. Those listings don't exist for most buyers.

Getting accepted is tough because there are more buyers than houses. Some houses go pending in one day, while others take two-three weeks or more! REOs also require a lot of paperwork up front. So the first thing is winning in a multiple offers environment.

Next is the loan.

When the lender begins to scrutinize the buyer's finances, things get dicey. I usually cross myself when entering the loan phase. Things come up that were not known, ranging from lower FICO scores, insufficient funds, verification of employment, collection issues, and marital status.

Before the bank approves the loan the bank has to check out the property. The bank's appraiser will check for value AND conditions. What if the property's value is off? The bank won't do the loan. The buyer comes up with the money difference or the REO has to lower the price.

Mold, peeling paint, broken house heaters, ceiling cracks, pools, kill the deal. The dilemma for buyers is that if they don't do repairs, no loan. But they risk losing their money/efforts. The REOs problem is that if they make repairs, but the buyer can't get the loan, they're out the money. REOs just want to sell property 'as-is.' Their position is: we're selling it cheap because it's in poor conditions. That's not what the lending bank wants to hear. This can become a no-win situation. Whether 3.5% or 25% down, the lending bank wants things repaired.

Handyman specials or contractor specials don't exist for regular buyers.

Another cause for losing a loan is that the REO and banks' procedures waste time. The deal drags on past the deadline and past a couple of time extensions and then everyone gets mad and tired and the deal goes south.

Even when the same bank is doing the selling and lending, things don't necessarily go well. The REO department doesn't know or talk to the underwriting department. Other problems occur between the branch's loan officer and their underwriters. Underwriters keep coming up with condition after condition. Most often the underwriting department is in another city or state.

So what does it take to buy an REO? Number one, get the offer accepted...get it past the multiple offers. A good down payment helps. All cash is even better. Two, a house in very good condition or be ready to fix it. Three, good FICO scores, organized financials such as bank statements, W-2s, pay stubs, Desk Underwriter's approval, good work history, etc., AND patience.

There's a lot of bank-owned, Real Estate Owned (REO) property on the market right now - most of the inventory is REO with short sales following second. The REOs are generating multiple offers; however, getting an offer accepted is challenging with acquiring the loan adding to the challenge. I have buyers, and I'm having a hard time buying!

Many REOs are requiring buyers to get pre-approved with their lender, which never goes over well with the buyers. Buyers say it's steering and illegal, and it may be, so some buyers cross out listings with this requirement. REOs just want to double check because transactions falter weeks into the deal because the buyer's bank did not do the proper front end checks.

When the buyer's lender begins to really scrutinize the buyer's financial situation, things become dicey. I usually cross myself when entering the loan phase. The lender who said they could close the deal all of a sudden disappears. Things come up that were not known before, ranging from lower FICO scores, insufficient funds, verification of employment, collection issues, and residency status. You probably have your own stories.

Before the bank approves the loan the bank has to check out the property. Enter the appraiser. The bank's appraiser will go look at the property for value AND for conditions. What if the property doesn't appraise in value? The bank won't do the loan. Either the buyer comes up with the money difference or the REO has to lower the price.

What kind of conditions could prevent the loan? Mold, peeling paint, broken house heaters, ceiling cracks, issues with swimming pools, etc. The dilemma for buyers is that if they don't fix the problems, they don't get the loan, or if they fix the problems and don't get the loan, they lose what they've invested. The problem on the REO side is that if they fix the problems, and the buyer can't get the loan, the REO is out the money. REOs just want to sell property ‘as-is.' Their position is: we're selling it cheap because it's in poor condition. That's not what the lending bank wants to hear. As you can see, this can be a no-win situation. It doesn't matter if the buyer is putting down 3.5% for 25%; the lending bank wants things repaired.

Another cause for losing a loan is that the REO and buyer's banks have such different procedures that getting them to agree is time consuming. The deal drags on past the deadline and a couple of time extensions; everyone gets tired and angry; and the deal falls apart.

