Definition: Short Sale versus REO

This will be a short blog because I’ve found people like short, sweet info. 

A lot of real estate agents are understandably confused about the difference between the two most common distressed sales: a short sale and an REO.  The basic difference is who owns the property, whose name is on the deed.  In a short sale, the buyer contracts with the seller and the home still belongs to the seller until the transaction closes.  The role of the seller’s lender is to accept or not accept the contract price and to work out the deficiency with the seller.  Throughout the process the seller still owns the property and a good way to think of it is, at any given moment the seller could win the lottery, pay off the whole loan, remove the short sale approval contingency, and sell the house completely clear of debt. 

An REO, or real estate owned, property is one that has been foreclosed on and is now owned by a financial institution. The original owner is gone.  The offer to purchase goes directly to the financial institution and the buyer contracts with that institution.

In summary: Short sale: buyer contracts with seller and lender has to approve; REO: buyer contracts with the owning financial institution.  The difference between the two is ownership.

Hope that was short and simple enough!

Real Estate is Still a Human Business

Real estate is still a human industry, thank goodness!  And agents can and do make mistakes.  State commissions and the REALTOR and local associations can police mistakes but that doesn’t change the impact to the buyer or seller.  So, always feel free to ask about anything that is important to you or seems a little off to you throughout the transaction, whether you’re a buyer or a seller.

In my neighborhood in North Asheville, we have a couple of houses that are out of the city school district.  There isn’t any rhyme or reason other than when the county schools split from the city schools individual households could choose to stay with the county.  These households continue to pay city taxes that pay for city schools, are in the city limits, and are governed by the same zoning as their neighbors.  They just happen to be in the county district. This is such a unique and unusual situation that it wouldn’t necessarily occur to a listing agent to double check the school district.  I found out by accident—fortunately not involving representing a homeowner or buyer!  However, as any parent of school-aged kids knows, a school district makes a big difference in purchasing a home.  So, there’s absolutely no harm in double-checking the address with the county or city, just in case.

Though buyer’s agents are supposed to follow up on items that are represented by the seller and agent, some things just may not routinely occur to an agent.  Your best bet as a client is to ask the agent to go one step further and ensure the accuracy.  It can be a royal pain, but so can finding out that your new home isn’t connected to public sewer. Yep, that one happened, too.  The seller had always understood and never questioned that it was on city sewer and since they paid a city sewer bill for years what would make them think otherwise? So, when they sold their home, they said it was on city sewer.  When the new buyer did some sewer repair work, they found they were on a septic system.  Imagine their surprise!  And imagine being the listing or selling agent.  Yikes.

Selling homes in Asheville, I’ve had to track down governing bodies for roads in disrepair, sometimes finding that no state, city, or private entity took ownership…even the road that had the city water line straight down the middle!

So for caution, If anything seems out of order or just a little off, or if you’re in a border area between jurisdictions, always investigate systems one step further.  And ALWAYS feel free to ask your agent to research just a bit more.  It can save both of you some very serious pains down the line.

Dude, where’s my equity?

the Federal Reserve says that 7 trillion was lost in real estate values between 2007 and 2009.  What does that mean? If we look hard enough can we find it?  Is it between the cushions of the couch with the remote control? Unfortunately, the concept of value is a lot more complex than that and the missing word is “perceived”.

So what actually happened?  What actually vanished?  Actually, nothing “vanished” because the 7 trillion didn’t really exist; 7 trillion one dollar bills weren’t actually floating around in circulation and then yanked out and burned.  7 trillion was the sum of the perceived value of real estate held by the public and the lending institutions at that time.

So let’s say you bought your home in 2005 for $150,000 and you went to sell it a couple of years later;  in February 2008 a buyer put it under contract for $200,000 and the appraisal supported this.  But, let’s say that unfortunately, the contract fell apart and you had to go back on the market in September of 2008.  Now the only price a buyer will pay is $175,000.  Does that mean you lost 25K?  No, it means you got your home under contract as the market did a complete 180 degree change AND unless you had received that extra 25K in actual cash by selling at the peak, then that 25K was in theory only.

Home Equity is the difference between the total amount that is owed on a home and how much you can liquidate it for at the moment.  If you owe $150,000 on a home, including lines of credit and such, and you can sell it for 175K, then you have 25k in equity, cash in hand, if you sell it AT THIS MOMENT.  If you can only sell it for 125k and you owe 150K, then the perceived value is less than you actually paid and you now have negative equity AT THIS MOMENT.  Negative and positive equity are dynamic and are only realized when they are “cashed out” so to speak.

No matter what type of real estate market, we’ll always have people who paid more than the current perceived value; the difference in what happened in 2007 to 2009 is the sheer number of homes and the extremes between the high and the lows.  And those numbers and extremes have led to a loss of 7 trillion in perceived value, like the Federal Reserve said!