With large quantities of so-called “distressed properties” inflating the US real-estate market, tides of savvy investors are eager to chip in. “Distressed properties” may refer to foreclosures or pre-foreclosures, short-sales or REO – properties.
Foreclosure is the process whereby the bank takes possession of the property after the property owner fails to pay their mortgage dues. “Pre-foreclosure” is a term often used by the banks to market the property as a distressed asset.
Short Sale – selling a property for less than its mortgage amount. Banks would often prefer this option as it saves them the fees, and costs and the waste of time associated with foreclosure procedures.
REO stands for Real Estate Owned property. Once the foreclosed property fails to sell at an auction, the bank is forced to take it back into possession, maintain it and prepare it for sale. REO deals are usually the most profitable for buyers since the banks are motivated to sell the property as quickly as possible and are willing to sell for significantly reduced price.
Short Sales are preferable by some buyers because the home is still occupied and may require less maintenance and repairs than, say, foreclosed property. However, in case with a Short Sale, the seller is less pressured to sell and sometime will wait for the highest bid. Therefore, prices here are not as low as with foreclosure or REO-property. Also, Short Sale deals are often embroiled in lengthy bureaucratic processes and may literally take months to get approved.
With Foreclosure, there is a better chance to get a bargain, although bids from other buyers may steal your deal. Also, foreclosure deals are more risky due to legal issues that might come up, and due to the fact that the property sells “as is”.
REO-properties might offer the best value as it is the last stage of the foreclosure process. The house didn’t sell as a Short Sale, it failed to sell at an auction and the bank had to repossess it, keep it and prepare it for future sale. At this stage, the bank will be most motivated to get rid of the property and will be open to substantial discounts in price. However, the downside here is the maintenance issues. Usually, the property hasn’t been occupied for such lengthy periods of time that major maintenance and repairs are in order.
Each situation is specific and buyers are advised to assess all aspects of a deal before committing to it. Distressed property deals may be tricky and it is always recommended to hire an accredited professional who will help to maximize profits and minimize risks of such deal.