Even when it's the same bank doing the selling and lending, things don't necessarily go smoothly. The REO department doesn't speak to the underwriting department. It's a case of the left hand not knowing what the right hand is doing. Sometimes, even the one hand doesn't know what it's doing. The branch loan officer/consultant/specialist may not understand what the underwriters need because the bank changed guidelines yesterday. Sometimes they are just backlogged. Most often, the underwriting department is in another city or state, which doesn't help the situation.

What does it take to buy a REO? First off, get the offer accepted - get it past the multiple offers. A good down payment helps. All cash is even better. Second, be ready to conduct any repairs if the property isn't in good condition. Third, good FICO scores, organized financials such as bank statements, W-2s, pay stubs, Desk Underwriter's approval, good work history, etc. are musts.

Because the buying process is complicated and long, financed buyers are advised to be strong and patient. Their frustration is understandable; anyone would be frustrated...heck...we're talking about a lot of money, a lot of moving parts, and a big dream.

Hard Work Real Estate

Not all probate listings involve deceased parties. Sometimes the owner is physically or mentally sick and unable to care for himself much less the property. This is called conservatorshipr or sometimes probate conservatorship.

If the probate sale is indepedent administrator GREAT...it's a regular sale.

If it's with court confirmation...more complicated...more players, more time involved.

10% of the purchase offer is required in a cashier's check. In some cases when there are no offers, the court may make an exception and go with less.

"Delivered to you herewith is a certified cashier's check in the sum of $_____________________, being a minimum of ten percent (10%) of the purchase price, balance to be paid within 30 days of court confirmation."

No contingencies. Buyer may do inspections, have someone appraise property, finance purchase...but purchase is not contingent on anything. First reason for this sale not being great for first time home buyers.

A County agency who hires me has a special purchase form where there is no room for contingencies as in standard Probate Purchase Agreement.

"I/we have inspected the property and the offer is made as a result of this inspection, and not on any representation based by the seller or any selling agent. I/we agree that you offer the property "AS IS" without representation, warranty, or covenant of any kind, express or implied."

Another agency uses the standard Purchase Probate Agreement.

Once the offer is accepted, buyer is committed to buying. The court is petitioned for a date for confirmation. Backing out threatens the loss of the deposit or part of it. At the very least the money will be tied up for months.

"This sale is subject to Probate Code section 10350(e). Should the purchaser fail to comply with the terms of the sale, the purchaser's deposit will be held by this agency subject to the court's determination of damages provided in Probate Code Section 10350 (e) which states: "If the property is resold, the defaulting purchaser is liable to the estate for damages equal to the sum of the following: (1) The difference between the contract price of the first sale and the amount paid by the purchaser at the resale. (2) Expenses made necessary by the purchaser's breach. (3) Other consequential damages."

Sometimes someone will show up in court to overbid, but it's unlikely...unless it is such a deal that it is worth bidding 5% over plus $500. Second reason to avoid having first time home buyers...they can't take the stress of bidding and potentially losing or over paying.

The judge will ask if there is anyone else interested in bidding. If no, original buyer gets the property. If someone else wants to bid, the ante goes up. Suppose the original winner was accepted at $200,000, the bid in court would be $210,500. And then the judge will have bids go up in increments of $5,000 (in my experience) so the original buyer would have to bid $215,500. If he says yes, the next bid is $220,500, and so on, and on, and on, until someone gives up.

As for agents, only the agent with court confirmation gets a commission. I usually have a division of commissions agreement signed by original broker/agent, broker B.

Agreement between brokers.

Wherein,
A = The estate (Seller). If the estate has a broker, that will be broker A.
B = The bidder (Buyer). If the bidder has a broker, that will be broker B.
C = The successful over-bidder (New Buyer). If C has a broker, that will be broker C.

If the bidder (B) is outbid in court by a new bidder (C), broker B will not get paid any commission.

Brokers A and C will split commission 50/50 per custom which will also include 50/50 on the overbid amount.

By the way, if a buyer shows up to bid without an agent, the listing agent takes all the commission.

Probate sales are good transactions, specially the independent administrator ones. Probate sales require a little more understanding as most agents and buyers are not familiar with them.