FAQ's

What is a foreclosure property? What is an REO?

Just about everybody has some idea of what a foreclosure is, but not necessarily an REO. So here’s the scoop. A foreclosure is a property that has been repossessed by a lending institution after the property owner has defaulted on paying their home loans. The lending institution must go through a series of legal steps during the foreclosure process, which takes a minimum of 121 days, although banks might decide to prolong the process several more months. At almost any time before the property forecloses, the homeowner may be able to reinstate the loan by paying off the default amount and late fees, thus stopping the foreclosure process.

If the homeowner is unable to work out a solution with the lender, the foreclosure process is completed and ownership of the property goes to the lender. Then the property is known as an REO, which is short for Real Estate Owned by the bank. Since banks are not in the business of owning property, they are motivated to sell them quickly. Most turn REOs over to an asset manager who lists the property for sale through an REO listing agent — usually a Realtor who is a member of a Multiple Listing Service (MLS). For more details, grab a cup of coffee and read more.

What is a Short Sale?

We wish “short sale” meant a very short escrow, but unfortunately, the short sale can drag on for months! Also known as a pre-foreclosure, a short sale is when a property is sold by the homeowner for less than what is owed to the bank. The lender must agree to a short loan payoff before a sale can go through. A short sale property is often listed for sale after the lender has filed a Notice of Default and the homeowner is trying to avoid foreclosure. Alternatively, a homeowner and his/her Realtor might start the process by contacting the lender when the homeowner begins having trouble making loan payments but has not yet missed one.

Short sales can be complicated and time consuming because there may be more than one lender involved, and all lenders must approve the price and the terms of the purchase offer. Since the lender with the first trust deed (the primary loan) usually has payback priority over those who hold the second or third loans (if any), the other lenders may not be in line to receive any money for a payoff. Sometimes the holder of the first trust deed will grant a small payoff to the holder of a second trust deed in order to complete a short sale.

Lenders stand to lose a substantial amount of money in a short sale. However, lenders may agree to a short payoff rather than going through foreclosure proceedings because it may cost them less and may be completed in a shorter time. Homeowners might prefer doing a short sale because it can be less damaging to their credit history than a full foreclosure.

Are there many foreclosures in the Santa Barbara area?

You’d think with all the press about foreclosures, there would be plenty of them to be found in Santa Barbara. But the truth is, our area so far has a much lower incidence of foreclosures than most of California and the U.S. Although there are more REOs for sale now than over the past 10 to 15 years, they are still a small segment of the inventory of homes for sale. Many more homes are listed as short sales than foreclosures at this time, but the number of short sale listings is also much lower in the Santa Barbara area than most people expect. All these foreclosures and short sales currently listed for sale in our area are on our website, though. Just click here to find them!

How do people buy foreclosures and short sales?

Although there are a few tricks, and it takes a bit of patience, it’s really not that much of a mystery. Like most home sales in our area, foreclosures, REOs, and short sales are usually listed for sale through Realtors, entered into the Multiple Listing Service (MLS), and sold to buyers who are also represented by Realtors. The processes differ from normal sales and from each other in several important ways, as described below. (It is possible to buy a foreclosure at auction on the courthouse steps, but this is very rare for several reasons, for instance the minimum bid required by the lender at this auction may be more than the market value of the property.)

Foreclosures/REOs: For a few weeks before an REO can be listed and sold, a notice is posted on the property, the listing agent’s sign may go up, and the property may be available for previewing. (Call Sue or Kalia if you are interested in previewing upcoming foreclosures before they are listed!)

Once a foreclosure is listed for sale in the MLS, the buyer makes an offer through their Realtor to purchase the property from the bank (who is the seller). The bank either accepts the offer or makes a counteroffer, and the price and terms are eventually decided upon. The buyer puts down a deposit and then, during the escrow period, has an agreed-upon number of days to do inspections, investigate the property, and, if necessary, get approval on a loan to purchase the home. Like most sales, escrow closes after all terms have been met, the paperwork is complete, and the purchase money is transferred to the bank that is selling the foreclosure property.

The main differences between the sale of an REO and any other house is that 1) the bank that is selling the property has little information to disclose to the buyer about problems with the structure, the grounds, or the neighborhood; 2) the bank will rarely make any repairs to the property; and 3) the investigation and escrow periods may be quite short.

