often asked to define the three primary types of home sales and how they
differ. REO vs Standard sale vs Short sale. Which type of sale is the best deal? How long does each one
take to close? Should I be focusing on one and avoiding the
I put this web page together to help answer many of these
questions. Should you have others, please feel free to call me. I will be
happy to discuss property sales with you and how you can take
advantage of each type of sale!
types of sales
three most common types of property sales in the market today
are: Standard sales, Bank Owned sales (REOs), and Short Sales. Following is a description of each type
of sale, plus buying strategies to help you decide which type
will be the best for you.
sale or "equity" seller
This is the
type of sale that most people are familiar with. The seller
still has equity in the property, so this type of sale is not
a "distress" sale. The advantage of a standard
sale is the ease of purchase (no long wait time) and the cooperation of the seller, who is usually willing to
work with the buyer for repair credits, termite repair,
closing costs, etc. Also, standard sale properties are usually
kept in the best condition. Many sellers take extra care to
prepare the property for sale by doing repairs, painting,
The down side of standard sales is
that they may be the most expensive option of the three. Standard
sellers typically pad their list price in order to try to get
the highest price possible. There is often room for negotiation
however, and this is especially true if the home has sat
unsold for an extended period of time, if the sellers are in a
hurry to relocate, or if they are otherwise motivated by
Owned or REO sale
A bank owned
or REO (Real Estate Owned) sale is a the sale of a home that
has already been foreclosed and has returned to the lender.
The original owner is no longer part of the transaction. This
transaction is strictly between the lender (who is now
the owner) and the buyer. REOs are considered to be a
type of "distress" sale, in that the loss of the
home by the original owner was involuntary. These types
of sales are sometimes referred to as a foreclosure sale.
the lender/owner is exempt from having to complete certain
disclosures such as the TDS (Transfer Disclosure Statement).
The properties are generally sold "as is", so it is
up to the buyer to thoroughly inspect the property before committing
to the purchase. The advantage of an REO is price. REOs are
typically priced to sell, so a buyer often winds up with a
very good deal. The down side is often, condition. Many REOs
are left in poor condition, due to the neglect (or resentment) of the former owners.
This type of
sale is often confused with a bank owned sale or a
foreclosure, but it is neither. In a short sale, the homeowners still
hold title to the property and they are trying to
sell short (for less than what is owed on the home).The reason they are selling may be because they are
"upside-down" on the
property, or they may have suffered a significant financial hardship,
rendering them unable to make the mortgage
payments. Selling the home through a short sale may allow the
owners to avoid a foreclosure, plus it may have less of a
negative effect on their credit. Short sales are also
considered to be "distress" sales, since they
involve the loss of the home due to a financial hardship.
In a short
sale there are at three parties involved, the seller, the buyer,
and the lender(s), who must approve the sale and agree to
take the shortage. If there is more than one lender, they also
have to approve the transaction. This further complicates (and
lengthens) the short sale process. The advantage of a short
sale may be the price, as short sales are usually listed below
market value. The flip side is that it typically takes
considerably more time to close than a bank owned or standard
sale. Short sales (despite
the name) typically take the longest time to close. Much
of the time involves negotiating with the lender(s) and
getting approval for the sale. Also, there may be several
additional costs involved, as any deficiencies must be paid
off before title can be transferred. These additional costs
have to paid in cash (outside of the buyer's loan) and the
costs can be substantial. Remember also, that lender
approval is never guaranteed!
occasionally see a home listed as an "approved"
short sale. This indicates that the primary lender has
approved the sale price for a former buyer (one who may have
"walked"). Generally, the lender will still approve this
price for a subsequent buyer, but this is not guaranteed.
Therefore, "approved" is a bit of a misnomer. If the
lender feels the market may have improved, they may order
another BPO (Broker Price Opinion, a type of appraisal) on the
property. If the BPO indicates a higher price, the lender will
typically counter for the higher price, even if hey approved
the former price before.
following table summarizes the differences in home sale
remember that the answers
are generalities - There may be exceptions with
sale / equity seller
owned / REO seller
response time for your offer?
