Short Sale vs. Foreclosure Sale vs. REO
There is lots of interest in properties that are commonly called distressed properties, as well as concern about the number of these that keep appearing on the market.
Sometimes there is confusion about what these different properties are. So here is a BRIEF description.
SHORT SALE – when the home owner owes more than the home is worth and is in a hardship situation financially where a sale must happen (loss of job, divorce, etc.). Just because a seller WANTS to sell does not mean the lender(s) will approve, and a hardship must be demonstrated and documented.
FORECLOSURE – once a homeowner reaches a point where s/he cannot pay the mortgage and (normally) is behind 3 payments, a NOTICE OF DEFAULT (NOD) is filed by the lender. Often an owner already has the home on the market as a short sale. Foreclosure proceedings vary from state to state.
REO – Real estate owned properties (also commonly called bank owned properties). If a foreclosure property does not sell, it may be auctioned off (e.g., a trustee’s sale here in CA). If it is not bought then, the house becomes an REO that is “owned by the bank” and sold BY the bank on the open market.
What are CC and Rs?
As part of the disclosure process, once you have an accepted offer on California real estate in Carlsbad (or elsewhere), you will have to review the CC & Rs (if there are any) that exist for the home you are buying.
CC & Rs stands for Covenants, Conditions and Restrictions. Sounds complicated, but it’s not really…although they can be lengthy with lots of legalese. You will find them most commonly in subdivisions and they are generally recorded documents.
Simply put, this is a description of the things you can and cannot do with your property on the area in which the property resides. Restrictions limit the activities of homeowners (you can’t turn your property into a farm) to assure that the property use is consistent with land use in the general area.
Covenants are promises to do or not do certain things. You might be prohibited from parking your RV on the street or in the driveway (a separate area would normally be provided). A penalty is usually monetary damages or an injunction (a court order to stop what you are doing).
Conditions are pretty much the same as covenants, except that the penalty could be return of the property to the grantor.
If there is a Home Owner’s Association (HOA) they have the authority to enforce these rules.
These are not negotiable, and you will be expected to review and approve these as part of the contractual process. You, of course, will have a copy for your files. If you should decide you cannot abide by the rules, then your best course of action is to withdraw your offer before the end of the contingency period (see your contract).
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Why Are There Disclosures?
As a first time home buyer you will run across a number of disclosures as part of purchasing your first home. These will vary from state to state.
California has a large list of disclosures for buyer to review:
- natural hazards [fire, flood, earthquake, wildlife preservation, etc.]
- lead paint
- mold
- hot water heater security for earthquakes
- the seller’s disclosure called the TDS or Transfer Disclosure Statement
and so on.
Disclosures exist to inform the public of conditions that may impact their home saleso that they can decide if, knowing what they know, they still wish to purchase the home. Some are federal in nature that require the seller to disclose certain things, such as the presence of lead paint, outlawed in 1978 but found in many homes in certain parts of the country; others are state or community related, and some are optional.
There are also some disclosures that have to do with the nature of the real estate relationship, such as how you are being represented (the relationship is referred to as agency) - as a buyer, as a seller, or when the agent represents both parties in the transaction as a “dual agent.”
Here is a link to a booklet on the disclosures in California (keep in mind that some may NOT be applicable in your transactions).
Do I Need a Buyer’s Agent?
You may be wondering – do I need a Buyer Agent? Well, I wanted to follow-up on my last post about AGENCY and talk some more about what a Buyer Agent is and why it may be important to have one.
A Buyer Agent is an agent who is specifically working on YOUR behalf. While any agent you “hire” can help you through the process of buying a new home, the traditional role of an agent (often unclear to buyers) is working on behalf of the seller. Not just because the commission gets paid that way, but unless an agent is specifically asked to be YOUR Buyer Agent, they may be working for the seller. And that means they are NOT protecting YOUR interests. The laws around agency vary from state to state so this may not always be the case, but you should ask for clarification.
So why is having an agent working for YOU important?
- You want someone who is looking out for your interests as the buyer; asking questions, obtaining information, and making sure YOU understand the implications of all that you do in the transaction.
- You want confidentality. An agent working for you will keep information s/he learns from you private and not share it with the seller or the listing agent (e.g., you might tell your agent that you are willing to pay full price if you need to, but want to start lower – this could really damage your negotiating if this were shared with the listing agent and seller, couldn’t it?).
- You probably want and need assistance determining an offer strategy. An agent working for you can help you determine the BEST price to offer based on current market conditions (although it is YOUR decision). An agent who is not, who is working for the seller, cannot help since their job is to help the seller get the best price, not you. Make sense?
