Real Estate - The New Real Estate Terminology
By Jennifer Rosdail
In the news, we’ve all be hearing a lot about the “foreclosure crisis,” and homes that are “underwater.” Many of us even have family and friends who are suffering as a result of the sharp decline in real estate values that began about two years ago.
Even though it’s been reported that in San Francisco specifically and the Bay Area in general that prices are leveling off, the disposition of so called “toxic assets,” will go on for some time to come. I’m not going to attempt to tell you how to buy a distressed property, but I think that starting with some terminology would probably help most of us to do what many like to do best - talk about real estate.
Let’s start with “foreclosure.” I hear people talking about “buying a “foreclosure,” all the time. There are three ways to do this: Trustee’s sale, attending a public auction, and buying an “REO” through regular sales.
To get into describing these types of sales, it’s necessary to step back a bit and talk about the process of foreclosure. In California, we use a form of securing debt called a “Promissory Note” and “Deed of Trust.” The word “mortgage” is slang we use to describe the other two things. A mortgage is a legal instrument not used in California, so I’m not going to get into how it’s different. The Promissory Note defines the terms of the loan and the Deed of Trust is recorded at the county courthouse in favor of the lender (who then becomes the “Trustee”) against the property. When someone has failed to make a number of payments, the Trustee can record what’s called a “Notice of Default,” which starts a 180-day clock ticking for a Trustee’s Sale. Trustee’s Sales are publicly noticed and technically anyone can buy the property. At this sale, the Trustee auctions off the property for cash.
Buying property at a Trustee’s Sale is a tricky business and should not be attempted by anyone who is not a professional investor. The biggest problem is that there is no protection assuring the buyer that they are the real owner of the property. Understanding exactly what this means and learning to do the research to protect oneself is a full time job. Properties sold at a Trustee’s Sale are also only sold for exact-change cash (generally in the form of cashier’s checks), which is another huge obstacle to most people. If no one comes forward at the Trustee’s sale willing to pay more than the minimum price set by the Trustee, the Trustee may complete the foreclosure and officially become the owner of the property. At this point, the property becomes an “REO.”
REO is an acronym that stands for “Real Estate Owned,” and these properties are usually owned by an institution that would prefer not to own them. Most REO properties are sold just under market value and are listed by realtors for sale through the regular Multiple Listing Service. When you see property listed for sale as a “REO,” then, you know it’s owned by an institution and that it has been foreclosed.
When an REO property has failed to sell through the regular sales process, it may be auctioned off by one of several large organizations, such as REDC. You can see their listings at auction.com. Properties sold at these auctions are sold with Title Insurance, which protects the buyer against other claims against the property and ensures that at the end of the process the buyer really owns the property. Many properties sold at these auctions can also be financed.
Now for the concept of being “underwater.” This means that the property is worth less than the total of the debt owed. As has been widely reported, people who are underwater on their homes are not as motivated to keep paying the mortgage as those who have equity in them. Makes sense. A person who is underwater may try to get their lender to modify the terms of the mortgage by reducing the amount owed, the interest rate, or both. This is called a “loan modification.” Another remedy for those underwater is a “short sale.” Short sales are listed by realtors and advertised in the Multiple Listing Service. They are listed this way when the amount of expected sale falls “short” of the amount of debt on the property. After an offer is received, which in effect proves the value of the property, an application is made to the lender(s) to request that they, essentially, forgive the short fall. This request may be countered, granted or denied. Getting a decision can take as long as three, six or even nine months, sometimes a lot less — you just never know. The effects on the person selling the property are not generally as dire as when the property is foreclosed, and this is the main reason people attempt to do it. In some cases, the debt is simply forgiven, and in others, the person selling may be asked to sign a promissory note for the difference. Anyone attempting a short sale should seek the advice of a real estate attorney before making any decisions. Because of the complexity and uncertainty involved in the process, these properties mostly sell below market value and can be a good deal for buyers who are willing to wait.
These can be exciting times if you’re in a position to buy and really hard ones if you are on the other end of one of these situations. In either case, contacting a Realtor is a great place to start figuring it all out.
Jennifer Rosdail is a Realtor with Paragon Real Estate Group. She can be reached at 415-269-4663 or Jennifer@Rosdail.com.