- Sellers will respond quickly to your offer.
- Lenders are anxious to sell REOs and will respond
slow. Your offer may get accepted by the seller and
the listing agent right away, but it will then be
submitted to the lenders and getting a response from
them will be slow to extremely slow
of time to close?
- Usually a 30-day escrow period if buyer is
purchasing with a loan.
to very fast - REO sellers will often ask for a faster
close time than for a standard sale.
- Most of the wait time with a short sale involves
getting lender approval (and this is all before
escrow is opened).
but not always accepted.
-The lack of a loan contingency is an incentive for
- Lenders prefer the faster close with a cash buyer.
and No - Cash is not a huge incentive on short sales.
concern of the lender is the purchase price and how
much the lender is being shorted.
down, FHA loan OK?
though cash buyer or buyer with higher down payment
will be preferred.
the initial list price is padded, since sellers want
to see how much they can get. They are more willing to negotiate
as the home sits unsold.
- Lenders usually price REOs to sell.
bag - Agents sometimes use "teaser" pricing
to draw an initial offer. Regardless of agent's price,
final price must be approved by the lender(s) so list
price is less meaningful than with bank owned or
is the best deal?
are exceptions, but standard sales are usually the
most expensive to purchase.
are priced well and are usually the best deal.
can be a great deal but watch out for hidden
costs. such as payoffs to 2nd lender,
delinquent HOA dues or taxes, negotiator fees, etc.
is the easiest to work with?
sales are usually the easiest and most
are generally easy to purchase, but are demanding on
time frames, plus are sold "as is". They can
also be competitive and you may find yourself in a
multiple offer situation.
sales are difficult because of the extended time
frame, lender negotiations, and additional
of contingency period?
17 day period typically used.
days or less. Lenders sometimes specify a shorter
period, for expediency.
due diligence period, once escrow has been opened.
from other buyers?
on price and availability. In areas with high numbers
of short sales, a standard sale of the
same model will be very desirable, increasing the
- REOs are in demand.
- Competition can be strong if list prices are low,
but a glut of short sales on the market, plus many frustrated
buyers, ensure that there will be an ample supply of
homes available for purchase.
all - Some are not required for an REO sale, such as
the TDS (Transfer Disclosure)
- Generally the seller will still complete
- Standard sellers usually take extra care to
prepare the home for sale.
sold "as is". Some have been damaged or
have been left in poor condition by the former owner.
Others may have been cleaned up by the lender.
- Many short sale sellers will continue to take
reasonable care of the home during the sale, though
some abandon the home.Almost all are sold "as is".
credit for repairs?
though the actual amount of the credit is
most part, the sale is specified "as
seller is in a "distress" sale and will
usually not contribute to repairs.
help with buyer closing costs?
many cases, Yes. Many standard sellers will agree to
pay some of a buyer's closing costs as part of the
Some lenders are OK paying closing costs as part of
the deal. Others won't.
though showing times must be coordinated with the
very easy - Most REOs are vacant
- Most short sale properties are still occupied
by the sellers and they are generally cooperative.
Some Short sale properties are vacant, so easy to
type of sale is best for a buyer who:
OK paying market value for the home
a home that is in good condition
asking for some concessions
a great price
to close quickly
doing repairs or rehabbing, if needed
not need to move right away and is willing to wait
a good deal
OK doing repairs on the home
Seller not fulfilling
repair commitments or doing second rate repairs,
removing items that were thought to be included
(window coverings, certain appliances), moving damage.
Extensive addendums with
lots of small print that may include: shortened
contingency periods, automatic contingency removal,
and/or ability to cancel escrow if they get a better
Lots of extra costs, like
pay-offs to 2nd TDs, delinquent property taxes and HOA
dues (these costs must be paid outside of the loan).