Short Sales: In the case of a short sale, a buyer submits an offer to the homeowner who is selling the house, not to the lender. Once the buyer and seller agree on a price and terms, the offer goes to the seller’s lender(s) for approval. It is possible to get a quick response, but it could take a lender 6 weeks or more to respond. The turnaround time depends on how many other short sale requests the bank has, how long it takes the bank to get the property appraised and determine its market value, and whether or not there is more than one loan. Often it is the seller’s Realtor who keeps in contact with the lender(s) and tries to facilitate agreements between lenders when more than one is involved.

The lender(s) may agree to the purchase offer that was submitted, reject the offer, or make a counter offer on price and/or terms. Once a short payoff price and terms are approved by the lender(s), the sale can proceed. Usually this is when the buyer does their investigations and inspections and gets a loan to purchase the property, but sometimes the buyer decides to get started before approval is finalized, especially if the Realtors are in close contact with the lender.

The trick with a short sale is to get it approved and escrow closed before the foreclosure process is concluded and the property becomes an REO. Even though lenders want to avoid foreclosing, there is no guarantee that the short sale price will be approved. Because of this, and since it can take weeks for approval, a buyer needs to be patient and willing to try purchasing the property without guaranteed results.

Are foreclosures and short sales the best way to get a great deal?

It pays to look at everything that’s out there! The listed prices for foreclosures and short sales are usually less than other properties, but in Santa Barbara, often not by much. Depending on property condition, it could take more time and money to buy and then fix up a low-priced REO than it would to purchase a non-REO that didn’t need as much work. Many homes in good condition are coming on the market now at extremely competitive prices, and anyone who is considering the purchase of a foreclosure or short sale would be advised to look at other properties as well. To search for all the bargains, and not just foreclosures and short sales, search the MLS on our website. Better still, contact Sue and Kalia and we’ll set up a personalized search just for you in your price range. Acting as your buyer’s agents, we can often negotiate an even better bargain for you on a “regular” sale than you could get on a short sale (without all the wait and uncertainty).

Is a foreclosure or short sale right for you?

The answer to this question depends on you – your skills, your knowledge of home repair, your financing, your timeframe, and your patience – as well as the condition of the property or properties that interest you.

Many (but not all) REOs and short sale properties have been poorly maintained, and it may involve a lot of time and money to fix the property to your standards. If you are skilled in fixing up homes and have the resources to do so, a low-priced property in poor condition might be the perfect property for you, whether or not it’s an REO, short sale, or a regular listing.

Regarding REOs specifically, are you able and willing to investigate the property and secure a home loan in a short time period? Call Kalia at 805-965-1098 or Sue at 805-705-6973 if you would like to discuss your situation in this regard. Financing is extremely important, and unless you have cash for the purchase, before you write an offer you must be preapproved by a lender to get a purchase loan. We can find out for you which lender the bank prefers, or we can recommend several lenders in town who have repeatedly done outstanding work helping our clients get home loans in a timely fashion. (We don’t receive any compensation for recommending these lenders; we simply like to recommend professionals who continually exceed our expectations!)

Regarding short sales, you will need time and patience to wait for the seller’s lender(s) to approve the short payoff. While everyone is waiting to hear back from the lender, two things can happen: 1) the lender can take so long to respond that the foreclosure process is completed before a short sale is approved (although rare, it happens!), and 2) another buyer might also submit an offer while you are waiting. There is a good chance the purchase will go through, but since there is no guarantee it’s best to be somewhat detached about the outcome. Short sales work well for investors who could purchase any one of several properties as long as the price is right, or for anyone who doesn’t mind the wait and suspense in order to get a good deal. If you are someone who falls in love with houses and can’t wait to live in particular home that is listed as a short sale, you might be in for an emotional roller coaster ride. Not all short sales are created equal and it’s important to research the particulars of that sale before writing an offer. Kalia and Sue can investigate each short sale you’re interested in and tell you which ones are more likely to result in a closed sale – and a great bargain for you!

