Why Are REOs Better than Short Sales?

By Raymond Stoklosa · March 3rd, 2009

Real Estate Questions and Answers Q: I’ve been reading your blog for awhile and it seems like you are biased against short sales and approve REOs – can you explain why?

A: Am I that transparent?… I do actually prefer REOs to short sales for a number of reasons. Most notably because buying an REO is generally a more business like, efficient transaction and takes far less time to complete with greater certainty.

You see, a short sale is a case of a desperate seller. This means that emotions are involved and tension runs high. Plus, the lender must approve the sale and they generally are less likely to take below-market offers because the property is not technically on their books yet. So, more often than not, a buyer would be better advised to wait until the property is foreclosed on and becomes an REO.

Let me describe the process of a short sale – which will shed some more light on why I find them less desirable.

First off, lenders are almost universally unwilling to assign the file to a loss mitigator until they have a fully executed sales contract signed and completely documented by both the buyer and seller, including a buyer’s pre-approval letter from a reputable direct lender.

Then several things must happen. The seller must demonstrate a genuine financial hardship. That is, show an inability to make loan payments. Examples of acceptable hardship are job loss, divorce, serious illness. Owning a home whose value has declined below the outstanding loan balance is not a hardship, it is a consequence of market fluctuation.

All throughout this process, the lender is the controlling force in the potential transaction. A lender will make a business decision based upon whether a short sale or a foreclosure will generate more dollars for them, so short sale homes may not be bargain priced or below market values. Lenders know what the property is really worth. They have fee appraisers and independent brokers available to determine the true value of the property. A buyer can expect to buy the property at market value. Buying a home at 50-cents on the dollar is unrealistic. Check the comps, the lender has. And, check the most recent comparable sales again because all real estate markets are local and fluid.

Given that fewer than 40% of the alleged short sales fail to close, and that most short sales can take between 3 – 8 months to actually close escrow, it is far more likely for a buyer to find a more suitable home in a shorter time for a better price.

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