Are you a cash investor looking to buy homes in Silicon Valley? Are you targeting distressed homes to buy?
It might be worth exploring the major difference between buying Short Sales vs REOs since each of them have it’s own risks associated with it. But before listing the major differences between REOs and Short Sales, lets understand what they are.
REOs are bank-owned homes which are sent to a Trustee Sales or an Auction as part of a
foreclosure proceeding. When a home is not sold to a 3rd party investor at the auction or court house steps, then the back becomes the owner on title hence the name REO.
Short Sale on the other hand is a sale transaction where the home owners are still on title and banks could have a stared foreclosure proceeding.
Now let’s explore the differences between REOs and Short Sales as far as investment opportunity and risks are concerned:
1) Ownership: Since the ownership of REOs are transferred to the bank, you are working with a business owner who has a great appreciation for time value of money. They are keen on liquidating the property and getting it off their book since it clears reserves requirements from the FEDs. For instance, if an REO home has a $1M value, typically (not always) a bank might have to set aside twice as much money to services that bad debt.
And that’s where the motivation of banks comes from since if they remove this $1M non-performing asset off their books, they will be able to free the $2M in reserves and lend it again.
But with Short Sales, the owners are still in the home and they could easily back out of a transaction.
2) Timing: REOs are listed for sale and the listing agents have 90 days to sell an REO home or it will be sent back to an auction. So, again there are more motivated folks in the food chain to sell these home vs a Short Sale where the owner might have different motivations.
3) Condition: REOs are often neglected and need more repair work compared to owner occupied Short Sale homes. So, if you are in the market for fixer upper, then REOs are better bets than Short Sales.
4) Restrictions: REOs purchases could come with deed restrictions where you might not be allowed to re-sell the home prior to 120 days. Banks also might attempt to put a cap on your re-sale profits. Yes, it’s an absurd attempt to interfere with market forces, but banks have done it to our investors, so you might see it as well.
Short Sales have no such restrictions since you are buying it from a home seller with the bank’s approval. As long you are not related to the home seller, you are fine.