As a consumer, it is in your best interests to have someone working for you during the transaction. So keep this in mind as you think about who you want to help you buy your new home.
Do You Know What Agency Is?
One of the terms you will hear in the real estate world is AGENCY. Do you know what agency is?
Well, it’s pretty important, and there is a lot of confusion about it.
Agency, simply, refers to the specific relationship between a principal (a buyer or seller) and another party (in real estate, the brokerage and thereby the agent who you work with). Each state has specific laws defining and regulating the types of agency relationships that can exist. As a buyer or seller, you should understand the relationship that you have (not what is implied, but what the specific nature of the relationship is) because it has a significant impact on your personal interests and whether, and how, they are protected.
Don’t assume a relationship exists, but ASK what it is and what that means. And generally the laws require that the nature of the relationship be disclosed to you, the client. This is critical information for you, the consumer.
An agent can represent a seller (typically called the Listing Agent) and that agent has a fiduciary responsibility to the seller – to protect that person’s interests, to be honest, and loyal, among duties.
The agent who is helping you find a home MAY be acting on your behalf (if a BUYER’S Agent) or may be responsible to the seller (the traditional role of the agent). Do NOT assume an agent is working on YOUR BEHALF unless you specifically ask. This does not mean they cannot and will not help you find a home and assist you throughout the transaction. But if the agent is NOT actually representing your interests, they cannot preserve confidentiality (since they are responsible to the seller) nor assist you in determining an offer strategy (since their duty is to the seller, their role is to get the seller the best price). You deserve to have someone acting on your behalf – make sure you understand if your agent is!
Stay tuned for more discussion on this critical topic. See my earlier post on real estate terms for more information on this and other terminology you will hear.
Are You Making an Offer on a Short Sale Home?
If you are making an offer on a short sale home, there are some things to be aware of.
If you are not familiar with short sales (there are lots of them, in many markets) or want a refresher, check out my post on the subject.
Making an offer on a short sale can, and probably will, be frustrating, so be prepared. Don’t expect this to go quickly, since you not only have a seller involved but also a lender. And there will likely be other contenders with competing offers. You might not get a response to your offer in the time you expect or want, but if it’s a house that really interests you I would simply wait it out. And try to keep a positive attitude since it can be a frustrating experience.
However, since there is no way to know how it will turn out, you might want to continue looking at other homes while you are waiting, so you don’t waste time. Then, if things don’t move along, or your offer is rejected, you can make an offer on something else. And make sure your agent is staying in touch with the other agent so you are aware of what is going on.
What is a Condominium?
A condominium, more commonly referred to as a condo, is a type of legal ownership in a property.
A condo owner has separate fee interest in a particular unit (or units if they own more than one). However, all condo owners share an undivided interest in all common or public areas in the development or building, including the land. Each unit owner has a deed for their unit and pays taxes on that unit, just as in a detached home.
One big difference is that there are commonly restrictions on what unit owners can do to their properties. There typically is an association (condo association or HOA) that manages the condo complex, although sometimes an outside management firm may also be involved and responsible for collecting the fees, paying the bills adn other related tasks. Typically, fees are assessed for each unit owner to cover the cost of maintenance, repairs, upkeep of the common areas, etc. These may range from under $100/month to hundreds of dollars or more depending on the complex (gates, elevators, pools, tennis courts and similar facilities all add to the costs of maintenance).
What is a PUD?
PUD stands for Planned Unit Development. It is often simply called a planned development, but you will see PUD in the MLS in Southern California, and other areas as well. Such communities are common in rural and suburban areas.
A PUD is similar to a condominium. In this type of development the zoning is different than conventional zoning and this allows for clustering of units (they may or may not be attached), among other things.
The owners have title to a particular unit and the land under it, along with membership in an association that owns all the common areas. The shared areas can include open spaces, ponds, trails, ocean access, golf course, private roadways, water and septic systems, and other things.
Covenants, Conditions and Restrictions (CC & Rs)
As a first time buyer here in California, you will most likely run across these if you are buying a home in some sort of subdivision (very common in our area).
CC & Rs come to light during the contingency period after an offer is made, and you must review and accept these restrictions. You can read more about Covenants, Conditions and Restrictions here.
If I can anser any questions about these documents, please let me know.
What is Title Insurance?
As a new buyer, it is important to understand what Title insurance is and why it is essential.
While you may have a choice whether or not to purchase an owner’s title insurance policy, your lender will require that you have a lender’s title insurance policy to protect their interests (remember, they are loaning you money and your house is the collateral until the loan is paid off or sold).
Here is a link to a great article by United Title on my Buyer and Seller Reports page that will futher explain what Title Insurance is and why you need it.
