Short sale and bank owned homes were, during the Great Recession or Global Financial Collapse, considered a possible way to get residential real estate at bargain prices. Today there are very few of these distressed properties available to buy, and for those interested in them, there are a plethora of warnings as the risks can be huge.
In this article we’ll touch on short sale and bank owned homes, plus foreclosure auctions. These are uncommon now, but people do ask about them.
What is a short sale?
A short sale happens when a property owner owes more than the property is worth and needs to part with it. The “short” part of the name refers to the bank or other lender agreeing to take a “short payoff”, meaning that it will accept less than full payment.
A negative for the seller is that this forgiven debt counts as taxable gain, so income taxes will or may be due. A tax professional can offer guidance on this.
If someone is buying a home offered as a short sale, it’s important to understand that many of the regular customs of buying a home don’t apply:
- usually there are no pre-sale inspections such as pest or home inspection
- the seller has a contingency to back out of the sale if the bank does not agree to the short payoff
- the seller’s lender can cancel the sale
- if the pending sale does go to the closing table, it will be on the seller’s lender’s timeframe
- and many other “differences”
- a buyer’s lender may not object to financing a mortgage for a short sale, but there are probably some caveats
Related reading on our main site (from 2010, when this was a big topic): What’s the difference between short sales and foreclosures? What is an auction?
Foreclosure Auction
A foreclosure auction is when the prior owner defaulted on the mortgage and the bank or other lender takes it back and tries to sell it auction style on the courthouse steps. The lender wants to part with it before doing anything with the home such as preparing it for sale, providing any types of disclosures, etc. Beware that:
- there are no disclosures
- no preliminary title report (which insures for “good title”), so there could be additional liens and debts that must be paid
- sales are all cash, no contingencies only (no financed sales)
- these are the riskiest type of distressed sale
Often flippers, contractors, and builders are the ones to make the bids on these homes.
If they don’t get willing and able buyers to purchase the property for the minimum amount to clear the first mortgage, the bank will take the home back and become then seller of the Bank Owned Home or REO.
See also (from our Valley of Heart’s Delight blog) Can a real estate agent help you to buy a foreclosure?
What is a Bank Owned Home or REO?
REO stands for “real estate owned”, and it refers to real estate owned by the bank or lender that had the mortgage before the owner defaulted and lost the property in foreclosure.
Bank owned homes are sold in As Is condition, but many lenders who take properties back do some work, such as cleaning and painting, before the real estate is sold.
- they may or may not have pre-sale inspections
- disclosures are minimal, since the last owner is out of the picture
All of these types of distressed home sales may be opportunities for savvy home buyers, but there are also extra risks as opposed to buying a “regular” home sale type. Buyer beware!
Browse Short Sale and Bank Owned Homes For Sale (if any)
Below we’ll share Santa Clara County short sale and bank owned homes for sale, if there are any at all. At the time we are publishing this article, there are merely 5 homes of this type listed on the MLS. (Foreclosure auctions are not on the MLS, at least never in my experience in Silicon Valley.)