Regarding loans, some buyers may qualify to purchase an REO property with as little as 5% down using an FHA loan, and there are also additional loan programs available with just 10% down. Rates for a 30-year fixed rate mortgage are still quite low, and some buyers are finding that home ownership in Santa Barbara is more affordable than it has been in years and sometimes not that much more than rent! Contact Sue and Kalia now to talk about how the loan process works and if you might be able to buy!

How do prices of foreclosures and short sales compare to regular listings?

Take a look at the bottom line. Most banks with REO properties price them just below market value in order to get the best price and a quick sale. Because there is competition and you may need to make a quick decision to purchase a particular foreclosure, it is very important to preview the property and then be able to estimate how much money and time it will take to make necessary repairs and improvements. This will help you determine what the property is worth to you.

Short sales are often priced similarly to REOs. Sometimes, though, they get listed at prices that seem absurdly low – prices that have little bearing on what the lender(s) will agree to. We’re not sure why some agents do this, but if a price seems too good to be true, it probably is. Call us and we’ll get the scoop for you.

How can a homeowner avoid foreclosure?

This is the question of the decade – one that comes up often and one for which the answers are constantly changing! If you are concerned that you will not be able to keep up with your payments, please beware of online or non-local companies that say they will save your home. Instead, call your lender(s) as soon as possible and see what programs they offer. Contacting your lender early in the process is the key to avoiding foreclosure.

Many big institutions have a “home retention” department through which they may be able to reduce your interest rate, refinance your loan, or work out another arrangement with you. They will likely want a letter explaining the nature of the hardship that is preventing you from paying your home loan, as well as bank statements and a thorough accounting of your monthly income and expenses.

Your Realtor can talk to your lender on your behalf as long as you mail or fax a letter to the lender approving them to do so. This at least can reduce some of the stress of dealing with a big organization while you are concerned about losing your home and harming your credit rating.

You may also be eligible for help from a recently extended Hope for Homeowners program that allows the Federal Housing Administration (FHA) to continue to provide mortgage assistance to targeted homeowners. For more information on this, please visit: http://www.hud.gov/fha/home080730.cfm In the near future there may be more government programs for struggling homeowners, and we will keep this website updated as conditions change.

As difficult as it is to face, it’s important to take action sooner rather than later. If it looks as if your only options are to sell or to go into foreclosure, it’s best to get the ball rolling and try to sell as a short sale. We have been informed by lenders that selling as a short sale does affect credit ratings, but not as much as going through foreclosure. Again, contact your lender(s) as soon as possible regarding missed payments and a possible short sale, and have discussions with your Realtor about preparing to sell and interacting with the lenders(s) for you. Sometimes a short payoff gets pre-approved by the lender, which makes the property much more attractive to buyers. In the meantime, your Realtor can be advising you on preparing the home for sale. Moreover, homeowners who have a Realtor on their team often boost their credibility with the lender and can potentially buy more time. Kalia and Sue are experienced listing agents, and if you do not have a Realtor already we would be happy to speak with you and do what we can to be of assistance.

If at any time you are concerned about your legal rights and protecting your assets, we recommend you contact qualified attorney for counsel.

How will Kalia and Sue help you purchase a great value?

We understand the foreclosure, REO, and short sales processes.
We know how banks want offers submitted for these properties.
There is often competition (multiple offers) on attractive REO properties, and we have the skills to make your offer stand out to the asset managers in charge of accepting offers.
We can recommend trusted lenders and inspectors to you, all people who have a proven track record with our clients for professional, honest dealing and timely service.
We are in the field looking at dozens of properties each week. We know a great deal when we see one, and might find you a bargain that is not in foreclosure or being sold as a short sale. We constantly contact our clients with new listings or information crucial to their decision making.
By providing statistics, examples, and explanations, we can help you learn about the market and the foreclosure/short sale processes so you feel confident about your decisions.
Our services to you are free! Our commissions are paid by the seller at the close of escrow.
We represent your interests alone, whereas an agent listing a home will have the best interests of the seller in mind as well.
Our market knowledge combined with our negotiating experience means you just might get a much better price than you thought possible!

Sue and Kalia have built their reputations on excellent service, strong negotiating skills, and extensive knowledge of the Santa Barbara real estate market. With this expertise and a commitment to continuing education in an ever-changing real estate climate, they can locate the best property for you, and negotiate the best deal. There is no better choice to guide you through your purchase. Click here for more information about us.