What’s The Difference Between A Short Sale And A Bank-Owned?

Banks
Lenders
Short Sale Lenders
Bank Negotiators
Asset Managers

These are all terms seen in listings. Realtors® use them daily, but the consumer does not. Even buyers who have been out searching for a while can become confused about who they are actually negotiating with, and how that might affect the transaction.

I have a client that I’ve been working with for a few weeks. Last night I got an email with a few questions that made it clear he did not understand the difference between a Short Sale and a Bank-Owned (REO) when it came to negotiation.

Question One (about a Short Sale): “Do you know how many offers the bank has and when they are going to pick one?”

Question Two (about a Bank-Owned): “How long does it normally take before a bank decides how much they want for the home?”

First, I’d like to say that this is a cash buyer. This is also a man who is not trying to low-ball anything. He certainly would like to pay as little as possible (who wouldn’t) but he is not a buyer who will go in 10-20% under asking and “see what happens.” This is an investor I’ve worked with for several years and have even seen him go over asking price to make sure he gets a property that he wants. But even with all that experience, the current Short Sale/REO market still causes confusion at times.

Some Common Aspects:

Both a Short Sale and a REO property have Bank Negotiators or Asset Managers. These are bank employees who have the property file and it’s their job to get the best possible deal for the lender. In a Short Sale there will be one Asset Manager for the first trust deed and one for the second (if there are two loans on the home). In both cases these negotiators will order comps and price opinions (similar to an appraisal called a BPO) to determine the value of the property they are handling. Bank Negotiators/Asset Managers are mainly looking at dollars and cents, they are responsible for loss mitigation on behalf of the lender and try and justify a offer price/sale.

At this point the differences between a Short Sale and REO come into play.

Short Sale:

In a Short Sale situation, the current owner is still the seller. We will still work with the sellers. Once we have determined what we want to offer…..price and terms….we submit that offer to the sellers in much the same way as we would an Equity-Seller. Then the seller/listing agent packages that offer together with documentation supporting the financial hardship of the seller and sends that to the Short Sale Lender(s) to approve.

The Short Sale Lender(s) are being asked to accept less than the amount owed on the mortgage in exchange for releasing the lien. Our offer includes the price and terms the seller is asking them to accept.

If the Short Sale Negotiator determines that our offer meets their guidelines, we will normally get an approval. If not, then they will come back to the seller and tell them what they are willing to accept. This process involves the research of comps and price opinions (as outlined above) and because of the amount of work involved, this approval process can take a long time….months at times. Because the Short Sale Lender can come back with different terms/price, this is often misunderstood as the lender “countering” the buyer. They are not…..they are simply defining what they are willing to accept to satisfy the lien.

Bank-owned:

When the property has been foreclosed upon it is now owned by the bank (REO=Real Estate Owned) and most of the work has already been done. Before listing the property, the Bank Asset Manager will have ordered the price opinion and seen comps. They normally price the home rather aggressively to generate quick offers. Often the offers will be over asking price if the home is particularly nice. Negotiations will be very similar to an equity seller.

Asset Managers will look at offers to see which have the best chance of closing quickly and easily. For this reason all-cash offers normally take precedence over financing….even if they are slightly less in price. Although some lenders do take a long time to respond, normally you can expect an answer within a day or so….again, similar to an equity seller. Banks are also looking for the shortest time frame for closing. So a 30 day escrow will be more desirable than a 60 day escrow.

Additional Points:

There are other aspects to the transaction where there are differences too. For instance, if we are working with a Short Sale, we are not going to incur any buyer costs until we know that our price and terms have been approved. There is no reason to pay for a home inspection nor order HOA documents if the lender is going to come back and ask for an unreasonable purchase price. For this reason, we often don’t find out about problems until AFTER we get Short Sale Approval. At this point it’s often difficult to go back to the lender(s) and ask for credits due to repairs or other problems.

With a REO property, the listing will always state “As-Is” but I often find a Bank Asset Manager is able to make repairs when a home inspection finds a significant problem. I’ve had mold remediated, electrical boxes rewired and roofs repaired. Certainly they are not going to be fixing loose hinges nor replacing screens, but if the case can be made that any future buyer will have the same issue….they can justify making certain concessions. Again, this is similar to an equity seller.

REO properties behave more like Equity Sellers. They are likely not to take longer than a standard sale. Short Sales (unless they have already been approved in terms and price) will require an approval process which can take a long time to complete.