A couple of people have asked what’s better to buy: houses that are foreclosures (REO, Real Estate Owned, Bank Owned) or short sales?

Well, first off, what is meant by better? Cheaper, easier, surer? Let’s address all three.

Foreclosures are generally priced very low, because banks want them sold fast. Houses are usually vacant and in poor conditions. Almost always there is only one lender, the second lender having been wiped out. But as the market is showing, bank owned properties are selling for more than asking price with multiple offers. A house listed at 9,000 sold for 5,000, with 15 offers.

On the other hand, short sales are usually owner occupied; in poor to fair conditions; banks act like they don’t want them sold; and there are usually two lenders. Listing agents and sellers want to get an offer that will satisfy the first and second lender but this is usually not possible. A house that was a short sale for 5,000 went into foreclosure, and came back on the market as an REO for 5,000. There was no second to worry about, and the bank priced it low to generate offers, which it did, and got more than asking price.

Generally speaking, a foreclosure sale will be cheaper than a short sale. However, it could take somewhere between 6 to 9 months from the date of foreclosure until the bank puts it on the market. Most buyers can’t wait that long for something that may or may not be. Also note that a low price draws more buyers, thus a higher sale price. At this time, short sales are very competitive.

Next, are bank owned properties easier to buy? Or rather, less difficult to buy? Right now, multiple offers are making it very hard to get an offer accepted. Also, banks come out with their own purchase contract; their very own submission procedures; and they want to dictate and control the process. Banks most always stipulate that the sale is As-Is; and they threaten per diem late fees. And worst, they claim the right to cancel the contract at any time for any reason. So, they too are difficult transactions.

Short sales are very difficult because banks take a long time to go over the owner’s information and the offer. It’s not uncommon for banks to approve in four to six weeks, even if there some agreement between the first lender and second lender. A first may give a second only 00 to release, and the second may accept. Or the second, may want 10 to 20% of their money. If there is only one bank it’s less difficult. The lengthy process becomes irritating, annoying, and frustrating to the point that most buyers quit and move on.

Are foreclosures more of a sure thing? Yes. The bank has done a Broker Price Opinion (BPO), set a price, done a few repairs, and put it on the market.

A short sale is less, less certain. If there is only one bank, the odds of getting the offer approved are 50-50; two lenders 25-75, a 75% chance working against the buyer. With three lenders, it’s nearly impossible. This is why many buyers avoid or try to avoid short sales. That with the fact, that a lender may entertain other offers coming in later. Buyers don’t want to wait two to three months only to be told sorry this offer isn’t going to work for the bank.

So taking everything into consideration, i.e. price, difficulty, and certainty, bank owned sales (REO) are ‘better’ than short sales.

My advice to buyers is go with a regular sale first, an equity sale, and a foreclosure second. If there’s a house that buyers really, really, really got to have, and it’s a short sale, then so be it. Go for it. This is the third option. There was a fellow who wanted to expand his business space; when a house adjacent to his business came up as a short sale, he bought it because it made sense. (Of course, price should be attractive.)

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