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Foreclosures, Short Sales, and REOs: Which Is More Profitable?

Distressed Home in Fort LauderdaleReal estate investors are always on the lookout for homeowners willing to sell their homes at below-market prices. These homes are often properties in a bad state of disrepair or homes with major issues like foundation damage.

They may also be homes where the homeowner defaulted on the mortgage, and the lender has repossessed the property or is on the verge of doing so. Such homes are also sold below market value, and investors can make a ton of profit if they get their hands on one of them, according to Upkeep Media Inc Company.

But buying a distressed house is not as simple as buying a home listed on the Multiple Listing Site (MLS). There are different types of distressed properties available on the market. The home may be a foreclosure (the most common type of distressed home), short sale, or a Real Estate Owned (REO).

Each property type presents different sets of opportunities and challenges to real estate investors. What is the difference between foreclosures, short sales, and REOs? And what are the pros and cons of buying one type of property over the other?

Open House sign for a short saleShort Sales

A short sale happens when a distressed homeowner agrees with the lender to sell the home at a price below its market value. The homeowner does this to avoid an auction and the negative impact a foreclosure would have on their credit. Homeowners who find themselves “underwater” may also choose this option. A home is underwater when its market value is less than what is owed on the mortgage.

Lenders may let a homeowner make a short sale if it becomes clear that the borrower is not likely to ever pay the mortgage. A short sale guarantees that the lender will recoup some of the debt and avoid the home’s protracted foreclosing process.

Pros

  • The home will normally be sold for a lower price than similar homes on the MLS.
  • Unlike an auction, the sales process is similar to a traditional sale; it is straightforward.
  • Short-sale homes are often in better shape than foreclosed homes since the homeowner still lives there.
  • There is less competition than when bidding at a foreclosure auction

Cons

  • Whatever price you agree with the homeowners must be approved by the lender
  • It could take months (up to six months) for the lender to accept your offer
  • There are no guarantees; if a buyer with a better offer comes along, your contract will be canceled, and you will lose the money you spent on the home inspection and appraisal.
  • In the time you wait for the lender’s approval, you will miss other investment opportunities.

Person at Foreclosure Auction with paddle number in handForeclosure Auctions

A foreclosure happens when a delinquent homeowner is evicted from their home, and the lender takes over the property. The lender subsequently arranges to have the home sold at a public auction to cut their losses and recoup some of their investment. Everyone can bid at an auction, including the foreclosing lender (who will usually bid the amount owed on the mortgage). The winning bid at an auction is expected to pay cash for the home.

Pros

  • Buying with cash increases the likelihood that a buyer will get a very good deal.
  • Lenders are usually eager to liquidate the asset as quickly as possible

Cons

  • The home is sold “as is” and will need major repairs due to being vacant.
  • Seller disclosure is not required.
  • Smaller investors may not have the ability to come up with cash on the spot
  • A clear title is not always guaranteed
  • Newbie investors may not have the experience to outcompete the hard-core investors who frequent these sales.

Photo of REO HomeREO

If a foreclosed home fails to sell at the auction, it becomes an REO home. This means the lender now owns it and has the right to sell it. The conditions attached to an REO home sale make it the best kind of distressed property to buy. This is because lenders will remove many of the hurdles that make buying other distressed properties a problem.

Pros

  • The lender will pay off any lien on the home.
  • Unlike when you buy at an auction, you can inspect the home before you make an offer.
  • Buyers don’t have to deal with the homeowner, which makes the sale less complicated.
  • Lenders may be willing to finance the home if they own it
  • The homes will usually be sold below market price
  • Because the sale is straightforward, it is easier for beginner investors to buy an REO home than a foreclosed property

Cons

  • The home is sold “as-is.”
  • Most REO homes are in a bad state because they are sold at the very end of the foreclosure process, and the home has been vacant for a long time.
  • Seller disclosure is not required.
  • It might take weeks for the lender to accept your offer
  • Even when your offer is accepted, the contract may be canceled without explanation if the lender gets a better offer
  • Lenders may prefer to bundle their REO homes and sell them to a big investor. In that case, smaller investors will not even get a chance to make an offer.

There you have it, the different types of real estate sales that you may find profitable. If you would like further advice on the subject, Real Property Management United is here to help! Our team, which is based in Fort Lauderdale, is the expert in the industry and the local area to help you make your investment properties as successful as possible. Contact us today!

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