A foreclosure is the forced sale of real estate to pay off a loan on which the owner of the property has defaulted. The seller of a foreclosed property is the bank/lender, so you will be working with a bureaucracy not a home/property owner. A home that has been foreclosed upon and has been taken back by the bank/lender is called an REO (Real Estate Owned) property. If the property is a home, it has typically sat vacant for many months by the time the property is first listed. If the home is listed in the winter, it is usually winterized to protect the property. When the property is listed, the lender has already prepared for the sale and completed the appraisals needed to establish the list price. The purchase price accepted by the lender is determined by the number of offers received and the lender’s motivation.    

A short sale occurs when an owner can not sell their property for enough to cover the mortgage(s). Home owners are usually still living in the property. In a successful short sale, the lender agrees to sell the property for a discounted payoff. There may be two lenders involved in the short sale- both lenders have to agree to the discounted payoff.  Once your offer is accepted by the seller, the lender(s) must perform appraisals and determine if their investors will agree to take a loss. This process can take months. 

Once the home owner signs the purchase agreement, the offer is contingent upon bank approval and any future offers will be considered back-up offers. The closing success rate of a short sale is much less than an REO, as the lender(s) may decline all offers and allow the home to go into foreclosure.  The number of lenders (and which lender) affects the potential success of the short sale. The more lenders involved the less likely it is to succeed.  The home owner’s hardship also plays a large role.

Please note: acceptance of the offer by the lender(s) is only the first step; other lien holders may not approve the sale or may request to be paid in full at the closing. It is imperative to ask if there are other lien holders, in addition to the mortgage lender(s).  For example, townhome associations are not likely to forego their lien against a property for unpaid dues/assessments. They usually require the outstanding dues/assessments be paid at closing; and the lender may not be willing to cover them.

Patience is the key to working with lender mediated properties. Please prepare yourself for long delays as: No Patience = No Short Sale. A majority of the lenders are located outside the state of Minnesota. Different time zones, the number of bank departments involved, and numerous systems can slow down the process. If you are a buyer looking for a specific closing date, purchasing an REO or a short sale may not be the best option for you. Lenders prefer to work with buyers who have a flexible time frame. Please keep in mind, many lender-mediated properties are in a distressed state (but some are still in good condition). Hopefully you will find the opportunity to get a decent property at a competitive price. 

As a buyer’s agent, I will provide you with all the information I am aware of, to protect your interests and to ensure a successful purchase. However, every transaction presents new challenges and issues that support the fact that purchasing a lender mediated property comes with risks- ones we can not completely prepare for or avoid.  You need to be comfortable with the uncertainty and the risks involved, including but not limited to the Sheriff’s Sale and redemption timelines.