The buyer may be asked to help to pay part of
the short sale negotiator fee if the listing agent is
sale / equity seller
sellers almost always "pad" their list price. Many
do so to test the market in order to see what they may be able
to get for their property. With sellers, time is often the
critical factor. Generally speaking, the longer the property
sits unsold on the market, the more motivated they become and
the more they will be willing to lower the price. With that, a
low offer on a home that is new on the market is not likely to
sellers will simply wait for a better offer. They do get
discouraged over time however, and a lower offer on a property
that has sat for several months may have more of a chance of
close to list price if the home is new on the market
lower than list if the home has sat on the market,
especially for an extended period
for repair credits or additional concessions to help
"sweeten" the deal.
Owned / REO sales
very anxious to unload REO homes form their portfolio and as
such, they are generally priced to sell. Because of this,
buyers should be aware that many REOs receive multiple offers.
Buyers may find themselves in competition with other buyers,
so they should be prepared to bid aggressively or look for
additional home choices. REO sellers will prefer a cash offer
over an offer with a loan because a cash buyer can close
quickly plus has no loan contingency. REO sellers will not
generally accept an offer that is contingent on the sale of
Make an offer that is lower
than list but still reasonable (don't "low
Be prepared for several
Act quickly, as REOs are
Remember that short sales are
always uncertain - There is always the possibility that the
lender will reject the short sale and will simply foreclose on the
property. With that, it pays to have additional options. Many
buyers prefer to place offers on several short sales at once
with the hope that one will get approved sooner than the
others. While this strategy may be frowned upon by the real
estate industry, it is nonetheless common practice by many
Find out if the list price
is a "teaser" price by checking
Make your offer according to
the above. Also, get your offer in quickly, so that your
offer will be the one that the agent submits to the
During the lender submission
process, continue to view other home possibilities and
make additional offers.
Be prepared to wait, even if
your offer has been accepted and has been submitted to the
types of property sales
are some of the other types of home sales.
property has gone through the foreclosure process and is now
being sold at a public auction, usually through a web site.
Very often, the list price is merely the auction opening
bid, so the price can be very miss-leading. It very
typical for the price to bid up quite a bit higher than list
price, so use caution.
Occasionally, some real estate agents
also hold their own "auction" on a standard sale
property, in an effort to attract a lot of buyers. They will
often state that buyers are to fill out an offer form, and
highest bids will then be contacted to fill out a purchase
agreement. These types of auctions are really just agent
schemes to create buyer frenzy and to get buyers to bid much
higher than they normally would, Be carefully of being lured
into one of these promotional auctions.
is the sale of a property in which the owner(s) have died and
the home is being sold be the former
owner's successors. It is similar to a standard sale, with the
exception that a special probate purchase agreement must be
used. There is also a court date set during escrow to confirm
the purchase and to possibly provide an opportunity for the
sellers to entertainer higher bids on the property. The
court process could require 60 days or longer to complete
during escrow, but overall, it is similar to a standard sale.
One note - Find out of the sale is subject to court over bid.
If it is, other buyers may appear at the court hearing and put
in higher bids.
is a sale that is similar to a Bank Owned sale. In a Corporate
Owned home sale, the original owner has accepted a buyout from
their employer. The owner is usually a relocation company who
has been hired to sell the property. Corporate Owned sales
often have sales addendums similar to Bank Owned sales. These
addendums may request an expedited contingency period, an
"as is" sale etc., so pay close attention to all
is essentially a bank owned home that is being sold by HUD
(Department of Housing and Urban Development). A
HUD home is a 1-to-4 unit residential property acquired by HUD
as a result of a foreclosure action on an FHA-insured
mortgage. HUD is the property owner and it is offered as a
bank owned sale or REO) property to recover the loss on the
foreclosure claim. See Bank OwnedHomes above for information that also applies to a HUD home sale.]
house foreclosure sale
property has gone through the foreclosure process and is now
being sold at a public auction, usually through a web site. Few properties are ever sold at auction, with the
majority returned to the lenders to be sold later as an REO.
The reason for this is that they are often priced over market
price, due to the amount owed on the loan. Second, purchasing
at auction requires all cash, or a cashier's check, for the
full amount of the purchase. Because of this, many of the
homes sold at auction are purchased by investors with the
intent to re-sell or "flip" the property