Differences between buying a Bank Owned and a Short Sale Property

Many of my clients ask me the difference in the process of buying a REO and a short sale property. It may be confusing at times: Who is the seller? Who makes the decision if they are going to sell the property? Both transactions require the banks’ involvements but the process and even strategy to submit offer can be very different. Below is a chart of the differences between the two transactions:

  REO Short Sale
Seller/Offer acceptance by Bank Homeowner
Additional Approval N/A Mortgage Holders/Investors (Bank and investors who hold the notes)
Acceptance Timeframe 24-72 hours 2 weeks to 6 months (click here to read about the process of buying a short sale property)
Communication During Escrow Difficult to communicate with listing agents and even the escrow officers, as they have many REO listings in pipeline. Relatively similar as a regular sale.
Liens Seller will clear all the liens prior to transferring the property to the buyer.  Sometimes, bank or sellers will not be willing to pay for certain liens, therefore, the buyer will need to add the payment for the liens into the purchase price.
Repairs Negotiable even after Inspection Contingency. Once bank provided the approval, no repairs will be allowed. If the buyer request repairs credit, the approval process may have to start all over again. Seller in this case may not agree to do the repair since seller cannot afford to pay for mortgage, not to speak the repair costs.
Contract Type Standard C.A.R. contract plus banks purchase addendum (usually sign after the bank accepted the offer) which supersedes the purchase contract. Therefore, be sure to read the addendum carefully before signing. Standard C.A.R contract with the homeowner.
Disclosures Minimal seller disclosures or waived Still require Seller Disclosures
  However, REO does not exempt bank to provide:-          Lead Based Paint Disclosure

–          Mold Disclosure

–          Provide operable smoke detector

–          Properly strapped water heater


Remember, when you are purchasing a property that involves the bank’s decision, it is a business deal between the seller and the buyer. The bank is seeking highest Net Purchase Price in the shortest period of time and they have a “system” that they have to follow. The offer strategies are very different when you submit an offer for a REO, short sale and a standard sale (directly with a homeowner).  Please be sure to work with a Realtor® who understands the process, so he/she may lead you to a successful transaction!

Helen Chong, is a Certified Distressed Property Expert (CDPE®) who can be reached if you have any further questions about selling or buying a property.


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