Q: I’m thinking about moving up. I’ve just started browsing through real estate listings online. But it seems like every other listing I see has some arcane notation in it. The house descriptors are easy enough to figure out, but there’s lots of stuff in there that I don’t recall seeing when I bought my first home 12 years ago, and that I don’t really get, things like "Not a Short Sale," "REO," "Subj to lender’s approval," and the like. What does this stuff mean, and which of these things should I care about?
A: It’s not at all bizarre that you feel so out of the loop; even those of us in the real estate business continually face a steep learning curve to stay up to speed on new developments in this rapidly changing market. What you are seeing is a slate of lingo that is entirely new to those of us in geographic markets where very few short sales and foreclosures existed two years ago.
First, some basics. A short sale is a property that is being sold for less than the owners owe on it. In order for a short sale to come off, every mortgage lender and lienholder who holds a debt secured by that property must agree to forgive some or all of that debt. Short sales can, paradoxically, take many months to close, and many never do — the list price can be bizarrely lower than the actual price the lenders will accept, and lenders can take up to six months to even say ‘yea’ or ‘nay’ to a short-sale offer. As such, many buyers and buyer’s brokers avoid them like the plague.
An REO is a piece of real estate owned by the bank. These are homes that have gone all the way through foreclosure, and are now owned by the foreclosing institution. REO transactions have their own set of rules, and can be tumultuous, but they are generally feasible to get to close of escrow and sometimes provide a good deal for the buyer.
I’ll spare the excruciating detail of all the pros, cons and other implications of buying a home that is a short sale or REO. Suffice it to say that myriad implications for buyers do exist, causing buyers and their brokers to screen properties in or out of their house hunt based on the property’s status as a short sale or REO. In the same vein, knowing that a property is an REO allows an experienced house hunter and Realtor to understand a number of differences in the way that property can be shown, the terms the seller will (and won’t) accept, and even the process by which the contract will be negotiated.
On the other hand, in certain geographic markets and certain price ranges, almost every property is either a short sale or a bank-owned property (REO). When a property’s status is unclear, the listing agent may get numerous phone calls from buyer’s brokers screening the property before showing it by asking the same two questions: "Is it a short sale?" and "Is it an REO?" As a result, listing agents have found shorthand ways of communicating — in 15 characters or less: (a) that the property is not one of the dreaded types, (b) any factors that render this property a less scary prospect, even though it is one of the dreaded types, or (c) potential deal-breakers of which buyers should be aware if they are even thinking about trying to buy the place.
Use this "decoder" when you peruse listings online, pull property fliers from the boxes on For Sale signs, and visit open houses:
- Not a Short Sale: Again, many buyers and buyer’s brokers steer a wide berth away from short sales. This notation lets you know that the list price is probably related in reality to the actual price the seller would accept, and that the transaction is much more likely to be able to close.
- Not a Short Sale or REO: In areas and at price points where the majority of properties are distressed properties, this notation advises you that you are likely dealing with an individual seller. This tips you off that you might be able to negotiate a broader range of terms than if you were doing a transaction involving a bank, and that your escrow will likely be a lot smoother than one with an institutional seller.
- REO: Knowing that a property is an REO from the listing, you know that the seller is a bank of some sort, that they will only sell the property in as-is condition (nine times out of 10), that documents may take days or even weeks to get the institution’s signature, and that the escrow may take awhile to close. Also, the seller is very likely to have a strict addendum to your state’s normal purchase contract that may change the normal terms of sale — pay close attention to the terms of any such addendum. On the other hand, REO sellers tend to be willing to negotiate on price and to offer significant closing-cost credits and concessions.
- S/S or Subj to Lender’s Approval: Once upon a time, S/S meant stainless steel appliances. Now, it is sometimes used to mean short sale. All home-buying transactions are subject to the approval of the buyer’s lender, but when a listing agent notes that a purchase is "Subject to Lender’s Approval," it means that the property is a short sale and the approval of the seller’s lender(s) will be required to move forward. Sellers’ lenders withhold approval, most often, because they want a higher price, but can also withhold it on various grounds amounting to the fact that the lender feels the seller is not in sufficient financial distress to justify debt forgiveness.
- Short sale already approved by lender: A very small number of lenders will "pre-approve" an amount at which they will agree to a short sale; other times, the property will have previously fallen out of escrow after the bank approved the short sale. Since the worst part of a short sale is obtaining the lender’s approval, some believe that an approved short sale is less problematic than a traditional short sale.
- LA is expd w/short sale or using s/s negotiators: Whether a short sale is approved is largely controlled by the listing agent (LA), who must submit an application package to the lender and persistently negotiate with the lender(s) involved. When a listing agent has a track record of successfully closing short sales or has hired a firm of experienced short-sale negotiators, it is thought that the chances the deal will be successful are increased.
- No reports: This just means that the seller has no inspection reports to make available to prospective buyers; we see this notation often on REO properties.
- As-Is/Where-Is: Virtually all REO sellers insist on selling the property in as-is condition, meaning the buyer must agree to accept the property in exactly the condition and location it is — if it’s got mold, you take it with mold. If it has an addition that is built over the neighbor’s lot line — you agree to take it that way, and to never sue the seller for any damages you incur as a result.
- AM says …: REO properties are managed for the bank/seller by asset management companies. Sometimes you will see, "AM says bring all offers," or something similar, to indicate that the individual asset manager responsible for the property is motivated to negotiate to get the property sold.
- Auction terms: Some asset management companies are resorting to auction-style bidding for REO properties that have been on the market awhile. In these situations, they usually take bids for a certain period of time, and may even have an e-Bay-style online auction set up. It is imperative that you and your Realtor develop a good grasp of all the auction terms that apply to a particular property before bidding.
Mastering the art of the house hunt these days requires you to stay on your toes — if you don’t yet have a Realtor, ask around for referrals to find someone who can help you keep abreast of developments in this ever-evolving market.
Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook," and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online.
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