Tuesday, October 19, 2010

Bidding on REO's vs Short Sales Flips

The offer process for REO flip properties differs significantly from the short sale transaction flip properties.  REO fixers come with virtually no disclosures. This means that your inspections need to be even more comprehensive and in-depth than usual. Don't overlook checking with the city and county for violations and permit history. The selling lendor may also reduce the inspection period to as little as seven days. So you have to do more in less time. Getting an accurate estimate of the condition of the property and what it will take to bring it to sellable condition is your first priority. REO lenders often assume you know the condition of the property when you make your offer and are unwilling to negotiate based upon your inspections. If you find unexpected, expensive fixes, you may just want to cancel your offer. That's what the inspection process is all about.

Make your offer on an REO property as "clean" as possible: don't ask for credits, offer a 15 day escrow, use the title company offered by seller, make earnest money deposits sunstantial (3%), offer to remove all contingencies within seven days, and make sure you have submitted any and all lender specific forms with the offer. 

 Making an offer on a short sale property differs in several ways. First, you will get disclosures. Also, there may be inspection reports available. Check and see if there is an approved price for the property.  See if an NOD had been filed. Is there a sale date already been set?  How many lenders are involved? Has the seller submitted a complete package to the lender(s)?  How experienced in short sales is the listing agent?

Short sales differ from REO's in another important way:  While it would be ethically wrong to make offers on several REO's simultaneously unless you planned on buying all of them, it is perfectly acceptable to have offers out on one, two, five or ten short sales and only plan on buying the first one that the selling lender accepts.  So find an agent willing to make several offers a week for you on short sales.  Remember that no time frames start on a short sale until the bank accepts your offer.  You generally don't even put up any earnest money until the bank accepts your offer.

When the bank accepts your offer on an REO transaction, you complete your inspections and you find significant new, costly troubles with the property, you can negotiate for consideration or price reduction.   You should get an answer back (accepted, rejected or countered) within a few days. However, in a short sale transaction, the entire short sale approval process may start over and you might not get an answer for weeks (or the property may go to auction while you are waiting). 

So, whether you are going after an REO or short sale, remember it's a competitive environment.  You may have to make ten offers before you get an acceptance. Also, if your offer does not get accepted, try to get into backup position. These days, about 35% of offers fall out of escrow. Most important of all, get an agent who knows what the home will sell for in rehabbed condition and has a good working relationship with the heavy hitters in the RE0 and Short Sale market in your area.

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